Best Low Risk Index Funds

Index funds have much to offer investors but require some sacrifices for low fees and transparency. Index funds won't work well for those seeking parabolic gains and life-changing money. But if you want to build wealth smoothly and consistently over extended time frames (while sleeping easy at night), you might consider some of the funds we’ve listed below.

Quick Look at the Best Low-Risk Index Funds:

• Best for Lowest Fees: BNY Mellon U.S. Large Cap Core Equity ETF (ARCA: BKLC)
• Best for Mutual Funds: Fidelity ZERO Large Cap Index Fund (FNILX)
• Best for Sector Investing: Fidelity MSCI Consumer Staples Index ETF (ARCA: FSTA)
• Best for International Stocks: iShares Core MSCI International Developed Markets ETF (ARCA: IDEV)
• Best for Government Bonds: Schwab Short-Term U.S. Treasury ETF (ARCA: SCHO)
• Best for Corporate Bonds: SPDR Portfolio Corporate Bond ETF (ARCA: SPBO)
• Best for Thematic Investing: Vanguard Dividend Appreciation ETF (ARCA: VIG)
• Best for Overall Diversification: Vanguard Total Stock Market ETF (ARCA: VTI)

8 Best Low-Risk Index Funds

An active stock picker doesn’t manage index funds. Instead, they track a benchmark index like the S&P 500, seeking to emulate its returns by initiating it as close as possible. Since index funds have no manager and low asset turnover, fees are generally lower and gains are often more tax-efficient. Here are our picks for the best low-risk index funds based on asset class and strategy:

1. Best for Low Fees: BNY Mellon U.S. Large Cap Core Equity ETF (ARCA: BKLC)

To find a zero-fee index fund, you generally have to buy mutual funds suitable for a tax-advantaged retirement account like a 401(k) or Roth IRA. But if you’re saving in a taxable account, ETFs are often more tax-friendly and now there are zero-fee choices. BKLC is one of the first U.S. large-cap ETFs to charge a 0.00% expense rate.

Why We Picked It: BKLC is the first exchange-traded index fund with zero expenses and you can purchase it commission-free at most major brokerages. Although the fund has only been around for four years and contains a vanilla mix of large-cap U.S. equities, it's highly liquid and still the only zero-fee fund in its class.

2. Best for Mutual Funds: Fidelity ZERO Large Cap Index Fund (FNILX)

If you don’t mind the mutual fund wrapper, Fidelity has various funds with zero expenses across asset classes like U.S. stocks, international equities and fixed income. FNILX is their U.S. large-cap offering, with over $12 billion in assets and only 3% portfolio turnover.

Why We Picked It: FNILX has zero expenses and trades commission-free for Fidelity clients, so it's an affordable way to get exposure to the most successful U.S. companies with the heaviest concentration in the tech, finance and consumer discretionary sectors.

3. Best for Sector Investing: Fidelity MSCI Consumer Staples Index ETF (ARCA: FSTA)

Sector investing allows those with a more narrow investment thesis (and a slightly higher risk tolerance) to use index funds to expose themselves to specific market niches. Some market sectors are riskier than others, but consumer staples tend to be older stocks with successful track records. FSTA from Fidelity offers a diverse portfolio at a very low expense.

Why We Picked It: FSTA has a 0.08% expense rate, which isn’t just the lowest in the consumer staples ETF space but the entire sector-specific index fund landscape. The fund also has a broader asset base than other consumer staples funds, with over 90 stock holdings, including some small caps not found in different funds.

4. Best for International Stocks: iShares Core MSCI International Developed Markets ETF (ARCA: IDEV)

Avoiding home country bias is vital for all investors, even if U.S. stocks have been more generous than the field over the last decade. Adding global equity exposure to your portfolio is easy with index funds and IDEV is our choice for the top international equity index fund.

Why We Picked It: IDEV is a low-risk international stock ETF with a low 0.04% expense rate and over $14 billion in assets. The fund tracks an index focusing on developed markets outside the U.S. and holds over 2,000 stocks, including some of the biggest global winners, such as Novo Nordisk, ASML, Nestle and SAP.

