As the U.S. economy takes a slow bow and China becomes the leading centre, according to financial prodigies like Ray Dalio, there is immense opportunity to invest in new index funds.
The world’s biggest hedge fund, Bridgewater Associates, is indeed amplifying its number of shares in Alibaba by almost a third in the fourth quarter of 2021 suggests now is the time to grow your wealth by putting it into smart, emerging market index funds.
In this guide, we’ll cover the top index funds for that.
Table of Contents:
Our Top Pick of Index Funds (UK) 🇬🇧
Considering index funds investment? When crunching your Investment Data, take time to learn your strategy and use good financial common sense.
A few key things for understanding top index funds:
- Very low taxes and fees, with higher diversification.
- Very popular with investors who want passive index trading, rather than hands-on fund management.
- Not designed for aggressively picking the right of opportunities, and there might not be a portfolio manager to trim underperforming indices.
- Some are better than others, but none are immune from market depressions.
1. iShares Asia-Pacific ETF – Top Index Fund for Investing in China
As mentioned in the introduction, the Asia-Pacific is on the slow steady rise, and so offers opportunities to diversify investments early on, including all of the major names the likes of Ray Dario and Warren Buffett are doubling up holdings in, such as JD.com and Alibaba Group.
Since the inception of the fund, its total gross returns have been around about 6%, with a return of over a whopping 12% for its five-year average (based on latest figures published at the end of 2021). Its top-four performing holdings are Taiwan Semiconductor Manufacturing (14.10%), Tencent Holdings Ltd (11.87%) Samsung Electronics Ltd (11.33%) and Alibaba Group Holding Ltd (7.53%).
Note that this is a fund based on dividends as opposed to market prices. There are overall 50 top-performing companies from around Asian-Pacific regions, all with a strong history of dividend payouts. The largest exposure comes from Japan and Hong Kong (40.78% and 32.62% in that order). But company funds also spread to Singapore, New Zealand, and Australia – to hedge this holding.
Note the graph however; in 2020, the fund dropped by nearly 20% in dividend value (partly due to regulatory pressures on China that have since calmed). Which means this index fund is naturally better suited to traders who can tolerate the risk for long-term as opposed to near-term gains; particularly because so many of his companies come from emerging markets which are known for higher volatility.
2. SPDR S&P 500 – Top Index Fund for Leading US Companies
While the U.S. is on a slow but sure decline, the SPDR S&P 500 offers in-built mechanisms to insulate you from the depreciations that should first trickle up from companies with lower market capitalisations.
Simply put, this index automatically readjusts itself to not only contain the largest but only the best-performing stocks on the U.S. markets.
In short, it isn’t allocated based on market capitalisation alone, but has this rebalancing mechanism put in place by the regulator of the index fund issuer.
What’s on offer is a fund that tracks the market prices of industry-leading corporations in the US, listed on NASDAQ and the New York Stock Exchange (NYSE). Among these names whose stocks are traded globally include Meta, Apple, Tesla, Amazon, Disney, IBM, Microsoft, Walmart, and a hundred more of the best brands listed in any of the best stockbrokers worth their salt.
Performance -wise, the S&P 500 has a track record longer than your arm for investor returns. Indeed, since its formation in 1926, the index has seen returns annually in excess of 10%. These awards are furthermore hedged by coming into forms: typical capital gains which tracks market prices of index funds and increases as share prices do; and quarterly returns by dividends payouts.
Certain platforms offer this on a commission-free basis.
3. iShares FTSE 100 – Best Index Fund for Leading London Stocks
This index fund tracks the FTSE 100.
Companies included in its fund are all chosen based on market capitalisations. Which means any included names will be among the 100 most-valued corporations listed on the London Stock Exchange, at the current time of the market, according to market-share.
For a sense of where your money will be allocated, iShares FTSE 100 ETF has the following leading holdings: AstraZeneca (6.83%), Unilever (5.28%), Diageo (4.14%) and HSBC (4.07%).
However, not far behind are the likes of BP, GlaxoSmithKline, British American Tobacco, and Royal Dutch Shell. Nevertheless, constituent holdings vary each quarter according to their performance on the London Stock Exchange.
As with the S&P 500, the iShares FTSE 100 ETF offers both dividends and capital gains returns. Keep in mind that the FTSE 100 has entered into its decline faster than its U.S. counterpart in the past few years. For instance, the past five years through 2016 to 2021 has seen less than 2% growth in the FTSE 100. During that same time period, the S&P 500 grew by a bit over 100%.
