Top Index-Fund Choices for Beginners
These fine offerings exemplify truly passive strategies.
These fine offerings exemplify truly passive strategies.
For investors just starting out, index funds are easy to recommend. It's simple to build a well-diversified, low-maintenance portfolio composed of benchmark trackers, and doing so is almost foolproof provided you use common sense in setting your asset allocation and stick with low-cost options that track broad swaths of the market.
At the same time, however, some of Morningstar's favorite index funds might not be accessible to investors just starting out. Although index funds from Vanguard and Fidelity are widely represented on Morningstar's Fund Analyst Picks list, the Vanguard funds generally have minimum initial purchases of $3,000, while Fidelity's Spartan index funds are available with a minimum of $10,000. It's not that these providers want to keep smaller investors from getting started. Rather, not allowing very small accounts helps reduce expenses for everyone in the funds. (Because all shareholders are entitled to receive services such as phone support and monthly statements, it costs a lot more to maintain 20,000 accounts that each hold $5,000 than it does to maintain 5,000 accounts amounting to $20,000 apiece.)
Exchange-traded funds are one option for newbies who are attracted to indexing: Many brokerage firms now offer commission-free trades, thereby removing what had until recently had been one of the big drawbacks for smaller investors to get started in ETFs. Morningstar's ETF Analyst Picks list is composed exclusively of index trackers; investors just starting out should focus on core-type options like iShares S&P 500 (IVV), Vanguard FTSE All-World ex-US (VEU), or Vanguard Total Stock Market ETF (VTI).
Smaller investors seeking index exposure via traditional mutual funds have a few options, as well. Using our Premium Fund Screener, we screened for index funds available to no-load retail investors who have less than $1,000 to get started. Some expensive funds make the cut, so we set the expense hurdle at 0.25%. Premium users can click here to see the screen. Among very low-cost index funds with low minimums, Schwab's offerings rose to the top, requiring minimum initial purchases of just $100.
Schwab International Index (SWISX)
While it might seem odd to describe an international equity offering as a "starter fund," U.S. stocks actually consume less than 50% of the globe's market capitalization, making a foreign fund a completely reasonable core choice. Granted, this isn't the cheapest international index fund around (its expense ratio is 0.19%), and it focuses on the very largest-company stocks while eschewing emerging markets. Even so, the fund is a reasonable building block for new investors aiming to build a geographically diversified portfolio.
Schwab Total Stock Market Index (SWTSX)
This fund is even cheaper than the international offering, with an expense ratio of 0.09%. It also provides effective broad market exposure: Although more than 70% of the portfolio is in large- and mega-cap stocks, it has stakes in mid-, small-, and even micro-cap names and could effectively serve as an investor's core--or only--domestic-equity fund.
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