In this article, we will look at the 10 best index funds to diversify your portfolio.
Index funds are the go-to choice for investors looking to diversify their portfolios and effectively manage risk. As opposed to investing in an individual stock, buying a stake in an index fund allows investors to gain exposure to a variety of stocks and improve their chances of sustaining or even growing their returns. Index funds can be mutual funds or exchange-traded funds, both of which are designed to track the performance of a broad market index such as the S&P 500, the Dow, or the Russell 2000.
The Power of Index Funds and Reinvesting Dividends
Legendary value investor, Warren Buffett, briefly explained how investing in an index fund can save investors from a lot of the difficulties that they typically experience when picking individual stocks. Mr. Buffett appeared in an interview on CNBC where he shared his ideas about investing in index funds. Here is an excerpt from the interview:
“The best single thing you could have done on March 11th, 1942, when I bought my first stock, was just buy an index fund and never look at a headline and never think about stocks anymore… If you’d put $10,000 in an index fund that reinvested dividends (Back when I bought my first stock), it would come to 51 million dollars now.”
Index funds can be an integral part of an investor’s portfolio. For investors that seek to generate passive income and avoid stock market volatility, index funds can be a safe haven. Investors can invest in index funds through 401(k) accounts, traditional brokerage accounts, or Roth individual retirement accounts. By investing in an index fund, investors can gain exposure to industry-leading and outperforming businesses such as Alphabet, Inc. (NASDAQ:GOOGL), Honeywell International, Inc. (NYSE:HON), and Johnson & Johnson (NYSE:JNJ).
Our Methodology
To determine the 10 best index funds for portfolio diversification, we looked at both index mutual funds and index exchange-traded funds (ETFs). We narrowed down our selection to index funds that had low expense ratios and strong yields. We included index funds that tracked a variety of major market indices. Along with each of our picks, we have mentioned one notable holding of the fund and the analyst sentiment and top shareholder for that holding. We have ranked our picks in ascending order in terms of their trailing twelve months (TTM) yields.
10 Best Index Funds to Diversify Your Portfolio
10. Shelton Capital Management Nasdaq-100 Index Fund (NASDAQ:NASDX)
Yield (TTM): 0.27%
The Shelton Capital Management Nasdaq-100 Index Fund (NASDX) is a passively managed mutual fund that tracks the performance of the Nasdaq-100 Index and invests at least 80% of its assets in growth and value stocks of large-cap companies. The fund has a top 10 holdings concentration of 53.22% and has investments across the energy, real estate, materials, healthcare, and technology sectors. The fund has an expense ratio of 0.50%, a turnover ratio of 7.00%, and a trailing twelve-month yield of 0.27%.
One of the top 10 holdings of the Shelton Capital Management Nasdaq-100 Index Fund (NASDX) is Amazon.com, Inc. (NASDAQ:AMZN). On July 29, Cowen analyst John Blackledge raised his price target on Amazon.com, Inc. (NASDAQ:AMZN) to $215 from $210 and reiterated a buy-side ‘Outperform’ rating on the shares.
In the second quarter of 2022, Fisher Asset Management raised its stake in Amazon.com, Inc. (NASDAQ:AMZN) by 1,959%, bringing it to $5.16 billion in value. The investment covers 3.65% of Ken Fisher’s 13F portfolio.
Here is what Vulcan Value Partners had to say about Amazon.com, Inc. (NASDAQ:AMZN) in its second-quarter 2022 investor letter:
“Amazon.com, Inc. (NASDAQ:AMZN) has three components to its business model: online retail, cloud-based Amazon Web Services (AWS), and online advertising. We believe that the stock price has declined primarily due to its disappointing online retail results. Retail was extremely successful during COVID, and Amazon spent immensely to protect the consumer experience including buying extra inventory, buying inventory ahead of time, securing alternate shipping routes and adding extra warehouse space. We believe this long-term behavior has been successful for Amazon as customer retention and engagement remain at high levels. Post-COVID, the company is in the process of rightsizing its cost structure, and it is facing a tough period of comparisons. The retail segment is the smallest contributor to our overall value. The majority of the company’s value is in AWS, which we believe is one of the best businesses in the world. AWS’ revenue is expected to be approximately $80 billion this year, which is nearly double the amount in 2020. The company’s online advertising has turned into an attractive business that did not exist 15 years ago, and we estimate its revenue to be around $40 billion this year.”
