Index funds are among the safest and best-performing stock market investments available to the average person. Thanks to their built-in diversification, low fees and high trading volume, they deliver a powerful punch of return at relatively low risk. Diversification reduces the “specific risk” in your portfolio by spreading your eggs across several baskets. Low fees reduce the costs of investing. High trading volume/liquidity reduces the “spread cost” (a kind of hidden fee) you pay to the market makers who trade for you. It all adds up to a very compelling package. In this article, I explore three index funds I’m holding for long-term dividends and gains.
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TSX stocks
The main TSX index fund I hold is iShares S&P/TSX 60 Index Fund (TSX:XIU). It’s an index fund that consists of the 60 largest publicly traded Canadian stocks. XIU has many things going for it that make it desirable for investment. First, its 60 shares make it a pretty diversified fund. Second, its holdings are reasonably spread out across many sectors, which means the assets inside the fund are not too tightly correlated with one another. Third, the fund has a 3.07% dividend yield, which is above average for broad-market index funds. Fourth and finally, the fund has a relatively low 0.18% management expense ratio (MER), which means you don’t pay too much of your returns to the fund’s managers. It’s Canada’s most popular index fund for a reason.
Global stocks
The main global stock fund I hold is Vanguard FTSE All-World Ex-US ETF (NYSEMKT:VEU).
VEU is a fund that holds all of the world’s stock markets except for the U.S. market. It’s mainly offered to U.S. investors who hold U.S. stocks and funds and who want a little global exposure. As a Canadian, I’m not in that category. However, I believe that the U.S. market’s overvaluation, combined with Donald Trump’s economically illiterate policies, makes the non-U.S. world more desirable than the U.S. today. It also doesn’t hurt that VEU has a higher dividend yield than equivalent U.S. funds. So, I am holding VEU in no small part to maintain my equity exposure while staying away from the increasingly risky U.S. market.
Like XIU, VEU has high trading volume and low fees. So, it gives you good bang for your buck.
Chinese stocks
Last but not least, I hold a Chinese tech ETF known as KraneShares CSI China Internet ETF (NYSEMKT:KWEB). KWEB holds some of the world’s biggest Chinese tech companies, leaders in sectors like e-commerce, generative artificial intelligence and electric vehicles. KWEB’s portfolio stocks have relatively high dividend yields by tech standards.
Chinese markets have been outperforming the world this year, as China is stimulating its economy as the U.S. and others move in the direction of austerity. KWEB’s annual MER (0.70%) is much higher than that of VEU or XIU, but on the flip side, KWEB offers targeted exposure to a very exciting and innovative sector. I plan on holding this fund for the long term.
Bottom line
Index funds are popular for a reason. Offering broad market exposure at low fees, they beat most of the world’s stock pickers long term. Warren Buffett has long counselled his fans to buy index funds, citing their low risk and superior returns. If they’re good enough for Buffett, they’re good enough for you, too.