4. Vanguard Total Stock Market – Top Index Fund for High-ROI U.S. Stocks
Note the graph to the right if you would.
You get nearly 4,000 constituent U.S. stocks with this index fund from the renowned Vanguard fund provider. It’s one to go for if you want maximum diversification, meanwhile sticking to a moderately aggressive allocation plan that sits in the stable section of the U.S. economy.
The Vanguard Total Stock Market Index Fund ETF has fair crossover with the S&P 500, which itself provides access to 500 blue-chip stocks.
By comparison, Vanguard index fund gives you nearly 10x this number, each taking the form of U.S. headquartered corporations. Which unsurprisingly covers a wide range of market sizes and business types. And means you get exposed to equities in the thousands spanning across almost every sector and industry that you can fathom.
In order to hedge against risk and market volatility, the Vanguard Total Stock Market Index Fund ETF places strong emphasis on companies with higher market capitalisations. So while you will see a bunch of blue-chip stocks – the likes of Alphabet/Google, NVIDIA, Apple, and Berkshire Hathaway – also included will be a bunch of mid-sized holdings you may not know (reasons for their inclusion range operations in niche markets, to being on-the-rise).
Regardless, the Vanguard Total Stock Market fund has performed with excellent results since its formation in 2001. In fact, they’ve managed to achieve an annualised return of 8.80%. Recent years have seen more extreme returns of nearly 20% (2018-2021) and an astonishing 44.32% between autumn 2020 and autumn 2021.
5. iShares Core Dividend Growth ETF – Top Index Fund for Dividends
Another fund on the rise.
This fund is for investors who want to focus on stocks with dividend payouts – which bolsters your income each quarter (every three months) and also brings capital gains.
It’s worth a note that corporations who offer dividends are usually well-established, robust, and resilient to downturns – in short, they have the financial reserves to distribute profits with shareholders.
Learning to discern why dividend stocks to migrate your portfolio can be difficult – particularly for newbies. Which means it’s worth considering putting one gross investment into the the iShares Core Dividend Growth Index Fund.
As implied by the name, the index fund is associated with high shares, which is an exchange-traded fund provider. Each constituent holding has dividend payouts as well as long track records for dividend appreciations. This commonly used index fund has nearly 400 different stocks – each is U.S. listed and weighted with care.
Finally, to give you a sense of holdings included, the following companies have between 2% and 3% weightings: JPMorgan, Apple, Verizon, Microsoft, Johnson & Johnson, Pfizer, and Procter & Gamble. On the smaller side of the market, holdings include Simpson Manufacturing, Cohen and Steers, and Cognex Group.
Buying Guide for Top Index Funds 2022 🔥
This section is good for beginners who are still getting to grips with how index trading works.
So it’s one to earmark when making a buying decision on the best index fund to go for:
What Are Index Funds?
Index funds are a subset of mutual funds. Mutual funds work as wider financial vehicles that invest pools of money from multiple investors, in order to invest in many types of securities (eg. stocks and bonds). The fund manager handles the fund’s buying and selling decisions.
But by comparison, an index fund focuses on securities existing inside of a specific market index, as the trading vehicle, and bids on its potential returns on investment. Itself, an index is a collection of securities that make up a market sector.
For instance, if you wanted to invest in 500 of the biggest (by market cap) U.S. companies, you could use the S&P 500 index. If you wanted to focus on the 30 most influential U.S. firms, however, you would use the Dow Jones Industrial Average index. There are many other indices - some represent specific stock market segments. Thousands exist, with some containing just a few firms and others thousands.
How Index Funds Work
Just as with regular mutual funds, index mutual funds pool together the wealth of multiple investors. The fund manager allocates money towards preferred securities and financial instruments inside of the index being tracked.
Some elements of an index may have wide investments in stocks, bonds, ETFs, and other instruments, whereas others are tracked in smaller parts across time.
Why Index Funds can be Reliable Long-Term
Advantages of Index Funds
Index funds have certain advantages over individual stocks or bonds or doing your own active management of mutual funds.
Low fees ✔️
Commissions are much less than for funds with active management. As with any business, high expense ratios can compound over time and drain investment returns, which is one reason that the majority of actively managed funds underperform across time.
Holds value ✔️
When you purchase an index fund, you’re basically getting a fraction of many securities. This immediately spikes diversification to hedge against sudden downturns in any single securities price.
Tax efficient ✔️
Index funds are also extremely tax efficient. Most indexes have very small turnover ratios relative to funds that are actively managed. Which means fund managers do not generate lots of income tax from constant exchanging of securities.