9. Invesco QQQ ETF (NASDAQ:QQQ)
Yield (TTM): 0.61%
The Invesco QQQ ETF (NASDAQ:QQQ) employs a full replication technique to track the performance of the NASDAQ-100 Index. The fund invests in growth and value stocks of companies that come from the energy, real estate, consumer discretionary, consumer staples, and technology segments, among others. The fund has a top 10 holdings concentration of 52.75%, an expense ratio of 0.20%, and a trailing twelve-month yield of 0.61%.
One of the top 10 holdings of the Invesco QQQ ETF (NASDAQ:QQQ) is Costco Wholesale Corporation (NASDAQ:COST). Wall Street is bullish on Costco Wholesale Corporation (NASDAQ:COST). On August 4, Truist analyst Scot Ciccarelli raised his price target on Costco Wholesale Corporation (NASDAQ:COST) to $571 from $543 and reiterated a ‘Buy’ rating on the shares. This August, Erste Group analyst Hans Engel upgraded Costco Wholesale Corporation (NASDAQ:COST) to ‘Buy’ from ‘Hold’.
In the second quarter of 2022, Fisher Asset Management raised its stake in Costco Wholesale Corporation (NASDAQ:COST) by 3%, with the value of its position standing at $2.07 billion on June 30. The investment covers 1.47% of Ken Fisher’s 13F portfolio.
Like Alphabet, Inc. (NASDAQ:GOOGL), Honeywell International, Inc. (NYSE:HON), and Johnson & Johnson (NYSE:JNJ), Costco Wholesale Corporation (NASDAQ:COST) is a winning business that investors can own a stake in through an index fund and generate passive income.
8. Fidelity ZERO Large Cap Index Fund (NASDAQ:FNILX)
Yield (TTM): 0.97%
The Fidelity ZERO Large Cap Index Fund (NASDAQ:FNILX) tracks the performance of the Fidelity U.S. Large Cap Index and employs a representative sampling technique. The fund invests roughly 80% of its assets in large-cap growth and value stocks. The fund has a top 10 holdings concentration of 26.32% and has spread its investments across a variety of sectors including technology, healthcare, financials, and consumer defensive. The fund has an expense ratio of 0%, a turnover ratio of 5.00%, and a TTM yield of 0.97%.
Among the Fidelity ZERO Large Cap Index Fund’s (NASDAQ:FNILX) top holdings, we have Apple, Inc. (NASDAQ:AAPL), which Wall Street is bullish on. On August 19, KeyBanc analyst Brandon Nispel raised his price target on Apple, Inc. (NASDAQ:AAPL) to $185 from $177 and maintained a buy-side ‘Overweight’ rating on the shares.
In the second quarter of 2022, Berkshire Hathaway raised its stake in Apple, Inc. (NASDAQ:AAPL) to over $122 billion in value. As of June 30, Berkshire Hathaway owns roughly 895 million shares of Apple, Inc. (NASDAQ:AAPL) and is the most prominent shareholder in the company.
