4 Best Index Funds For 2023 (2024)

More than $67 trillion is invested across the globe in regulated investment funds. Of that, the majority are in mutual funds, which have been around since 1924. More recently (starting in 1993 in the United States), exchange-traded funds (ETFs) entered the scene, and are gradually eroding the dominance of mutual funds.

The majority of ETFs track indexes, such as the S&P 500, and there are now more than 3,000 different ETFs. Read on to learn what index funds are, along with factors to consider when searching for index funds and funds in which you might consider investing.

What Is An Index?

Investment indexes track the performance progress of a group of securities that were chosen by the creator of the index. Thus, any index is simply the results of the index creator following a predefined method of choosing stocks, bonds or other assets. Index-based investing has gone from a small part of the investment landscape to a dominant one.

What Is An Index Fund?

An index fund’s objective is to match the returns of a specified index. The goal here is for the investor to simply identify an index they wish to invest in, and identify their preferred vehicle to do so.

The emergence of indexes and index funds has removed a great deal of the minutiae involved in investing, especially for newcomers. Rather than having to understand the particulars of several companies, an index fund investor can simply decide “I want to invest in the broad stock market,” then choose one of many index fund vehicles (mutual funds or ETFs) to pursue that goal.

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Why Invest In Index Funds?

You can’t invest directly in an index. However, you can invest in something that endeavors to track the performance of an index. That’s what index funds are.

Index funds simplify the investment process by collecting a portfolio of stocks or other investments using a construction process and updating procedure that essentially makes it an automated investment portfolio for the investor. Whereas non-index funds, better known as actively-managed funds, involve placing assets with a fund manager who will then decide what to buy and sell and when.

How To Choose An Index Fund

Here are some factors to consider in the search for index funds that make sense for your personal objectives:

• How much can you afford to lose? Before going further, have an understanding of the range of returns you’re striving for, and over what time period you’ll evaluate results. The S&P 500 has had 12-month periods in which it has gained and lost 40%. So, risk management is a great starting point.
• Investors with long time horizons are more likely to stay within the global stock market, rather than seek more diversification through bonds and other asset types.
• From there, it is more about the characteristics of the index funds themselves. Looking for the lowest expense ratio makes sense, but only to the extent you don’t sacrifice in other areas.
• For ETFs, understand that liquidity is determined more by the underlying assets held by the ETF, rather than how much money is invested by all investors in that ETF.

Best 4 Index Funds For 2023

1. Invesco IVZ S&P 500 Equal Weight ETF RSP

• Asset Category: U.S. Stocks
• Assets Under Management:$42 billion
• Inception Year: 2003
• Expense Ratio: 0.40%

RSP appeals to investors seeking an alternative way to own the stocks in the S&P 500 versus the way most index funds own them. Typically, the biggest stocks get the highest weightings. RSP invests in the same 500 stocks, but weights all stocks equally, so each one is about 0.2% of the fund.

After years of dominant performance of the capitalization-weighted S&P 500 over the equal-weighted, a trend change would make RSP a potentially attractive option. Its portfolio sells at 16 times earnings, and yields 1.3%, while the more popular capitalization weighted funds sell at 20 times earnings and yield only 1.1%.

2. Invesco Equal Weight 0-30 Years Treasury ETF (GOVI)

• Asset Category: U.S. Government Bonds
• Assets Under Management: $650 million
• Inception Year: 2007
• Expense Ratio: 0.15%

Bonds and income investing are back. After nearly 15 years of low interest rates rendered bond fund investing less useful, rates are now up due to inflation and the Fed rate hikes in response.

GOVI allows investors to step into the bond market by investing in U.S. Treasury securities across the entire yield curve. It owns bonds from under one year out to 30 years, which involves some interest risk, albeit with significant diversification by maturity year.

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3. iShares MSCI EAFE ETF EFA

• Asset Category: Non-U.S. Stocks
• Assets Under Management: $48 billion
• Inception Year: 2001
• Expense Ratio: 0.33%

EFA may benefit if and when non-U.S. stocks finally close a long performance gap with U.S. stocks. The capitalization-weighted S&P 500 Index is up 210% the past 10 years, while EFA, which invests in stocks outside the U.S., has advanced just 48%. This followed a period of years in which non-U.S. equity investments were more competitive with the U.S. market.

EFA’s diversified portfolio of stocks from Europe, the United Kingdom, Australia and Asia is poised for a long-term comeback. Trading at under 14 times earnings and yielding 2.2%, statistically there is value potential here versus what worked the past decade.

4. iShares Short Treasury Bond ETF SHV

• Asset Category: U.S. Treasury Bills
• Assets Under Management: $20 billion
• Inception Year: 2007
• Expense Ratio: 0.15%

SHV tracks an index of U.S. Treasury Bills that mature from less than a month out to 12 months. That may not sound exciting until you consider that this is about as riskless as it gets, and the fund yields 5.4%. An index fund that simply invests in short-term U.S. Treasurys and pays 3-4 times the yield of the stock market is worth a look.

What Risks Exist With Index Funds?

One common misperception about index funds is that they are somehow less risky than other vehicles. It is important to distinguish between the risk of performing very differently from, say, the stock market, and the risk of losing a lot of money.

Index funds have very low risk of varying from their target index, since their whole reason for being is to track that index. So these funds will be as risky as the indexes they track. Using the examples from above, RSP and EFA will be much more volatile than GOVI, and BIL BIL will be less volatile than the other three, often by a wide margin.

Bottom Line

Keep in mind that “best” is an individual decision whenever it comes to investing. This article is merely a slice of a much larger investment research process. Index funds have become a popular vehicle, and should continue to be. As more of them are created, the more complex, yet opportunistic the research process becomes.

With inflation running at 3.7%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.