5. Best for Government Bonds: Schwab Short-Term U.S. Treasury ETF (ARCA: SCHO)

Government bonds are considered one of the least risky asset classes and risk-averse investors on a fixed income could benefit from adding Treasuries to their portfolio. But you don’t need to buy them from the Treasury anymore - use Treasury ETFs like SCHO instead.

Why We Picked It: SCHO is our choice for government bond index funds because of its low expenses, diverse portfolio of bond holdings and high liquidity. The fund holds one- to three-year bonds, limiting credit and interest rate risk.

6. Best for Corporate Bonds: SPDR Portfolio Corporate Bond ETF (ARCA: SPBO)

Corporate bonds are riskier than government bonds since public companies face solvency issues far more frequently than governments with money printers. However, corporate bonds also offer a higher yield and a diverse corporate bond portfolio can mitigate the risk of individual companies. SPBO has a mix of short-dated corporate bonds ideal for a low-risk portfolio.

Why We Picked It: SPBO isn’t as large as the iShares Corporate Bond ETF, but it's cheaper and its short-dated nature gives it a lower risk profile (although it has underperformed in the last few years).

7. Best for Thematic Investing: Vanguard Dividend Appreciation ETF (ARCA: VIG)

Thematic investing and low risk rarely combine. However, a dividend index fund can provide a theme that minimizes risk and maximizes income. Dividend funds usually contain stocks like Dividend Aristocrats, companies that have raised dividend payouts for over 25 years.

Why We Picked It: Vanguard has plenty of high-quality index funds, but VIG is one of its better offerings. The fund has a tiny expense rate of 0.06% and pays an annual dividend yield of 1.71%. It holds some of the oldest and most successful American companies across industries and sectors, such as Apple, JPMorgan Chase and Visa.

8. Best for Overall Diversification: Vanguard Total Stock Market ETF (ARCA: VTI)

Finally, if you want the broadest level of diversification in your portfolio, consider an index fund like Vanguard’s Total Stock Market ETF. Total stock market funds invest across the U.S. equity spectrum, including small and large caps from diversified sectors and industries.

Why We Picked It: Once again, fees and portfolio composition played a role in our selection and VTI offers the lowest rates for an extensive portfolio of U.S. stocks. Unlike most total stock market funds, VTI’s holdings are evenly distributed across sectors and are not heavily centered on tech or finance.

What are Some Risks of Index Funds?

While offering diversification and low costs, index funds also carry inherent risks. Thoughtful consideration of these factors is crucial for informed investment decisions. 

• Market volatility: While designed to reduce violent price swings, index funds aren’t immune to market volatility. They can also have concentrated exposure to specific sectors, limiting granular control. 

• Tracking errors: Though usually small, discrepancies occur due to fund expenses and trading, causing slight deviations from the benchmark index.

• Fees erode returns: Low management fees are a key advantage for index funds, but even low fees can erode returns over long periods. 

Are Index Funds Good Investments?

Index funds offer a compelling investment strategy that balances benefits and drawbacks. Their primary advantage lies in passive management, which mirrors a market index to provide broad diversification and long-term growth potential tied to overall market performance. This passive approach significantly lowers expense ratios compared to actively managed funds, maximizing cost-effectiveness. 

However, index funds are susceptible to market volatility, sector concentrations and tracking errors. These securities are excellent for long-term, cost-conscious investors seeking market-average returns. They offer no protection against market crashes and provide limited control over allocation. Understanding these trade-offs is important for making quality investment decisions aligned with individual risk tolerance and financial goals.

Proper Investment Management Requires Understanding the Trade-offs of Index Funds

Study after study has shown how difficult it is for active managers to consistently outperform market averages over long periods. While some unique strategies or asset classes may require the skills and access of an active manager, buying diversified and broad-market index mutual funds and ETFs is usually a sound strategy. If you have long-term goals like a retirement nest egg and don’t want to adjust your portfolio constantly, index funds like the ones on this list can form a strong base for capital growth.

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