Here is what Wedgewood Partners had to say about Apple Inc. (NASDAQ:AAPL) in its second-quarter 2022 investor letter:
“Apple grew revenues +9%, driven by +17% growth in the Services segment. While iPhone revenues grew a modest +5%, it was on an exceptional year ago comparison of +66%. iPhone continues to capture most industry smartphone profits by focusing on high-end price tiers. Apple is taking nearly two-thirds of the revenue share in the premium ($400 and above) smartphone segment. Further, most of the growth was driven by expansion in the “ultra-premium” price tier of $1000 or more per unit.[1] As we have highlighted in the past, Apple’s relentless focus on the development and integration between hardware (especially integrated circuits) and software continues to add significant value for customers of its products and services. We expect this favorable competitive dynamic to continue for the foreseeable future.”
7. Fidelity US Sustainability Index Fund (NASDAQ:FITLX)
Yield (TTM): 0.97%
The Fidelity US Sustainability Index Fund (NASDAQ:FITLX) is an index mutual fund that invests in growth and value stocks of invests of companies that follow strong ESG policies and practices. The fund employs a representative sampling technique and seeks to track the performance of the MSCI USA ESG Leaders Index. The fund has a top 10 holdings concentration of 33.99% and has investments across a diverse range of sectors including technology, energy, healthcare, consumer cyclical, and consumer defensive. The fund has an expense ratio of 0.11% and a trailing twelve-month yield of 0.97%.
One of the top holdings of the Fidelity US Sustainability Index Fund (NASDAQ:FITLX) is The Procter & Gamble Company (NYSE:PG). On August 2, Barclays analyst Lauren Lieberman revised her price target on The Procter & Gamble Company (NYSE:PG) to $154 from $157 and maintained an ‘Overweight’ rating on the shares.
As of June 30, Bridgewater Associates owns more than 6.74 million shares of The Procter & Gamble Company (NYSE:PG) and is the largest shareholder in the company. The investment covers 4.11% of Ray Dalio’s 13F portfolio.
Some of the best stocks that investors can gain exposure to through index funds include Alphabet, Inc. (NASDAQ:GOOGL), Honeywell International, Inc. (NYSE:HON), Johnson & Johnson (NYSE:JNJ), and The Procter & Gamble Company (NYSE:PG).
6. Schwab S&P 500 Index Fund (NASDAQ:SWPPX)
Yield (TTM): 1.36%
The Schwab S&P 500 Index Fund (NASDAQ:SWPPX) tracks the performance of the S&P 500 Index and uses a full replication technique. The fund invests 80% of its assets in both growth and value stocks of large-cap companies that are tracked by the S&P 500 Index. The fund has an expense ratio of 0.02%, a turnover ratio of 3.00%, and a trailing twelve-month yield of 1.36%. The fund has a top 10 holdings concentration of 28.09% and has investments across the technology, healthcare, energy, and communications segments.
One of the top holdings of the Schwab S&P 500 Index Fund (NASDAQ:SWPPX) is Microsoft Corporation (NASDAQ:MSFT). On July 27, BMO Capital analyst Keith Bachman raised his price target on Microsoft Corporation (NASDAQ:MSFT) to $320 from $305 and reiterated a buy-side ‘Outperform’ rating on the shares.
In the second quarter of 2022, Fisher Asset Management raised its stake in Microsoft Corporation (NASDAQ:MSFT) by 3%, giving it a $7.36 billion position in the company. The investment covers 5.21% of Ken Fisher’s 13F portfolio.
Here is what investment management firm Ave Maria had to say about Microsoft Corporation (NASDAQ:MSFT) in its “Ave Maria Focused Fund” second-quarter 2022 investor letter:
“Microsoft Corporation (NASDAQ:MSFT)’s cloud business is nearly half of the company’s revenue and the largest business in Microsoft, with Office 365 being the second largest. The cloud business helps customers save money, so it is somewhat recession-proof. Office 365 allows customers to purchase low annual subscriptions, as opposed to purchasing expensive license agreements every few years. This could keep the revenue stable in a tough economic environment. We believe the company will be able to maintain mid-teen revenue growth for the foreseeable future.”
