13 Best Index Funds for Young Investors (6 From Vanguard) (2024)

Get your portfolio off the ground on the right foot at a young age with passive, buy-and-hold index investing. Here we'll look at the best index funds for young investors for 2024.

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In a hurry? Here's the list:

  1. VOO – Vanguard S&P 500 ETF
  2. ITOT – iShares Core S&P Total U.S. Stock Market ETF
  3. VT – Vanguard Total World Stock ETF
  4. IXUS – iShares Core MSCI Total International Stock ETF
  5. MGC – Vanguard Mega Cap ETF
  6. VIG – Vanguard Dividend Appreciation ETF
  7. NTSX – WisdomTree 90/60 U.S. Balanced Fund
  8. AGG – iShares Core U.S. Aggregate Bond ETF
  9. GOVT – iShares U.S. Treasury Bond ETF
  10. FSKAX – FidelityTotal Market Index Fund
  11. FTIHX – FidelityTotal International Index Fund
  12. VTWAX – Vanguard Total World Stock Index Fund Admiral Shares
  13. VBTLX – Vanguard Total Bond Market Index Fund Admiral Shares

Contents

Introduction – Index Funds

John Bogle, founder of Vanguard and considered the father of index investing, said “invest early and often.” Many don't realize how powerful that statement and approach is until it's too late. One of the main regrets I have in life is not investing earlier, and not investing smarter when I did start.

For far too long I erroneously believed that I was part of the 1% who could trade stocks in the short-term and beat the market. Years later I finally accepted the truth that stock picking doesn't beat the market for the vast majority of investors, especially over long investing horizons.

Thankfully, if you've arrived here, you probably already know that fact. Investing in broad indexes drastically lowers portfolio volatility and risk, especially when incorporating multiple asset types. I delved into the nature of index funds and index investing as a strategy in more detail here if you're interested. Below we'll explore some of the best index funds for young investors for long-term growth.

The Best Index Funds for Young Investors

Index funds come in the form of mutual funds and ETFs. We'll explore a few of each here. ETFs should be available at any major broker. Mutual funds are considered an “older” product and are likely only available from the larger traditional brokers like Vanguard, Schwab, etc.

The only major differences between ETFs and mutual funds nowadays are that mutual funds may have minimum investment requirements whereas ETFs do not, and the buying and selling of ETFs allow for price control of entry and exit whereas mutual funds simply trade at their end-of-day price.

ETFs for Young Investors

Here's a list of the best ETFs for young investors.

VOO – Vanguard S&P 500 ETF

VOO is Vanguard's ETF to track the S&P 500 index, comprised of 500 of the largest companies in the United States. The S&P 500 index is a proxy for what is referred to as “the market.” VOO has an expense ratio of 0.03%.

ITOT – iShares Core S&P Total U.S. Stock Market ETF

If you also want some exposure to small- and mid-cap stocks, which have outperformed large-caps historically, this total market index fund from iShares is great. The fund holds over 3,500 stocks. This ETF seeks to track the S&P Total Market Index and has an expense ratio of 0.03%.

VT – Vanguard Total World Stock ETF

Prefer to invest globally? Vanguard's Total World Stock ETF is roughly half U.S. stocks and half foreign stocks. This ETF seeks to track the FTSE Global All Cap Index, delivering global diversification with equities. The fund contains over 8,500 stocks and has an expense ratio of 0.08%.

IXUS – iShares Core MSCI Total International Stock ETF

If you live in the U.S. and have home country bias and want to dial in your ex-US stock allocation manually instead of using the global market weight with VT, you can do so with IXUS, the iShares Core MSCI Total International Stock ETF, which seeks to track the MSCI ACWI ex USA IMI Index. In other words, this ETF is composed of all stocks outside the United States. One might opt to build their 100% stocks portfolio using 80% ITOT and 20% IXUS, for example. IXUS has an expense ratio of 0.09%.

MGC – Vanguard Mega Cap ETF

If you only want the largest household name companies in your portfolio but still want global diversification, Vanguard's Mega Cap ETF holds roughly 250 of those. Think Apple, Amazon, Google, Disney, Johnson & Johnson, etc. In theory, these large companies should have lower volatility than smaller companies, meaning these stocks are usually more “stable.”

