Best Index to Invest In
Investing in index funds has become one of the most popular strategies for both beginners and seasoned investors looking to build wealth over time. With thousands of options available globally, choosing the best index to invest in can feel overwhelming. This comprehensive guide breaks down the top-performing indices, their characteristics, and how to start investing in them today.
What Are Index Funds and Why They’re Popular
An index fund is a type of mutual fund or ETF (Exchange-Traded Fund) designed to track a specific market index like the S&P 500 or NASDAQ. Unlike actively managed funds, index funds follow a passive investment strategy that simply mirrors the performance of their benchmark index.
Index investing has surged in popularity for several compelling reasons:
- Lower expense ratios compared to actively managed funds
- Built-in diversification across many companies
- Historically consistent long-term returns
- Reduced research and timing pressure for investors
- Greater transparency in holdings and strategy
Top Indices to Consider for Your Portfolio
When looking for the best index to invest in, these major indices stand out for their track records and accessibility:
- S&P 500 Index – Tracks 500 of the largest U.S. companies
- NASDAQ 100 – Focused on tech and growth companies
- MSCI World Index – Represents developed markets globally
- FTSE 100 – Follows the largest companies on the London Stock Exchange
S&P 500: The Gold Standard of Indices
The S&P 500 has become synonymous with broad market investing. Representing about 80% of the U.S. stock market’s value, it offers exceptional diversification across sectors including technology, healthcare, financials, and consumer goods. With an average annual return of approximately 10% over the long term, the S&P 500 has consistently rewarded patient investors.
Popular S&P 500 index funds include Vanguard’s VOO, iShares’ IVV, and Fidelity’s FXAIX, all with extremely low expense ratios below 0.10%.
“The best investment most Americans can make is a low-cost index fund that tracks the S&P 500.” – Warren Buffett, who famously bet $1 million that an S&P 500 index fund would outperform a collection of hedge funds over 10 years (and won). Learn more about Buffett’s index fund advocacy.
NASDAQ 100: For Technology and Growth Focus
Investors seeking greater exposure to technology and growth companies often turn to the NASDAQ 100. This index excludes financial companies and focuses heavily on tech giants like Apple, Microsoft, Amazon, and Google. While more volatile than broader indices, the NASDAQ 100 has delivered superior returns during technology booms.
Funds like Invesco’s QQQ Trust have made NASDAQ 100 investing accessible with reasonable expense ratios around 0.20%.
MSCI World and International Exposure
For investors seeking global diversification beyond U.S. markets, the MSCI World Index offers exposure to approximately 1,500 companies across 23 developed markets. This international approach helps mitigate country-specific risks and captures growth opportunities worldwide.
Popular MSCI World ETFs include iShares’ URTH and Vanguard’s VT, which provide comprehensive global market coverage.
FTSE 100: UK Market Exposure
The FTSE 100 represents the 100 largest companies listed on the London Stock Exchange. It offers exposure to a different market profile than U.S. indices, with greater representation in sectors like banking, energy, and consumer staples. This index is particularly attractive for those seeking dividend income, as it historically offers higher dividend yields than U.S. counterparts.
Key Benefits of Index Investing
- Low fees: Most index funds charge expense ratios under 0.20%, compared to 1-2% for actively managed funds
- Diversification: Instant exposure to hundreds or thousands of companies
- Simplicity: No need to pick individual stocks or time the market
- Tax efficiency: Lower turnover means fewer taxable events
How to Start Investing in Index Funds
Getting started with index investing is straightforward:
- Open an account with a brokerage firm (Vanguard, Fidelity, Charles Schwab, etc.)
- Research index ETFs or mutual funds that track your preferred index
- Compare expense ratios and minimum investment requirements
- Consider using dollar-cost averaging by investing a fixed amount regularly
- Hold for the long term to maximize returns and minimize trading costs
Common Beginner Mistakes to Avoid
Even with index investing’s simplicity, investors should avoid these pitfalls:
- Trying to time the market rather than investing consistently
- Overlapping multiple similar indices, creating redundancy
- Focusing solely on recent performance rather than long-term suitability
- Neglecting international exposure for a well-rounded portfolio
- Choosing funds with unnecessarily high expense ratios
Long-Term Performance Comparison
When evaluating the best index to invest in, historical performance provides valuable perspective:
- S&P 500: ~10% average annual return since inception
- NASDAQ 100: Higher growth potential but with greater volatility
- MSCI World: Smoother performance through international diversification
- FTSE 100: Often lower growth but higher dividend yields
Remember that past performance doesn’t guarantee future results, but indices with broader market representation tend to deliver more consistent long-term returns.
Conclusion: Finding Your Best Index Match
The best index to invest in ultimately depends on your financial goals, risk tolerance, and time horizon. For most investors, especially beginners, the S&P 500 offers an ideal balance of diversification, growth potential, and stability. Those with longer time horizons might allocate portions to growth-oriented indices like the NASDAQ 100, while investors seeking global exposure should consider the MSCI World or similar international indices.
Whatever index you choose, the keys to success remain consistent: invest regularly, keep costs low, maintain a long-term perspective, and resist the urge to react to market fluctuations.
What index funds are in your portfolio? Share your thoughts in the comments below!
