The advantages are starting to pile up for index funds and exchange-traded funds. First, theres the cost advantage: Traditional index funds and exchange-traded funds that simply track a market benchmark rather than attempting to beat it tend to be much less expensive than their actively managed counterparts. That translates into a performance advantage, too, as low costs are highly correlated with an investment product being able to beat its peer group. Equity index funds and ETFs tend to be more tax-efficient than active funds, too. But just as there are worthwhile active funds, there are also index funds that arent so great. Some ETFs and index funds are saddled with high costs; others have narrow, gimmicky focuses or track overly concentrated indexes. Morningstars U.S. Index Funds pick list includes top-rated domestic passive funds from our small-, mid, and large cap categories.
Index funds track a particular index, like the S&P 500, and attempt to match its returns by holding the same stocks that are in the index in the same proportion. Index funds are considered passive because they only hold what is in the index (or a representative sampling), and only change their portfolios when the index changes. Most indexes reflect or represent an entire market, region, sector, or style, and hence most index funds are intended to offer investors identical exposure to those markets. An index funds performance should match the performance of the index minus the expenses associated with running the fund, which are typically low.
These U.S.-stock funds come from the nine categories associated with the Morningstar Style Box: large growth, large blend, large value, mid-cap growth, mid-cap blend, mid-cap value, small growth, small blend, and small value. Funds in these categories cover most of the U.S. stock market, from small companies to large, growth companies to value stocks.
The Analyst Rating for Funds (including Medalist ratings) is based on our fund analysts conviction in a funds ability to outperform its peer group (funds in the same category) and benchmark on a risk-adjusted basis over the long term. If a fund receives a Gold, Silver, or Bronze rating (i.e., a Medalist rating), it means that Morningstar analysts expect it to outperform over a full market cycle of at least five years.
This list includes only no-load funds. No load refers to a mutual fund that does not charge a fee (known as a load) for buying or selling its shares; the investor typically buys no-load funds directly from a fund company or through a fund supermarket. Load funds, on the other hand, are sold by an advisor or broker and charge a percentage fee at purchase or sale of the shares, which is meant to be compensation for the planners investment-selection advice. (Note: Not all advisors sell load funds. Many are compensated via a flat fee or a percentage of all assets under management.) Whether a fund charges a load or not isnt a reflection of its underlying quality. Many load funds are also Medalists, and some load funds are available without a load through 401(k) or other retirement plans. But were including only no-load funds here, since this list is designed to help investors who are primarily doing their own fund-picking.
All the funds on this list are open for new investment. Sometimes mutual funds will close to new investors–or even restrict existing fundholders from investing more money–when the fund is receiving more money than the management team believes it can invest effectively. Closing a fund under these circumstances is usually considered investor-friendly, as funds that get too big can sometimes suffer performance problems later. Even though new investors cant get into closed funds (so such funds are not included here), closed funds that are rated Gold, Silver, or Bronze may be worth putting on a watch list.
Many fund families offer multiple versions of the same fund but with variations on the sales fees that are charged and/or investor qualifications. Screening for distinct portfolios only removes all but one of these options to avoid having several share classes of the same offering cluttering the list. Morningstar normally designates the oldest share class as the distinct portfolio. In some cases, this share class may be for institutions (such as company retirement funds) or otherwise have a high investment minimum. In those cases, investors may want to consider an investor share class of the same fund, though the fund expenses may be higher for those share classes.
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