5. Vanguard Russell 2000 ETF (NASDAQ:VTWO)
Yield (TTM): 1.36%
The Vanguard Russell 2000 ETF (NASDAQ:VTWO) tracks the performance of the Russell 2000 Index and invests in growth and value stocks of small-cap companies operating across a diverse range of sectors including healthcare, financial, industrial, and technology, among others. The fund uses a full replication technique. The ETF has a top 10 holdings concentration of 2.71%, an expense ratio of 0.10%, and a trailing twelve-m0nth yield of 1.36%.
One of the top 10 holdings of the Vanguard Russell 2000 ETF (NASDAQ:VTWO) is Texas Roadhouse, Inc. (NASDAQ:TXRH). On July 29, Deutsche Bank analyst Brian Mullan raised his price target on Texas Roadhouse, Inc. (NASDAQ:TXRH) to $97 from $91 and reiterated a ‘Buy’ rating on the shares.
As of June 30, Millennium Management owns over 1 million shares of Texas Roadhouse, Inc. (NASDAQ:TXRH) and is the dominant shareholder in the company. The investment covers 0.04% of Israel Englander’s 13F portfolio.
4. SPDR S&P 500 Trust ETF (NYSEARCA:SPY)
Yield (TTM): 1.48%
The SPDR S&P 500 ETF (NYSEARCA:SPY) invests in growth and value stocks of large-cap companies and tracks the performance of the S&P 500 Index. The fund employs a full replication technique. The fund has an expense ratio of 0.09% and a trailing twelve-month yield of 1.48%. The fund has a top 10 holdings concentration of 28.25% and its investments are spread across the healthcare, consumer cyclical, utilities, and consumer defensive segments.
One of the top holdings of the SPDR S&P 500 ETF (NYSEARCA:SPY) is Johnson & Johnson (NYSE:JNJ). On July 20, Citi analyst Joanne Wuensch revised her price target on Johnson & Johnson (NYSE:JNJ) to $201 from $205 and reiterated a ‘Buy’ rating on the shares.
As of June 30, GQG Partners owns over 6.56 million shares of Johnson & Johnson (NYSE:JNJ) and is the leading shareholder in the company. The fund’s stake is valued at $1.16 billion and the investment covers 2.86% of Rajiv Jain’s 13F portfolio.
Mayar Capital named a few stocks in its second-quarter 2022 investor letter, one of which was Johnson & Johnson (NYSE:JNJ). Here is what the firm had to say:
“J&J is currently our largest position and a long-standing holding. The majority of the group’s sales comes from its collection of pharmaceutical franchises, but a large majority (~45%) comes from its collection of medical device businesses and its consumer brands.
Here’s how JNJ make and spend a dollar of revenues: As of 2021, about 55 cents of that dollar comes from its pharmaceutical sales – sales of drugs to pharmacies and distributors – while 30 cents come from the sale of medical devices, such as surgery equipment and orthopaedics. The rest of that dollar in sales comes from sales of JNJ’s consumer brands such as Listerine mouthwash, Nicorette nicotine tablets and Neutrogena cosmetics.
To make that dollar, however, JNJ typically spends about 25 cents to make the products themselves and another 27 cents on marketing and general administrative functions. This leaves JNJ with about 48 cents on the dollar in profit…” (Click here to see the full text)
3. Vanguard Total Stock Market ETF (NYSEARCA:VTI)
Yield (TTM): 1.49%
The Vanguard Total Stock Market ETF (NYSEARCA) tracks the performance of the CRSP US Total Market Index and uses an indexing investment approach. The fund invests in growth and value stocks of micro-cap, small-cap, mid-cap, and large-cap companies. The fund has a top 10 holdings concentration of 23.71% and has investments across a diverse range of sectors including technology, consumer cyclical, healthcare, and energy. The fund has an expense ratio of 0.03% and a trailing twelve-month yield of 1.49%.
