The mechanics of buying classic funds are easy; choosing the right funds to fit your portfolio less so.
The first step is to choose a provider, or one of the growing number of firms that offer index funds. Many of the firms that provide passive mutual funds also provide ETFs.
Some of the mutual fund leaders are Bogle’s Vanguard, as well as Fidelity and Charles Schwab.
On the ETF side, BlackRock’s iShares lead, with $1.4 trillion in assets, according to ETF.com. Vanguard, State Street, Invesco and Schwab round out the top five of some 137 firms that are now players in the industry.
From there, investors need to figure out which index or indexes they want to follow. All the big ones can be tracked, such as the Dow Jones Industrial Average, S&P 500, Nasdaq and the Russell 2000 small-cap gauge.
However, those offerings have blossomed as well. There are now a staggering 161 index providers listed across four different exchanges, providing investors a dizzying assortment of choices, from basic sectors to strategies like high-dividend and buyback providers and the popular FAANG trade of tech leaders.
Then there are fees.
Index funds have always been cheaper alternatives to stock picking, but they’ve gotten more so over the past few years. Industry leaders have been involved in an aggressive price war that has taken the costs in some cases close to zero.
Of course, nothing is foolproof, so there are dangers in passive investing.
Because big stocks historically dominate indexes, outsized waves of selling in a few names can drag down returns. Market pros also worry about liquidity issues, or what would happen if an absence of buyers should suddenly hit. And Bogle himself, while a big advocate of passive investing using index-tracking mutual funds, worried that ETFs invited speculation and were being used primarily by big institutional investors for hedging purposes.
But the avenue to index investing is a wide-open one for individual investors who want to emulate Bogle, who will be remembered as one of investing’s great pioneers.
The five biggest index mutual funds:
- Vanguard 500 Index (VFIAX) ($253.2 billion)
- Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ($203.9 billion)
- Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ($129.9 billion)
- Vanguard Institutional Index Fund Institutional Shares (VINIX) ($116.7 billion)
- Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) ($104.7 billion)
The five biggest index ETFs by market capitalization are:
- SPDR S&P 500 (SPY) ($246.6 billion)
- iShares Core S&P 500 (IVV) ($156.5 billion)
- Vanguard Total Stock Market (VTI) ($100.1 billion)
- Vanguard S&P 500 (VOO) ($95.1 billion)
- Vanguard FTSE Developed Markets (VEA) ($68 billion)