In this article, we will take a look at the 11 best low risk index funds to buy. To see more such companies, go directly to 5 Best Low Risk Index Funds to Buy.
Index funds have seen a rise in popularity among investors lately thanks to the lower costs, flexibility and the variety of opportunities they provide to investors to hedge against risks. A Wall Street Journal report shared an interesting data point which shows the rise of index funds. By 2021, “two of every five dollars invested in funds was held in index funds specifically—more than twice the share they held a decade earlier.”
The popularity of index funds is part of the broader shift to passive investing. A study by Morningstar says that only one out of every four active funds posted better returns when compared to passive funds over a ten-year period.
Similarly, ETFs have also shot up in popularity in nearly all financial markets of the world. In Europe, where a strict regulatory environment and rules tend to have limited the number of investing opportunities available to average investors, ETFs are seeing expansion and major financial institutions are competing with each other in the space. For example, earlier this year, JPMorgan launched two ETFs in Europe. These ETFs will be meeting all regulations imposed by Europe. These ETFs are focused on ESG investing, a theme highly popular in Europe and in-line with the continent’s long-term carbon emissions goals. A Bloomberg report said that ESG ETFs have seen a lot of positive trends in Europe, unlike declines in the US and other parts of the world.
Fees Wars in the Index Fund World: "Heaven for Investors"
The rising competition in index fund offerings is boding extremely well for investors and causing companies to keep lowering their fees to attract new investors. For example, recently, State Street decreased its fee for SPDR Portfolio S&P 500 ETF (NYSEARCA:SPLG) to just 0.02%. That means if you invest $1,000 in SPLG you’ll have to pay just 20 cents a year in fees.
A Wall Street Journal report took a look at this development in detail and talked to several market experts on what exactly is going on in the industry and how the fees wars are unfolding. The report quoted Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, who said that the lowering of fees is “hell for issuers” but "heaven for investors."
Perhaps the biggest and most obvious benefit of lowering fees is new inflows even during tough economic times like today. For example, when State slashed its fee for the SPDR Portfolio High Yield Bond ETF to 0.05% from 0.1% earlier this year, it saw inflows of a whopping $611 million in just one month.
Investing in index funds has become popular for a reason. Over the past several months and years one thing has become extremely clear: financial markets are highly volatile. When the COVID-19 struck markets crashed but the ensuing months saw unprecedented rise in stocks (including meme stocks). Easy money available via banks combined with stimulus checks injected a strange euphoria in the market that needed correction. That correction came when the Fed woke up to the reality of untamed inflation. When interest rates began to rise, investors fled growth stocks to safer plays. But then the artificial intelligence boom came and investors started to pile into AI stocks like there’s no tomorrow, creating another bubble-like environment. Now, analysts are warning that the AI bubble will drop and tech valuations will crash. All of this has made diversifying your portfolio more important.
When it comes to managing risks and diversifying portfolio, who’s better at the job than Ray Dalio, who has built a money making machine that is Bridgewater Associates. Central to the ideas of Ray Dalio is his risk management and diversification philosophy. He says:
“Bonds will perform best during times of disinflationary recession, stocks will perform best during periods of growth, and cash will be the most attractive when money is tight. Translation: All asset classes have environmental biases. They do well in certain environments and poorly in others. When I say uncorrelated asset classes, what I'm really doing is not using the classic measure of correlation, like stocks and bonds are 40% correlated. What I am instead really referring to us, do you know how they behave, and is it intrinsically going to behave alike or differently? The only way to achieve reliable diversification is to balance a portfolio based on the relationships of assets to their environmental drivers, rather than based on correlation assumptions, which are just fleeting byproducts of these relationships. To do this, we recognize that while asset classes offer a risk premium that is by and large the same once adjusting for risk, their inherent sensitivities to shifts in the economic environment are not the same. Therefore you can structure a portfolio of risk-adjusted asset classes so that their environmental sensitivities reliably offset one another, leaving the risk premium as the dominant driver of returns. Underperformance of a given asset class relative to its risk premium in a particular environment (e.g., nominal bonds in higher than expected inflation) will automatically be offset by the outperformance of another asset class with an opposing sensitivity to that environment (e.g., commodities), leaving the risk premium as the dominant source of returns, and producing a more stable overall portfolio return.”
Best Low Risk Index Funds
Methodology
For this article we chose 11 index funds that give investors exposure to low risk stocks. We preferred funds that have recession-proof, stable companies in their portfolios with strong fundamentals.
Best Low Risk Index Funds to Buy
11. Vanguard Total Stock Market Index Fund (NYSEARCA:VTI)
VTI is one of the best low-cost ways to gain exposure to the US stock market. VTI is up about 44% over the past five years.
10. Vanguard 500 Index Fund (MUTF:VOO)
Vanguard 500 Index Fund (MUTF:VOO) tracks the S&P 500 Index and it is perhaps the best fund for beginners looking for low-risk investments. Despite short-term headwinds and worries the broader S&P 500 index tends to move upwards, albeit at a slower pace. While no investor ever got rich quick investing in the S&P 500, no one has lost money over long periods of time by investing in the index, either.
Some top holdings of Vanguard 500 Index Fund (MUTF:VOO) include Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT). Vanguard 500 Index Fund is up about 48% over the past five years.
9. Invesco QQQ Trust (NASDAQ:QQQ)
Invesco QQQ Trust (NASDAQ:QQQ) gives exposure to the Nasdaq-100 index which includes some of the top technology companies in the US. Invesco QQQ Trust (NASDAQ:QQQ) is up about 92% over the past five years. Some top holdings of Invesco QQQ Trust (NASDAQ:QQQ) include NVIDIA Corporation (NASDAQ:NVDA), Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN). The major holdings of the fund are major companies with established businesses. Having exposure to these companies is low-risk and can increase the chances of long-term gains.
8. Vanguard Total Bond Market Index Adm (MUTF:VBTLX)
While investing in bonds is not promising in a high interest rate environment, over the long term having exposure to investment-grade bonds is considered less risky and ideal for portfolio diversification.
Investors also can generate income via bond investments.
7. Fidelity Blue Chip Growth (MUTF:FBGRX)
Another Fidelity fund in our list, Fidelity Blue Chip Growth (MUTF:FBGRX) gives investors exposure to well-established and well-capitalized companies in the US stock market. Some of the top holdings of the fund include Apple Inc. (NASDAQ:AAPL), NVIDIA Corporation (NASDAQ:NVDA) and Tesla Tesla, Inc. (NASDAQ:TSLA).
Tesla, Inc. (NASDAQ:TSLA) stock is up about 127% year to date.
As of the end of the second quarter of 2023, 79 hedge funds out of the 910 funds tracked by Insider Monkey reported owning stakes in Tesla, Inc. (NASDAQ:TSLA). The biggest stakeholder of Tesla, Inc. (NASDAQ:TSLA) was
Catherine D. Wood’s ARK Investment Management which owns a $1.3 billion stake in Tesla, Inc. (NASDAQ:TSLA).
Fidelity Blue Chip Growth (MUTF:FBGRX) is up about 47% over the past 5 years.
6. ProShares UltraPro QQQ (NASDAQ:TQQQ)
ProShares UltraPro QQQ (NASDAQ:TQQQ) fund tracks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the Nasdaq-100 Index. ProShares UltraPro QQQ (NASDAQ:TQQQ) has exposure to technology, consumer staples, consumer discretionary, communication services and several other sectors.
ProShares UltraPro QQQ (NASDAQ:TQQQ) is up about 119% over the past five years.
