You may think you’re the next George Soros or Warren Buffet, genius stock-picker who’s going to make billions investing in the next Apple or Facebook or whatever. But, did you know that, according to research done by the authors of The Incredible Shrinking Alpha, 92% of actively managed large-cap investment funds failed to beat the S&P500 over a 15-year period?
What does that mean in laymen’s terms? Well, even the so-called experts who manage billions of dollars in investments typically can’t outperform the market in the long term.
So, what’s that mean for your investment strategies? Well, you’re probably better off going with the market rather than trying to beat it! And you do that by investing in index funds.
An index fund is just a mutual fund or ETF with a portfolio that’s meant to track the movements of a particular index, like the S&P 500. So, if the S&P 500 index goes up 5%, so does an S&P 500 index fund.
Index funds are typically considered one of the safest and lowest-cost investments out there and they completely remove the need to spend a ton of time studying individual stocks. Plus, as I mentioned, they usually have a better return than trying to invest in individual stocks anyway.
But, there are a lot of different index funds out there so, in this article, I’m going to tell you the 6 index funds which are, in my opinion, the best options in 2022. These are the 6 best index funds to invest in 2022.
#1: Fidelity ZERO Large Cap Index Mutual Fund (FNILX)
The Fidelity ZERO Large Cap Index Mutual Fund (FNILX) actually tracks an index known as the Fidelity U.S. Large Cap Index, hence the name. And this index is meant to replicate the most popular stock index on the market, the S&P 500, as closely as possible.
By doing so, Fidelity is able to avoid paying a massive licensing fee to Standard and Poor’s, the company that manages the S&P 500. And they’re able to charge a 0% expense ratio, meaning that investing in the Fidelity ZERO Large Cap Index Mutual Fund is essentially free.
Now, as a disclaimer, the Fidelity fund has typically performed about 0.08% worse than comparable S&P 500 funds. And 0.08% is more than the expense ratio on most of the other index funds we’re going to discuss.
So, if you’re smart, you might be wondering why you would invest in this Fidelity fund rather than a true S&P 500 index fund. Well, over time, experts believe the Fidelity U.S. Large Cap Index will become increasingly similar to the S&P 500 index until the two of them are essentially identical.
That’s because the Fidelity fund is still catching up with the older, larger S&P 500 funds. But, once they do, you’ll basically be able to invest in an S&P 500 index fund without having to pay any fee at all, which is a pretty good deal.
And it seems that that’s already happening, considering the 3-year return has been pretty much the same for the Fidelity ZERO Large Cap Index Mutual Fund and the Vanguard S&P 500 ETF since the Fidelity fund launched back in 2018.
#2: Vanguard Real Estate ETF (VNQ)
Over and over, you’ll hear big-time investors say that real estate is one of the best asset classes that you can invest in. Why? Because the real estate market is not nearly as volatile as other investments and you get high returns for the risk that you take.
Plus, real estate funds typically pay out large dividends, which means that you have passive income coming in year after year. And, if you’re going to invest in any real estate index fund, the one to go with, in my opinion, is definitely the Vanguard Real Estate ETF (VNQ).
It’s by far the largest real estate ETF out there with many times more assets than the second largest, which means it’s going to be the most diversified and least risky of the bunch. And it tracks the MSCI U.S. Investable Market Real Estate 25/50 Index, which is an index that broadly tracks the entire U.S. real estate market.
And, while this fund invests in some real estate management and development companies, the majority of its assets are held in REITs, which makes it a great option for those who want a strong dividend investment as well.
As of March 15, 2022, the 12-month dividend yield was a solid 2.89%. Plus, this ETF has some great potential for growth as well as you can see by its historical 5-year return of 8.68%.
Overall, for a stable ETF that tracks the entire real estate market with a low cost of 0.12% expense ratio and that’s a good hedge against inflation and will consistently deliver strong dividends, the Vanguard Real Estate ETF is your best bet.
#3: Schwab Emerging Markets Equity ETF (SCHE)
For all of you patriots out there, this may be hard to hear. But, there are other countries catching up with the U.S.A. in terms of economic prominence. According to some economists, China could overtake the U.S. as the world’s largest economy by 2030. And, at a growth rate of 8.2%, India has the fastest-growing economy in the world, according to the International Monetary Fund.
So, if you want to profit off of these fast-growing economies, the best way to do so, in my opinion, is to invest in the Schwab Emerging Markets Equity ETF (SCHE).
This fund tracks the FTSE Emerging Index, which contains large- and mid-cap companies in over 20 developing countries, with the highest concentrations in China, Taiwan, India, Brazil, and South Africa.
The fund has over $8 billion in assets and its largest holding is in Taiwan Semiconductor Manufacturing, followed by Tencent Holdings and Alibaba Group, both Chinese companies.