One of the top 10 holdings of the Vanguard Total Stock Market ETF (NYSEARCA:VTI) is Alphabet, Inc. (NASDAQ:GOOGL). On August 3, Tigress Financial analyst Ivan Feinseth raised his price target on Alphabet, Inc. (NASDAQ:GOOG) to $186 from $183 and reiterated a ‘Strong Buy’ rating on the shares.
As of June 30, TCI Fund Management owns more than 2.47 million shares of Alphabet, Inc. (NASDAQ:GOOGL) and is the most prominent shareholder in the company. The investment covers 17.13% of TCI Fund Management’s 13F portfolio.
Arch Capital mentioned Alphabet, Inc. (NASDAQ:GOOGL) in its second quarter 2022 investor letter. Here is what the firm had to say:
“In May we decided to buy Alphabet Inc. (NASDAQ:GOOG) (parent company of Google, YouTube, and Android). Our thesis was simple. Alphabet has billions of locked-in users around the globe with businesses like Search, Maps, and YouTube that should grow in-line or faster than worldwide GDP. With all the cash these businesses generate, management is able to reinvest in Google Cloud, Other Bets projects like Waymo, and return cash to shareholders via share repurchases. At an enterprise value-to-free cash flow (EV/FCF) of around 20 at the time of our purchase, we believe this sets up shareholders for low risk 15%+ returns over the next five years.”
2. SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA)
Yield (TTM): 1.89%
The SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) invests at least 80% of its total assets in both growth and value stocks that operate in a wide array of sectors. The fund has investments across energy, real estate, industrial, healthcare, and technology stocks, among others. The fund employs a full replication technique and tracks the performance of the Dow Jones Industrial Average Index, or Dow. The SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) has a top 10 holdings concentration of 55.24%, a trailing twelve-month yield of 1.89%, and an expense ratio of 0.16%.
Among the top holdings of the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), we have Honeywell International, Inc. (NYSE:HON). On July 29, Citi analyst Andrew Kaplowitz raised his price target on Honeywell International, Inc. (NYSE:HON) to $222 from $211 and maintained a ‘Buy’ rating on the shares.
As of June 30, quant fund D E Shaw owns roughly 1.26 million shares of Honeywell International, Inc. (NYSE:HON) and is the top shareholder in the company. The investment covers 0.25% of D.E. Shaw’s 13F portfolio.
1. Schwab Emerging Markets ETF (NYSEARCA:SCHE)
Yield (TTM): 2.78%
The Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE) invests in growth and value stocks of mid-cap and large-cap companies in emerging markets. The fund tracks the performance of the FTSE Emerging Index and employs a representative sampling technique. The fund has a top 10 holdings concentration of 21.64% and has investments across the financial, industrial, technology, healthcare, and energy segments, among others. The fund has an expense ratio of 0.11% and a trailing twelve-month yield of 2.78%.
One of the top holdings of the Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE) is the leading semiconductor manufacturer and supplier of Apple, Inc. (NASDAQ:AAPL), Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM). On July 14, Susquehanna analyst Mehdi Hosseini revised his price target on Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) to $88 from $90 and reiterated a ‘Neutral’ rating on the shares.
In the second quarter of 2022, Fisher Asset Management raised its stake in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) by 1%, ending the quarter with $2.15 billion in TSM shares. The investment covers 1.52% of Ken Fisher’s 13F portfolio.
Here is what The Mercator International Opportunity fund had to say about Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its second-quarter 2022 investor letter:
“Another example of this buyers’ strike is Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) (1.81%), down 40% from its high and trading at less than 15 times forward earnings. When TSM announced better-than-expected earnings growth of 67% in the second quarter with no slowdown in sight, the stock barely gained a few percentage points. No matter how good the news, buyers are not showing up. Yet.”
You can also take a look at the 10 Best Index Funds to Invest In 2022 and the 10 Best Metaverse ETFs To Buy.
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Disclosure. None. 10 Best Index Funds to Diversify Your Portfolio is originally published on Insider Monkey.
