Best Index Funds for Long-Term Investors

These low-cost index funds stand the test of time

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The best index funds have low expenses and diversified portfolios that can stand the test of time. But not all index funds are diversified, and some are not ideal for long-term investing. Because there is a wide variety of index funds to choose from, it's important for investors to understand with index funds are best for their needs.

In recent years, many index funds and exchange-traded Funds (ETFs) have hit the market, and many of them are not ideal for long-term investors. These funds usually focus on just one narrow sector, such as biotechnology, social media, or master limited partnerships (MLPs). These narrowly focused funds can put up big returns in the short term, but they can also see big declines.

Niche funds also tend to have higher expense ratios than most other index funds. The best index funds for most investors, however, are broadly diversified and cheap. So without further ado, here are some of the best index funds you can buy for long-term investing.

Best S&P 500 Index Funds

One of the most popular types of index funds invests in the S&P 500 index, which is an index of stocks representing about 500 of the largest companies in the United States, as measured by market capitalization.

  • Fidelity Spartan 500 Index (FXAIX): Fidelity has intensified its competition with Vanguard and now allows investors to get this fund at a dirt-cheap expense ratio at a 0.015% expense ratio. Often the index funds between the two giant rivals are indistinguishable in terms of expenses and performance. Ultimately, the competition creates higher-quality funds for the investor. There is no minimum initial investment for FXAIX.
  • Schwab S&P 500 Index (SWPPX): Charles Schwab made a conscious effort to provide more than just discount brokerage service to investors. They have dipped deeply into Vanguard and Fidelity index fund markets. In recent years, the discount broker has lowered its expenses to compete, head to head, with Vanguard and Fidelity. The expense ratio is a low 0.02% for SWPPX, and there is no minimum investment.

Best Total Stock Market Index Funds

If getting exposure to over 500 U.S. large-cap stocks isn't diversified enough for you, a total stock market fund that invests in thousands of stocks that include large-cap, mid-cap, and small-cap might be of more interest. Here are the best of total stock market funds:

  • Schwab Total Stock Market Index (SWTSX): With an expense ratio of 0.03%, it's tough to beat SWTSX unless you qualify to get lower expense ratios with one of Vanguard's Admiral Shares funds. The minimum initial purchase price for SWTSX is very affordable at $1,000.

Best Aggressive Stock Index Funds

If you're a long-term investor and don't mind seeing market fluctuations and your account balance going up and down in the short term, you might find aggressive stock index funds attractive.

  • Vanguard Growth Index (VIGAX): This fund invests only in large-cap stocks that have growth potential, which makes it a bit riskier but also potentially more rewarding in the long run than S&P 500 Index funds. The expense ratio for VIGAX is a low 0.05%, and the minimum initial investment is $3,000.
  • Fidelity NASDAQ Composite Index (FNCMX): The NASDAQ Index consists of mostly large-cap stocks but many are technology and health stocks that tend to have greater long-term growth potential than broad market indices. So if you don't mind the added risk for the extra long-term return potential, you'll like FNCMX. The expense ratio is 0.3%, and the minimum initial investment is $2,500.
  • Vanguard Mid Cap Index (VIMAX): Perhaps the best way to give yourself a chance to beat the S&P 500 index is to buy an index fund that invests in mid-cap stocks, which have historically performed better than large-cap stocks. Mid-caps are also less risky than small-caps, making VIMSX a rare exception that invests directly in the "sweet spot" of higher returns but without extreme risk. The expense ratio for VIMSX is 0.05%, and the minimum initial investment is $3,000.

Best Bond Index Funds

Bond funds are appropriate for nearly every investor to have a diversified portfolio of mutual funds. Index funds are an ideal way of capturing a large portion of the bond market in just one low-cost investment.

The total bond market index usually refers to index mutual funds—or Exchange Traded Funds (ETFs)— that invest in Barclay's Aggregate Bond Index (BarCap Aggregate). The index is a broad bond index covering most U.S. traded bonds and some foreign bonds traded in the U.S.

Here are the best bond index funds to meet this type of need for diversification and simplicity:

  • Vanguard Total Bond Market Index (VBTLX): This is the biggest bond index fund in the world in terms of assets under management (AUM). This size means it's the favorite of do-it-yourself investors and the majority of fee-only advisors as well. When you buy shares of this bond index fund, you get exposure to the entire U.S. bond market, which is thousands of bonds, spanning several types, including corporate bonds, U.S. Treasury bonds, short-term bonds, intermediate-term bonds, long-term bonds, and more. The expense ratio is just 0.05%, and the minimum initial investment is $3,000.
  • Fidelity Total Bond (FTBFX): This broadly diversified bond fund is similar to Vanguard's VBTLX. However, it has more flexibility in balancing risk and reward. In translation, FTBFX can hold more high-yield bonds, for example, and possibly capture greater long-term returns as a result, as compared to VBTLX. The expenses are a bit higher at 0.45% but an index fund's added expense can be worth it. The minimum initial purchase is $2,500.

Best Balanced Index Funds

If you're looking for an ideal way to have a diverse mix of stocks and bonds in just one mutual fund, the best way to do it is with balanced index funds.

Here are the best index funds with a balanced mix of stocks and bonds:

  • Vanguard Balanced Index (VBIAX): This fund does a great job of keeping costs low and balancing risk and reward over the long term. The asset allocation stays at approximately 60% stocks and 40% bonds, making it appropriate for investors looking for moderate (or medium) risk. Long-term returns have been attractive at nearly 7%, as measured by the 15-year annualized returns through 2016. The expense ratio is low at 0.07%, and the minimum initial investment is $3,000.

There are other balanced index funds, but none beat Vanguard's combination of low cost and long-term returns.

The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.