The Best Best Index Funds for Long-term Investing for Smart Stock Analysis
The best index funds for long-term investing are those with the lowest expense ratios, broadest diversification, and a market structure that matches the investor's time horizon. Vanguard's VOO (S&P 500, 0.03% expense ratio) and VTI (total U.S. market, 0.03%) lead on cost. Fidelity ZERO funds charge nothing at all. The case for index funds over most active managers is well-documented: over any 15-year period, fewer than 12% of large-cap active funds beat the S&P 500 after fees. Knowing which index fund to choose, and how to combine it with individual stock analysis, separates deliberate investors from passive ones.
Key Takeaways
- Expense ratio is the single most controllable variable in index fund investing. A 0.5% higher fee compounds into a 12% loss of terminal wealth over 30 years.
- The S&P 500 index has returned approximately 10.4% annualized over the past 30 years including dividends, versus 13.8% for the Nasdaq-100 but with significantly higher drawdowns.
- Index funds do not protect you from valuation risk. Buying the S&P 500 at a trailing P/E of 30 has historically produced poor 10-year forward returns.
- Total market funds (VTI, SCHB) include small and mid-cap exposure that has historically added 0.5-1.0% annualized return over pure large-cap funds over very long horizons.
- International index funds (VXUS, EFA) provide valuation diversification. As of April 2026, European equities trade at a significant P/E discount to U.S. equities.
- The screener at ValueMarkers lets you analyze the individual holdings inside any index to see where quality clusters.
What Best Index Funds for Long-term Investing Actually Look Like
The best index funds share four characteristics. Low cost (below 0.10% expense ratio). Broad diversification (at minimum 500 holdings). High liquidity (tight bid-ask spreads and daily trading volume above $500 million). And tax efficiency (low turnover means fewer capital gains distributions).
| Fund | Index Tracked | Expense Ratio | 10-Year CAGR | Holdings | Dividend Yield |
|---|---|---|---|---|---|
| VOO (Vanguard) | S&P 500 | 0.03% | 12.1% | 503 | 1.4% |
| VTI (Vanguard) | CRSP U.S. Total Market | 0.03% | 11.8% | 3,700+ | 1.4% |
| IVV (iShares) | S&P 500 | 0.03% | 12.1% | 503 | 1.4% |
| SCHB (Schwab) | Dow Jones U.S. Broad Market | 0.03% | 11.7% | 2,500+ | 1.4% |
| FXAIX (Fidelity) | S&P 500 | 0.015% | 12.1% | 503 | 1.4% |
| FZROX (Fidelity ZERO) | Fidelity U.S. Total Market | 0.00% | 11.7% | 2,700+ | 1.3% |
| VXUS (Vanguard) | FTSE Global ex-U.S. | 0.07% | 5.4% | 8,500+ | 3.1% |
| QQQ (Invesco) | Nasdaq-100 | 0.20% | 16.2% | 100 | 0.6% |
All data approximate as of April 2026. Past returns do not predict future results.
S&P 500 Funds vs Total Market Funds
The S&P 500 contains the 500 largest U.S. companies by market cap, selected by committee. VTI and SCHB include small and mid-cap companies down to the smallest publicly traded names.
In practice, the S&P 500 drives about 82% of VTI's performance because of market-cap weighting. The extra diversification from small-caps has historically added a modest return premium over very long periods, averaging around 0.5% per year over 30+ year windows. Over shorter periods, small-caps frequently underperform.
For most investors with a 20+ year horizon, VTI's broader coverage is preferable at identical cost. For investors who want to layer active stock picks on top of a passive core, VOO's focused 500-name universe is easier to track and complement.
Why Valuation Still Matters for Index Fund Investors
Index funds do not eliminate valuation risk. They spread it across 500 or 3,700 companies. If those companies as a group are priced at 30 times earnings when the historical median is 17 times earnings, forward returns are likely to disappoint regardless of how low your expense ratio is.