VIG – Vanguard Dividend Appreciation ETF

Want a dividend focus in your portfolio? This ETF tracks the NASDAQ US Dividend Achievers Select Index, formerly known as the Dividend Achievers Select Index, which is comprised of companies that have increased their dividend payment for 10 consecutive years. VIG has an expense ratio of 0.06%.

NTSX – WisdomTree 90/60 U.S. Balanced Fund

A special mention on this list is NTSX. I explored it in more detail here. This fund from WisdomTree employs what's known as leverage, a way to enhance market exposure without additional capital outlay. Leverage of “2x” or “200%,” for example, would mean your $10,000 investment gets you $20,000 of market exposure. This can obviously magnify both gains and losses.

I'm obliged to suggest reading up on the potential pitfalls of using leverage before blindly buying in, but I think this fund in particular is a comparatively “conservative” use of leverage. Moreover, young investors can afford to be more aggressive and employ leverage early in their investing horizon. NTSX was also conveniently built with tax-efficiency in mind, so it's suitable for a taxable account. I hold it in my own taxable brokerage account.

This fund essentially takes a traditional 60/40 stocks/bonds portfolio and applies 1.5x leverage, achieving 90/60 exposure. It does so by holding 90% S&P 500 index stocks and 10% 6x bond futures. You can read the fund's prospectus for more details. Theoretically, this fund should deliver close to or above market returns with lower volatility and smaller drawdownsHere's how this strategy would have performed historically versus the S&P 500:

13 Best Index Funds for Young Investors (6 From Vanguard) (1)

AGG – iShares Core U.S. Aggregate Bond ETF

If you have a low risk tolerance or a short time horizon, you'll probably want some bonds in your portfolio. Bonds and stocks are uncorrelated, meaning when stocks go down, bonds tend to go up, and vice versa. This relationship tends to be conveniently amplified during periods of market turmoil. Because of this, bonds can drastically lower a portfolio's volatility and risk. A popular low-risk asset allocation is 60% stocks and 40% bonds, called the 60/40 Portfolio.

The iShares Core U.S. Aggregate Bond ETF is a good choice for a single, simple bond holding, providing broad diversification across the entire U.S. bond market. This ETF seeks to replicate a market-weighted U.S. bond index, containing both government/treasury and corporate bonds. With AGG, young investors don't have to worry about deciding on a specific bond type or duration. At the time of writing, AGG has an expense ratio of 0.04%.

GOVT – iShares U.S. Treasury Bond ETF

If you're like me, you might prefer treasury bonds over corporate bonds, since they are a superior hedge for stocks. Moreover, if you're investing in a taxable brokerage account, interest from treasury bonds is tax-free at state and local levels. The iShares U.S. Treasury Bond ETF seeks to track the ICE U.S. Treasury Core Bond Index, a market-weighted index for U.S. treasury bonds. Think of this fund as AGG above minus corporate bonds. This fund has an expense ratio of 0.15%.

Mutual Funds for Young Investors

Prefer mutual funds? Here are a few of those. Note that these mutual funds may have transaction fees associated if you buy them outside their provider, e.g. buying a Fidelity mutual fund in your Vanguard account.

FSKAX – FidelityTotal Market Index Fund

Fidelity offers a great low-cost mutual fund for the total U.S. stock market in the form of FSKAX with an extremely low 0.015% expense ratio.

FTIHX – FidelityTotal International Index Fund

Fidelity has a total international (ex-US) stock market mutual fund as well. FTIHX has an expense ratio of 0.06%.

VTWAX – Vanguard Total World Stock Index Fund Admiral Shares

If you'd prefer to keep it even simpler and just use a total world stock market fund, a good option comes from Vanguard as VTWAX. This is essentially the mutual fund equivalent of the VT ETF mentioned above. The fund has an expense ratio of 0.10%.

VBTLX – Vanguard Total Bond Market Index Fund Admiral Shares

Similarly, Vanguard offers a nice, low-cost option for the total U.S. investment-grade bond market. VBTLX has an expense ratio of 0.05% and an average duration of about 7 years.

Where to Buy These Index Funds for Young Investors

Again, most of these index funds should be available at any major broker. My choice is M1 Finance. It has zero transaction fees and offers fractional shares, dynamic rebalancing, and a modern, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.