With an expense ratio of 0.11%, this is a fairly cheap option for those who want to get in on the potential growth of the developing world. And, while this index has historically trailed the S&P 500 by quite a lot, considering that the vast majority of the Earth’s population lives in developing countries, I believe that these emerging markets are due to explode with growth one of these days.
So, if you’re comfortable with some risk and you agree with me, the Schwab Emerging Markets ETF is a good place to put some of your money.
#4: Fidelity 500 Index Fund (FXAIX)
So, if investing in emerging markets isn’t super appealing to you and you’d rather put your money in the U.S. economy (and in a fund that generates reliable returns with extremely low risk), it’s time to take a look at the Fidelity 500 Index Fund (FXAIX).
This is an official S&P 500 index fund, meaning that it tracks the S&P 500 index almost exactly. And, since pretty much all S&P 500 index funds generate the same returns as the index itself, the best thing to focus on when it comes to choosing which one to invest in is the cost.
And, with a beautifully low expense ratio of 0.15%, the Fidelity 500 Index Fund is about as cheap as you can get for a large-cap S&P index fund. As of right now, the Fidelity 500 has about $366 billion worth of assets under its control, which makes it one of the largest index funds out there and a very stable investment. Plus, with a minimum investment of $0, this is the best option on this list for first-time investors.
What makes S&P 500 index funds such a safe investment is that they include stocks from the biggest companies from all sectors across the U.S. economy. So, if the financial sector isn’t doing well, it may be offset by gains in the tech sector, for instance, meaning that you won’t experience massive losses unless there’s a general stock market crash.
Some of the other index funds talked about in this article definitely carry more risk and more potential for returns. However, if you’re looking for something tried and true and safe for your first-time investment, the Fidelity 500 Index Fund is the one for you.
Plus, with a 5-year return of 13.65%, there’s definitely some potential to make money as well.
#5: Vanguard Russell 2000 ETF (VTWO)
In general, small-cap companies have a much higher growth potential than large-cap companies, but they also carry far higher risk. There is a two-fold thing going on here.
First of all, large-cap companies have the financial resources to be able to weather downturns in the market far better than small-cap companies. However, small-cap companies also need to increase their bottom line by far less money to grow significantly than large-cap companies.
A company with a net income of $100 only needs to make $100 more to double its bottom line while a company with a net income of $1,000 needs to make $1,000 more to double its bottom line.
For these reasons, a riskier yet potentially more rewarding way to invest is by going with small-cap companies. And the best way to do so is with the Vanguard Russell 2000 ETF (VTWO).
This fund tracks the Russell 2000, which tracks 2,000 of the smallest publicly-traded companies in the U.S., some of which you’ve probably heard of. These include Avis Rental Cars, AMC Theatres, and BJ’s Wholesale Club. And, their top holding Ovintiv, is a large natural gas company out of Canada.
With a historic 5-year return of 7.32%, the Vanguard Russell 2000 has trailed S&P 500 index funds; however, that could change if things shift back towards small business in the future.
For instance, if some legislation passes that favors small business heavily, you could see these smaller-cap companies thrive and the Russell 2000 go way up. Plus, with an expense ratio of 0.10%, it’s a relatively low-cost way to invest in small-cap companies.
So, if you’re willing to take on some risk and you want to take a chance on some of the smallest publicly traded companies, put some money in the Vanguard Russell 2000 ETF and wait.
#6: VanEck Semiconductor ETF (SMH)
As with any investment, as a general rule of thumb, you should always know what you’re investing in. So, if you’re sitting there watching this and wondering, What the hell is a semiconductor?, then this is probably not the best index fund for you to invest in.
The great Warren Buffet once said, “Never invest in a business you cannot understand.” But, get on the internet, research everything you can about semiconductors and what purpose they serve in the world of today, and then come back and consider investing in the VanEck Semiconductor ETF (SMH).
This fund tracks the MVIS U.S. Listed Semiconductor 25 Index, which contains 25 domestic and international producers of semiconductors, all of which are listed on U.S. exchanges. And, if you’re wondering why semiconductors are such a big deal, they’re essentially the brain of electronics and are used in technologies in sectors including communications, computing, healthcare, military systems, transportation, and clean energy.
Pretty much, the more smart technology makes its way into everyday life, the more important semiconductors are going to be.
If you’re already following this industry, you’ll know that 2022 has been rough to the semiconductor industry as it’s experienced major sell-offs due to chip shortages. However, that could mean that right now is the best time to invest while share prices are on a downswing.
And, with the semiconductor industry projected to double by 2030, this could be a huge win for your portfolio in the long term. However, an ETF that’s so specific to an industry has a lot more risk than, say, an S&P 500 index fund.
So, if you’re not willing to take on some risk, this isn’t the index fund for you. But, if you can handle some risk, the VanEck Semiconductor ETF has huge potential upside.