Finally, because active research isn’t needed, the expense ratio for index funds is very low (this can sometimes even be 0%) relative to actively managed funds.
Typical expense ratios for major market index funds, such as the S&P 500, are typically at around 0.05%. Which means for every £50,000 invested, the fund firm will charge £25 yearly to reimburse the fund manager and pay for its fees.
Active funds by comparison have an expense ratio of about 1%.
Disadvantages of Index Funds
It’s fairly frequent that an index fund underperforms. Which means it did not meet expectations, based on the market condition of the wider index that is being tracked. While this doesn’t mean a loss, it means returns are not being made at the rate expected. This can potentially last for years of lost opportunity.
No Active Manager ✖️
Index funds do not have active managers; otherwise, professional investors who trim and adjust portfolios for performance optimisation. Index funds instead only have management in the sense of investments being added or removed. Which puts you essentially into the hands of the larger index and its overall performance.
No Room for Aggressive Growth ✖️
With safety comes less room for opportunity. Index funds are built to match the performance of the wider financial index, but not to outperform the index. Which means exceptional growth outside of the market itself is not possible. You have to settle with the average growth of the index.
No Individual Choice On Underlying Investments ✖️
Individual investors do not have any say on the specific underlying investments contained in the index fund. Which means you are either all-in or not. You cannot opt to add or remove specific stocks. You cannot move more of your investment across to one index segment or the other. Your entire fund will be invested as it is. Which means you have to settle for missing out on any opportunities you think you see. Rules and regulations of index funds also mean there’s no room for adjustment.
Over-Specialisation of Certain Index Funds ✖️
Lastly, some index funds suffer from over specialisation. In other words, these types focus too much on a market index that tracks only a small market segment or niche. They’re less insulated from downturns in specific sectors, which can mean substantial losses for the fund. Which can also be amplified if some key component collapses, such as governmental or industrial.
Choosing the Best Index Funds & Fund Managers
Evaluating index funds
There are a few components to factor in when evaluating index funds and discerning the best mutual fund provider to go with.
To begin with, you should select a suitable index for your fund to track, based on objectives and sectors. The broader, the more robust against market downturns.
The S&P 500 is good for the overall U.S. stock market (there are others too, such as the Wilshire 5000), the FTSE 100 for the 100 largest companies on the London Stock Exchange. You may want to also include indexes for smaller companies, such as the S&P 600.
Once you know what index you want to track, you can browse all over the funds that track the index. You may find it contains only the index or many others too.
Expense ratios and tracking errors
These are the two most important considerations from this point. Expense ratios vary from service service, including whether it is using the mutual fund or the ETF version of the index fund.
Rather than choosing the index fund with the smallest expense ratio, first double check the tracking error for the fun. This figure shows you how accurately funds represent the target index’s returns. The better the fund can track returns, the higher the expense ratio will probably be -- but it is often worth the extra fee.
From there, deposit your funds to your platform or broker and select Buy.
Activities of an index fund manager
Because index funds track market indexes, the fund manager is tasked with keeping the fund holdings up to date if the index changes. For instance, the S&P 500 index updates once a quarter; the fund manager needs to keep up with these updates.
Foreign managers also allocate fund pools. But their responsibilities are substantially less research heavy compared to an actively managed mutual fund. That’s because usual funds want to outperform their index. For this, mutual funds need to be structured differently from the benchmark market index.
Index Funds vs. Hedge Funds
- Hedge funds use active investment strategies, exchanging securities in real time while the manager comes across opportunities to boost profits and hedge against risks; by comparison, index funds are passive, designed to match and will outperform the benchmark market index.
- Hedge funds only accept wealthy parties, qualified investors, and big institutions such as pension funds and college endowments, because large minimum deposits are required; whereas index funds are open to general consumers who have small starting capitals.
- Hedge funds are also less transparent, giving investors management updates every-so-often; whereas index funds are simplified, with daily updates and performance metrics as the markets open.
- Hedge funds take a large percentage of expenses, usually a few points of the securities being managed; whereas index funds have very low expenses, normally under 0.1%.
Index Funds vs. Mutual Funds
- ✔️ Index funds aim to match the market, whereas active mutual funds aim to outperform it. ✔️ Active mutual funds normally have greater expense ratios than index funds.
- ✔️ Index funds have steady and relatively predictable performance across time; active mutual funds tend to be more volatile.
Index Funds vs. ETFs
The key difference between an ETF and an index fund is the ETFs are directly tradable (for buying and selling) throughout the day, whereas index funds are only available at a fixed price at the close of the trading day.