This year have been extremely challenging for investors. After double digit market returns in 2013 and 2014. Investor optimism did not carrying forward to 2015.
It pays for long term investor to maintain exposure to the public market. Low cost market index funds that track the major market indexes allow investors market exposure while eliminate excess fees that could cut the full potential of the returns.
We highlight the best index fund for the major market indices the S&P 500, Nasdaq and Russell 3000 and the main differences between each index so investors understand the underlying industry exposure. We have previously provided a detailed analysis of Dow Jones Industrial Average.
Aside from market index funds which provide investor option to invest in the market as whole there are also sector specific index funds which is one of the best means for investor exposure to a particular sector like housing, health care and metal and mining.
Standard and Poor’s 500 Index Fund (S&P 500)
S&P 500 index includes 500 largest listed US stocks. It is the go to market index for most investors due to the diverse number of companies in the index, the perceived safety of blue chip names and long track record of delivering returns for investors.
SPDR S&P 500 ETF (SPY) is one of the largest listed ETF. Importantly investors get a lot bang for their buck given that fees are only 0.10% of AUM a year. Pie chart below shows the sector breakdown of companies in the SPY ETF.
It shows tech (information technology), financials and the health care sector are the 3 largest components of the index.
Top 10 holding of SPY ETF are represented by giants of american innovation and industry with the likes of Apple, J&J, GE, Exxon and Berkshire.
|Exxon Mobil Corporation||1.9%|
|Johnson & Johnson||1.5%|
|General Electric Company||1.5%|
|Berkshire Hathaway Inc. Class B||1.4%|
|Wells Fargo & Company||1.4%|
|JPMorgan Chase & Co.||1.3%|
|Procter & Gamble Company||1.2%|
SPY ETF Performance
Long term performance of SPY shows the market has been in a bull run for the last 5 years. It has recovered since the depth of the credit crises where it returned 13% annually after fees and broke its prior peak at the start of 2013.
Long term investors should note even with the dip in value in 2007/8, the 10 year return of Standard Poor 500 is 8% and 9% since the SPY ETF inception since 1993.
NASDAQ Index Fund (Nasdaq 100)
Nasdaq traditionally is known to be a tech heavy index. After all it embodies the dot com bubble of the 2000s. Powershares provides an alternative market index Nasdaq 100 Index Fund (QQQ ETF) for investors. It is encompasses 100 largest companies listed on the Nasdaq.
Sector breakdown of QQQ ETF shows more than 50% of the value of companies in the Nasdaq ETF is in the information technology area.
Nasdaq ETF 10 year performance averaged 13% while since inception is only 6% due to period including the dot com bubble years. Nasdaq only exceeded the bubble level of 5000 in 2014 with a much different composition and a much investable selection of companies with actually profitable companies that are in the forefront of consumer like Facebook, Google and Intel.
|Gilead Sciences Inc||3.1%|
|Cisco Systems Inc||2.9%|
Important to note that the top 10% of Nasdaq ETF is that it account for nearly 50% of the fund. Top 10 position of S&P 500 ETF accounts for 18% of the ETF. This shows that it is a much more concentrated fund even with just 100 stocks in the index.
Downside of a heavy reliance on technology sector is the low immediate income paid to investors. Income focused investors can focus on Dividend ETF that look at the investable universe with an emphasis on dividend returns.
At the other end where large cap focused indices like S&P 500 and Nasdaq 100. Russell 2000 is a small cap index that captures the aggregate weighted returns of the 2000 small cap stocks. The index on a 10 year return horizon averaged 8.8% annually and 14.5% a year on 5 year horizon.
The small cap index funds like IWM track the Russell 2000. See our small cap ETF research to get a detailed breakdown of IWM.
In addition to best index fund for long term investors from above. There are index funds which can provide international market exposures either on a regional basis like Europe or specific countries such as China.