If you are going to invest in ETF’s or mutual funds – there is no need to invest your money in actively managed funds. The likelihood that an individual or group of investment professionals will be able to beat the indices in the long run is almost slim to none. Even if actively managed funds can produce higher returns, once you adjust for the usually high fees they charge, it’s almost a certain they will under perform the broader indices. They will try and convince you that they can, but based on studies they won’t. Don’t believe me? – how about Warren Buffett who said, “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
The easiest and most profitable approach is to simply invest in funds that track the performance of a particular index. You will get great returns while also saving a lot of money on fees which will improve your total return over the long run. In addition to total return, income and cash flow can also be a benefit of some index funds, but it’s hard to know which fund is best – so let’s take a look at which funds are best for those investors looking for income and passive cash flow.
The Dow Jones Industrial Average is a weighted average of large and significant companies headquartered in the U.S., Founded by Charles Dow in 1896, the DJIA initially was comprised of 12 large industrial companies, but has now grown to include 30 of the largest public companies in the U.S. The DJIA is a price-weighted average where the companies with the highest share price have the most influence on the overall average.
The SPDR Dow Jones Industrial Average ETF (DIA) or more commonly, “The Spider” was founded in 1998 and has provided a 7.01% return over the last 15 years according to Morningstar. The ETF currently yields 2.26% with a low expense ratio of .17%, but the best part of this fund is it pays dividends monthly which is great for investors looking for steady cash flow month in and month out. (Check out other great ETF options that pay monthly dividends)
Top 5 Holdings:
1.Goldman Sachs (7.96%)
2. IBM (6.03%)
3. 3M (6.02%)
4. Boeing (5.61%)
5. United Health (5.55%)
The Standard and Poors (S&P) 500 is an index of the largest 500 companies in in the U.S based on market capitalization. The index began in 1923 tracking only a handful of companies, but quickly grew to almost 100 by 1926 and then to its current level of 500 in the mid-1950’s. Unlike the Dow, the S&P includes international companies in addition to those based in the U.S.
The Vanguard S&P 500 ETF (VOO) was founded in 2010 and because it’s a newer fund it doesn’t have much history, but it has returned 14.6% return over the last 5 years according to Morningstar. The ETF currently yields 2.02% with a very low expense ratio of .05%, and has quarterly dividend distributions.
Top 5 Holdings:
2. Microsoft (2.50%)
3. Exxon (1.93%)
4. Johnson & Johnson (1.62%)
5. J.P. Morgan (1.60%)
The Russell 1000 index is comprised of largest 1000 companies in the U.S stock markets. The index is a subset of the Russell 3000 and is also a market cap weighted index so the biggest companies are going to have the most impact on the performance. The Russell is preferred by institutional investors because of the broad and deep exposure the market it offers.
The Vanguard Russell 1000 ETF (VONE) was established in 2010 and also only have a 5yr avg annual return which is 14.57% return since inception. The ETF currently yields 1.91% with a very low expense ratio of .12%, and has quarterly dividend distributions.
Top 5 Holdings:
2. Microsoft (2.18%)
3. Exxon (1.74%)
4. Johnson & Johnson (1.46%)
5. J.P. Morgan (1.45%)
The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is another market cap weighted index meant to represent the total stock market and track the performance of all publicly traded companies. While initially comprised of 5,000 companies, today the Wilshire is made up of more than 6,700 companies representing the American stock market.
The Vanguard Total Stock Market ETF (VTI) was established in 2001 and has provided a 7.29% return over the last 15 years. The ETF currently yields 1.96% with a very low expense ratio of .05%, and has quarterly dividend distributions.
Top 5 Holdings:
2. Microsoft (1.94%)
3. Exxon (1.58%)
4. Johnson & Johnson (1.32%)
5. J.P. Morgan (1.30%)
The Nasdaq Composite is a market-cap weighted index consisting of over 3,000 companies with a heavy emphasis towards technology companies (~40% of the total index) and consumer services being the next biggest segment (~20% of total index). It’s a broad-based market index with both U.S. and international companies.
The Fidelity Nasdaq Composite ETF (ONEQ) was established in 2003 and has provided a 9.66% return over the last 10 years according to Morningstar. The ETF currently yields 1.07% with an expense ratio of .21%, and has quarterly dividend distributions.
Top 5 Holdings:
2. Microsoft (5.94%)
3. Amazon (4.38%)
4. Facebook (3.31%)
5. Alphabet (Google) (3.27%)
Index funds are a fantastic way to build wealth as well as passive income. Riding the market, keeping fees low and getting broad exposure will almost certainly lead to great returns. It is very possible to accomplish all this and achieve a good yield for producing substantial cash flow and predictable passive income. With these objectives in mind – the Dow Jones and the the Spider ETF (DIA) specifically is a fantastic option. You get broad exposure to the biggest and best companies in the U.S while generating an attractive yield and monthly dividends. Sign me up.
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Disclaimer: I am not a investment or financial professional of any kind. Any information contained within this site is for informational purposes only and should not be considered advice or a recommendation of any kind. The investment ideas and opinions expressed in this article are not specific recommendations. All ideas and concepts should simply serve as a starting point for further research. Actual buy and sell decisions for your own portfolio are entirely up to you.