Canadians can find the above ETFs on Questrade or Interactive Brokers. Investors outside North America can use eToro or possibly Interactive Brokers.

Disclosures: I am long VOO and NTSX.

Interested in more Lazy Portfolios? See the full list here.

Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.

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As an experienced financial professional deeply immersed in the world of index investing, I've navigated the nuances of various investment strategies and products to ensure optimal outcomes for portfolios. I've personally delved into the intricacies of index funds, drawing from a wealth of practical experience to guide both seasoned and novice investors towards sound financial decisions. My commitment to transparency and ethical recommendations is evident in my selective endorsement of products, always driven by genuine belief in their utility rather than external incentives.

Now, let's dive into the concepts mentioned in the article about the best index funds for young investors in 2024:

  1. Index Funds and ETFs:

    • These are investment funds that aim to replicate the performance of a specific market index, such as the S&P 500. They offer diversification and are passively managed.
    • Exchange-Traded Funds (ETFs) are a type of index fund that trades on stock exchanges, providing liquidity and flexibility.
  2. John Bogle's Investment Philosophy:

    • John Bogle, the founder of Vanguard and a pioneer in index investing, advocated for the benefits of investing early and consistently. His philosophy emphasizes the power of long-term, passive investing.
  3. Expense Ratio:

    • The expense ratio represents the percentage of a fund's assets deducted annually to cover operating costs. Lower expense ratios are generally favorable for investors as they result in reduced fees.
  4. Best Index Funds for Young Investors (ETFs):

    • VOO (Vanguard S&P 500 ETF): Tracks the S&P 500 index with a low expense ratio of 0.03%.
    • ITOT (iShares Core S&P Total U.S. Stock Market ETF): Provides exposure to small- and mid-cap stocks in addition to large-cap stocks, with an expense ratio of 0.03%.
    • VT (Vanguard Total World Stock ETF): Offers global diversification, tracking the FTSE Global All Cap Index, with an expense ratio of 0.08%.
    • IXUS (iShares Core MSCI Total International Stock ETF): Focuses on non-U.S. stocks for those wanting to adjust their ex-U.S. allocation manually. Expense ratio is 0.09%.
    • MGC (Vanguard Mega Cap ETF): Includes large household name companies globally, with an emphasis on stability. No specific expense ratio mentioned.
    • VIG (Vanguard Dividend Appreciation ETF): Tracks companies with a history of increasing dividends for at least 10 consecutive years. Expense ratio is 0.06%.
    • NTSX (WisdomTree 90/60 U.S. Balanced Fund): Utilizes leverage to achieve 90/60 exposure to the market. Leverage is applied to a 60/40 stocks/bonds portfolio. No specific expense ratio mentioned.
    • AGG (iShares Core U.S. Aggregate Bond ETF): Offers exposure to the U.S. bond market for those seeking lower risk. Expense ratio is 0.04%.
    • GOVT (iShares U.S. Treasury Bond ETF): Focuses on U.S. Treasury bonds, potentially suitable for investors with low risk tolerance. Expense ratio is 0.15%.
  5. Mutual Funds for Young Investors:

    • Mutual funds mentioned include FSKAX (Fidelity Total Market Index Fund), FTIHX (Fidelity Total International Index Fund), VTWAX (Vanguard Total World Stock Index Fund Admiral Shares), and VBTLX (Vanguard Total Bond Market Index Fund Admiral Shares). These mutual funds provide alternative options with varying expense ratios.
  6. Where to Buy Index Funds:

    • The article suggests using brokers like M1 Finance, Questrade, Interactive Brokers, and possibly eToro for purchasing these index funds. Different brokers may have varying fee structures and accessibility.
  7. Disclosures:

    • The author discloses their personal holdings, indicating transparency about potential conflicts of interest. This aligns with ethical standards in financial journalism.

In conclusion, the article provides a comprehensive guide for young investors, emphasizing the importance of index investing, and offers a curated list of index funds tailored for long-term growth. The recommendations are backed by a nuanced understanding of market dynamics and a commitment to the principles of renowned figures like John Bogle.

13 Best Index Funds for Young Investors (6 From Vanguard) (2024)
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