The earnings yield of the S&P 500 is simply 1 divided by the trailing P/E. At a P/E of 24, the earnings yield is 4.2%. Subtract expected inflation of 2.5% and the real expected return is 1.7%. That is the math for buying the index at current valuations with no earnings growth assumption. Add 6% expected nominal earnings growth and you get a more optimistic 10%+ total return scenario. The point is not that the market is overvalued or undervalued. The point is that P/E at entry determines the range of likely outcomes.
Robert Shiller's CAPE ratio (cyclically adjusted P/E using 10-year average earnings) shows that every time it has risen above 35, the subsequent 10-year annualized return for the S&P 500 has averaged below 5%. Every time it has been below 15, the 10-year average return has been above 12%.
How to Combine Index Funds With Individual Stock Analysis
A core-satellite portfolio combines a passive index core with an active satellite of individual stocks you have analyzed specifically. A typical allocation is 70% core (index funds) and 30% satellite (individual stocks selected via fundamental analysis).
The satellite component is where the screener earns its value. By filtering for ROIC above 20%, P/E below 22, and payout ratio below 60%, you identify names that are likely to outperform the index on a risk-adjusted basis. Apple at ROIC of 45.1% with a P/E of 28.3 is a candidate. Microsoft at ROIC near 35% with a P/E of 32.1 passes the quality filter with a slight valuation premium to justify. Berkshire Hathaway (BRK.B) at a P/B of 1.5 offers the Graham Number test without the P/E complexity since earnings are distorted by investment gains.
The Graham Number is a quick ceiling price: the square root of (22.5 x EPS x Book Value). Companies trading below this ceiling pass Graham's basic value screen. Most S&P 500 constituents do not pass it. Those that do often represent the highest-value opportunity within the index.
International Index Funds: The Valuation Case
U.S. stocks trade at a trailing P/E near 24 as of April 2026. European stocks trade at a trailing P/E near 13. Japanese stocks trade near 14. Emerging markets trade near 12.
That valuation gap is not random noise. It reflects genuine differences in profitability (U.S. technology companies earn returns on capital that European industrials cannot match), political and currency risk, and investor preference for U.S. assets. But the gap has historical limits. Over the decade following the widest U.S. valuation premium (2001), international developed markets outperformed U.S. equities by a cumulative 40%.
VXUS gives you 8,500+ non-U.S. companies at 0.07% per year. The dividend yield is 3.1%, double the S&P 500's. A 20-30% international allocation provides real valuation diversification that a U.S.-only index does not.
The Cost of Fees Over Time
This table should settle any remaining debate about the importance of expense ratios.
| Annual Expense Ratio | $100,000 Invested Over 30 Years | Total Cost vs. 0.03% Fund |
|---|---|---|
| 0.00% (Fidelity ZERO) | $1,744,940 | Reference |
| 0.03% (VOO/VTI) | $1,697,200 | $47,740 |
| 0.20% (QQQ) | $1,519,600 | $225,340 |
| 0.50% (many ETFs) | $1,284,000 | $460,940 |
| 1.00% (typical active fund) | $1,000,000 | $744,940 |
Assumes 10% annual gross return before fees. Taxes excluded.
The difference between a 0.03% fund and a 1.00% active fund is $744,940 on a $100,000 starting investment. The active fund would need to deliver consistent alpha of roughly 1.0% per year (after its own internal trading costs) just to break even with the index. The evidence shows fewer than 1 in 10 active funds accomplish this over 15+ years.
Further reading: SEC EDGAR · Investopedia
Why S&P 500 index fund Matters
This section anchors the discussion on S&P 500 index fund. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply S&P 500 index fund in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.
