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As the U.S. economy takes a slow bow and China takes centre stage in the global economy, there has never been a better opportunity to invest in new index funds.

US vs China Economy

The signs can be seen all through the financial world; the world’s biggest hedge fund, Bridgewater Associates, is amplifying its number of shares in Alibaba by almost a third and this is just one indication that 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, whether you are just getting started, or are looking to expand your existing portfolio.

Ready to invest? Then read on for all you need to know!

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.

There are a few key things to understand when discussing index funds:

  • They have very low taxes and fees, with higher diversification.
  • Index funds are very popular with investors who want passive index trading, rather than hands-on fund management.
  • They are 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, the Asia-Pacific is on the slow steady rise, and this in turn offers great opportunities to diversify investments, 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.

iShares Asia-Pacific ETFiShares Asia-Pacific ETF

Your capital is at risk.

Great Returns

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%). This makes it one of the best index funds in terms of returns, and a great option for those looking for a positive addition to their portfolio.

Plenty of Exposure

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.

Long-Term Investment

As with any investment, however, it is important to be aware of ups and downs – in 2020, the fund dropped by nearly 20% in dividend value (partly due to regulatory pressures on China that have since calmed). This is one of the best index funds for 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 that are known for higher volatility.

PROS

  • 12% over five years - great for growing your investments quickly
  • Access to top performing companies
  • 32.62% Hong Kong Companies - great when the market is strong in this area

CONS

  • Best for long-term investment - may not be the best option for those looking for short-term gain

2. SPDR S&P 500 – Top Index Fund for Leading US Companies

With the US market looking a little uncertain, this is one of the best index funds to see you through the uncertain times.

The SPDR S&P 500 offers in-built mechanisms to insulate you from the depreciation that should first trickle up from companies with lower market capitalizations.


SPDR S&P 500SPDR S&P 500

Your capital is at risk.

So what does this mean? Simply put, this index automatically readjusts itself to not only contain the largest but only the best-performing stocks on the U.S. markets.

Rather than being allocated based on market capitalisation alone, this fund includes a rebalancing mechanism put in place by the regulator of the index fund issuer, allowing you to access the best index funds at that moment in time.

Good Range of Investments

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.

Strong Reputation

Performance-wise, the S&P 500 has an excellent for investor returns. 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 track market prices of index funds and increase as share prices do; and quarterly returns by dividends payouts. 

PROS

  • Capital gains + dividends - great for those looking to focus on this
  • Adjusts for performance - this means that you are not at the mercy of the market
  • Great variety of investments - great for diversification

CONS

  • U.S. on decline - this could impact your investments
  • Only U.S. stocks - not the best if you like to access a global market with your stock market index

3. iShares FTSE 100 – Best Index Fund for Leading London Stocks

This index fund tracks the FTSE 100, and is one of the best index funds for allowing you to make up-to-the-minute decisions about your finances.

Wide Choice of Quality Funds

iShares FTSE 100iShares FTSE 100

Your capital is at risk.

Companies included in its fund are all chosen based on market capitalisations. This means that 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. This offers a wider range compared to other index funds, and also ensures that you will be investing in some of the highest quality options in the stock market index.

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.

Opportunities for Varied Returns

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%.

PROS

  • 100 top LSE firms - chance to invest in some great names
  • Capital gains + dividends - maximise your returns
  • Adjusts for performance - keep your investments a little safer and benefit from upswing in the market

CONS

  • Only 1.87% average - quite low compared to other options
  • Only London stocks - can be quite restrictive

4. Vanguard Total Stock Market – Top Index Fund for High-ROI U.S. Stocks

Vanguard have long had an established reputation within the stock market, and remain a popular option for those looking for a quality stock index fund.

Vanguard are often considered to have some of the best index funds in the industry.

Vanguard Total Stock MarketVanguard Total Stock Market

Your capital is at risk.

Wide Range of Stocks

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.

Good Variety

The number and breadth of stocks available unsurprisingly covers a wide range of market sizes and business types, meaning that you get exposed to equities in the thousands spanning across a huge array of industries and sectors.

Safeguards to Protect Investors

In order to hedge against risk and market volatility, the Vanguard Total Stock Market Index Fund ETF places a strong emphasis on companies with higher market capitalizations. 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).

Strong Historic Reputation

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.

PROS

  • Diversified U.S. stocks - have a wide, diverse portfolio
  • Strong performance with a historic record of success
  • 44.32% returns - this is strong compared to other change traded funds and other index funds

CONS

  • Only U.S. stocks - this can limit your options if you prefer to trade on a global market

5. iShares Core Dividend Growth ETF – Top Index Fund for Dividends

Another fund on the rise is the iShares Core option, which is the perfect option for those looking for an index fund that focuses on dividends.

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.


iShares Core Dividend Growth ETFiShares Core Dividend Growth ETF

Your capital is at risk.

It’s worth a note that corporations that offer dividends are usually well-established, robust, and resilient to downturns – in short, they have the financial reserves to distribute profits with shareholders.

High Range of Quality Shares

As implied by the name, this index fund is associated with high shares, and 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.

Big Names to Invest in

This is a great option if you want to access some of the biggest names in the financial world. 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.

PROS

  • 0% commission (eToro) - keep more of your investment without spending on fees
  • Capital gains + dividends - ideal for those looking for dividend-focused options
  • Well-established holdings - a chance to invest in big names

CONS

  • Only U.S. stocks - can be hard to diversify

Buying Guide for Top Index Funds 2023 🔥

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.


index

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.

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Low fees ✔️

Commissions for an index fund 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. This means fund managers do not generate lots of income tax from constant exchanging of securities. 

Inexpensive ✔️

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 

Some of the main downsides that can come with an index fund include:

Under-Performance ✖️

An index fund tends to underperform fairly frequently, and this 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 optimization. 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. This 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., and this means you are either all-in or not. You cannot opt to add or remove specific stocks, and you cannot move more of your investment across to one index segment or the other. Instead, your entire fund will be invested as it is., meaning that 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-specialization 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. This can also be amplified if some key component collapses, such as governmental or industrial.

Choosing the Best Index Funds & Fund Managers

Best Index Funds

So, just how do you go about choosing the best index fund and managers? There are a few things to factor into your decision:

Evaluating Index Funds

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), and the FTSE 100 is best 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

Two of the most important considerations are expense ratios, and tracking errors. Expense ratios vary from service to 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.

What are The Differences Between Index Funds vs. Hedge Funds

It can also be useful to understand the difference between an index fund and hedge funds, and these are as follows:

  • 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.


FAQs

What are Index Funds?

An index fund refers to a type of mutual or exchange-traded fund that tracks the return of the market index. Some great examples of an index fund include the S&P 500 Index and the Russell 2000 Index.

Are Index Funds Better Than Stocks?

Index funds track portfolios that are made up of many stocks, and this allows for a more diverse portfolio. Investors can then benefit from advantages such as increasing the expected return of the portfolio while minimizing the overall risk.

What are The Pros and Cons of Index Funds?

There are a number of pros to index funds, and these include a lower cost, the chance to diversify, and the fact that little financial knowledge is needed to get started. On the downside, you will have little choice, and be unlikely to be able to beat the market.