Which Index Funds Have the Best Returns?
In fact, there are a handful of funds that consistently outperform their peers, and understanding the nuances behind their success can make a significant difference in your investment strategy. But before we dive into the specific funds, let’s explore what makes an index fund a great choice for long-term investors.
Why Index Funds?
Index funds are essentially a collection of stocks or bonds that track a specific index. This could be something as broad as the S&P 500, or more specific like a sector-based index such as technology or healthcare. The beauty of index funds is that they offer instant diversification, reducing your risk by spreading your investment across multiple companies. Furthermore, index funds tend to have lower fees compared to actively managed funds, meaning you retain more of your profits.
The return on index funds is directly tied to the performance of the index they are tracking. Historically, many broad market indexes like the S&P 500 have provided returns of around 7-10% per year. But, there are certain funds that have outpaced the average, delivering even more substantial gains. These are the funds we will focus on today.
1. Vanguard 500 Index Fund (VFIAX)
It would be impossible to talk about index funds without mentioning the Vanguard 500 Index Fund (VFIAX). This fund tracks the S&P 500 index, meaning it invests in the 500 largest companies in the U.S. The Vanguard 500 Index Fund has delivered an average annual return of approximately 10.5% over the past decade, making it a top performer. The low expense ratio of just 0.04% further enhances its appeal, as fewer fees mean more of your investment returns go directly into your pocket.
2. Fidelity 500 Index Fund (FXAIX)
Another strong contender is the Fidelity 500 Index Fund (FXAIX), which also tracks the S&P 500. The fund has a reputation for mirroring the performance of the index extremely well. With a 10-year average return of 10.4%, it’s very close to its Vanguard counterpart but comes with no minimum investment, making it more accessible for new investors.
3. Schwab S&P 500 Index Fund (SWPPX)
The Schwab S&P 500 Index Fund (SWPPX) has gained popularity for both its performance and its ultra-low expense ratio of 0.02%. The 10-year average return of around 10.3% speaks to the fund's reliability. What makes this fund particularly attractive is Schwab’s commitment to keeping costs low, which, combined with no minimum investment requirement, provides a welcoming option for those just starting their investing journey.
4. Vanguard Total Stock Market Index Fund (VTSAX)
For investors seeking broader exposure, the Vanguard Total Stock Market Index Fund (VTSAX) is an excellent choice. This fund doesn’t just track the S&P 500, but rather the entire U.S. stock market, meaning it includes mid-cap and small-cap stocks as well. Over the past 10 years, it has delivered an average return of 10.1%, closely mirroring the performance of the broader market. Its expense ratio is also low, at 0.04%.
5. Fidelity Total Market Index Fund (FSKAX)
Like VTSAX, the Fidelity Total Market Index Fund (FSKAX) provides exposure to the entire U.S. stock market. The 10-year average return of 10.2%, coupled with an expense ratio of 0.02%, makes it a formidable competitor in the total market space. Its performance is consistently in line with the broad U.S. market, making it an ideal choice for investors looking to cast a wider net.
6. iShares Core S&P 500 ETF (IVV)
The iShares Core S&P 500 ETF (IVV) is another fund that mirrors the performance of the S&P 500, but with a twist. As an ETF (exchange-traded fund), it offers more liquidity compared to mutual funds like VFIAX or FXAIX, allowing you to trade it throughout the day. The average return of around 10.4% over the past 10 years, combined with its low expense ratio of 0.03%, makes it an attractive option for those who want the flexibility of an ETF with the performance of a solid index fund.
7. SPDR S&P 500 ETF Trust (SPY)
SPY is one of the most well-known and widely traded ETFs in the world. It tracks the S&P 500 and has an expense ratio of 0.09%, which is slightly higher than some other funds but still competitive. With a 10-year average return of approximately 10.2%, it’s a reliable option for those who want to invest in the U.S. large-cap market and have the ability to trade throughout the day.
Analyzing Returns
To understand which index fund offers the best returns, we need to look at both historical performance and expense ratios. Generally, index funds that track the S&P 500 perform similarly, with only marginal differences in returns. The table below provides a comparison of the average annual returns and expense ratios of the top funds discussed:
| Fund | 10-Year Average Return | Expense Ratio |
|---|---|---|
| Vanguard 500 Index Fund (VFIAX) | 10.5% | 0.04% |
| Fidelity 500 Index Fund (FXAIX) | 10.4% | 0.015% |
| Schwab S&P 500 Index Fund (SWPPX) | 10.3% | 0.02% |
| Vanguard Total Stock Market Index Fund (VTSAX) | 10.1% | 0.04% |
| Fidelity Total Market Index Fund (FSKAX) | 10.2% | 0.015% |
| iShares Core S&P 500 ETF (IVV) | 10.4% | 0.03% |
| SPDR S&P 500 ETF Trust (SPY) | 10.2% | 0.09% |
The performance between these funds is close, with the most notable differences being in expense ratios and fund accessibility. When choosing between these options, it often comes down to personal preference, particularly regarding ETFs vs. mutual funds, and the importance of the expense ratio to your long-term returns.
Conclusion
Choosing the right index fund can have a significant impact on your long-term investment success. Vanguard, Fidelity, Schwab, iShares, and SPDR all offer excellent funds that have performed well over the last decade. The key is to find the right balance between performance, fees, and your investment goals. Whether you opt for a fund that tracks the S&P 500 or a total market fund, you can be confident that these funds will provide you with steady returns and a safe harbor in a volatile market. Long-term investment is the real strategy here, and with the right index fund, you’ll be set for years to come.
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