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Types of Index Funds

Not all index funds are created equal. They come in tons of colors and flavors —and you might want to taste the rainbow. In fact, plenty of investors and money types recommend that you buy at least three index funds to diversify. That way, if the S&P 500 tanks, you still have two other funds linked to indexes that are (hopefully) doing well. Of course, if the entire world economy tanks or a zombie apocalypse comes to town, you're out of luck.

Index funds can be linked to international stock market indexes, U.S. stock market indexes, or specific industries (e.g., tech). Vanguard has a whole bunch of 'em, so you can choose from

  • U.S. Value
  • High Dividend Yield
  • Large-Cap
  • California Tax-Exempt
  • High-Yield Corporate
  • Long-Term Treasury
  • Dividend Growth
  • Equity Income
  • Small-Cap

How do you know which one to choose? Well, part of it depends on what you think will do well in the next 7 years, 10 years, or 30 years (however long you think you'll want to hold on to your fund). Do you think Asia has pretty much peaked or do you think it will become even more of a superpower? Do you think tech will just grow bigger and bigger? Do you like the idea of small capitalization companies that might do well or a fund full of large cap companies that have been doing well forever?

No one can predict the future, but lots of people sure try.

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