Key inputs for S&P 500 index fund
See the main discussion of S&P 500 index fund in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using S&P 500 index fund alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for S&P 500 index fund
See the main discussion of S&P 500 index fund in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using S&P 500 index fund alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- Graham Number — Graham Number captures how cheaply a stock trades relative to its fundamentals
- Earnings Yield — Earnings Yield is the metric used to how cheaply a stock trades relative to its fundamentals
- Pe Ratio — Glossary entry for Pe Ratio
- Best Dividend Stocks To Buy And Hold — related ValueMarkers analysis
- Best Stocks For Long Term Investment — related ValueMarkers analysis
- Intrinsic Value Of A Share — related ValueMarkers analysis
Frequently Asked Questions
what is a dow jones index
A Dow Jones index is any index published by S&P Dow Jones Indices under the Dow Jones brand name. The most cited is the Dow Jones Industrial Average, a price-weighted index of 30 large-cap U.S. companies. The family also includes the Transportation Average (20 companies), the Utility Average (15 companies), and the Composite (65 companies). None of them are the same as the S&P 500, which is a separate index published by the same company but covering 500 stocks and using market-cap weighting rather than price weighting.
what does ebitda stand for
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It represents operating cash profit before capital structure decisions (interest) and accounting choices (depreciation and amortization) distort the number. Analysts use it to compare companies across different tax jurisdictions and capital structures. The EV/EBITDA multiple is widely used in buyout valuations where the buyer will refinance the debt and choose their own depreciation schedule. The limitation is that EBITDA excludes capital expenditure, so a capital-intensive business with high EBITDA can still generate poor free cash flow.
when did warren buffett start investing
Warren Buffett made his first stock purchase at age 11 in 1941, buying three shares of Cities Service Preferred at $38 each. He started managing outside money professionally in 1956 when he launched the Buffett Partnership at age 25. Berkshire Hathaway (BRK.B) became his primary vehicle in 1965. His annualized return from 1965 through 2024 is approximately 19.8%, roughly double the S&P 500's 10.2% over the same period. BRK.B trades at a P/B of approximately 1.5 today, near the floor at which Buffett himself has stated he would buy back Berkshire shares.
what does cagr stand for
CAGR stands for Compound Annual Growth Rate. It measures the rate at which an investment, revenue, or any metric would have grown had it increased at a steady rate each year. The formula is (ending value / beginning value)^(1/number of years) - 1. If $10,000 grew to $18,000 over 8 years, the CAGR is (18,000/10,000)^(1/8) - 1 = 7.6%. CAGR is more useful than simple average returns because it accounts for the compounding effect and ignores year-to-year volatility. The screener displays 5-year revenue CAGR and 5-year EPS CAGR for every stock in the database.
what are the best stocks to buy right now
The best stocks to buy right now are those that pass both a quality test and a valuation test simultaneously. Quality: ROIC above 15%, operating margins above 15%, debt-to-equity below 1.5. Valuation: trading below or near intrinsic value as calculated by the DCF model. As of April 2026, Apple carries a ROIC of 45.1% at a P/E of 28.3. Johnson & Johnson yields 3.1% at a P/E of 15.2. Berkshire Hathaway trades at a P/B of 1.5. The screener filters all 120 indicators simultaneously so you can find these intersections without manual research across hundreds of names.
how to invest in s&p 500 index
Investing in the S&P 500 index requires opening a brokerage account (Fidelity, Schwab, Vanguard, or any major broker) and purchasing an S&P 500 index fund or ETF. The three most common options are VOO (Vanguard, 0.03% expense ratio), IVV (iShares, 0.03%), and FXAIX (Fidelity mutual fund, 0.015%). VOO and IVV trade on exchanges like stocks throughout the day. FXAIX settles at end-of-day NAV. For a long-term investor, the difference is negligible. Set up automatic monthly purchases and reinvest dividends. The academy covers index fund selection, rebalancing, and the core-satellite portfolio approach in more detail.
Apply the screener to identify the highest-quality names inside the index and build a satellite portfolio that complements your passive core.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
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Disclaimer: This content is for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.