A blue and yellow chart with a 100 dollar bill next to it representing the top index funds of 2014.

Top 5 Index Funds in 2014

Although hedge funds have dominated financial news headlines for the last few years, investors have been flocking towards index funds since 2013. Investing in the performance of the financial markets and exchanges has gotten a bit more expensive than before, but index funds are still very attractive options this year. Here are the five most interesting index funds for investors in 2014:

  1. Vanguard FTSE Emerging Markets
    Many investors believe that major indices such as the S&P 500 are easier to track and, therefore, safer than indices that track emerging markets. In terms of risk factors, however, emerging markets and the S&P 500 often appear to present similar amounts of risk. The Vanguard FTSE Emerging Markets ETF (VWO) and the Vanguard Emerging Markets Stock Index (VEIEX) are essentially mutual funds that employ a quantitative risk strategy to select stocks that could yield higher profits than the S&P 500.
  2. Schwab U.S. Dividend Equity (SCHD)
    On the surface, the investment methodology of this fund is rational; Investments are made in large companies that have made dividend payments to shareholders over the last few years. Competing mutual fund firms such as Vanguard have their own versions of similar indices that track blue-chip companies such as Coca-Cola and Microsoft.
  3. iShares MSCI EAFE Minimum Volatility (EFAV)
    Investors who would like to test foreign markets are often concerned about volatility. Developed markets outside of the United States can become as volatile as emerging markets when it comes to securities tied to macroeconomics, such as energy stocks and commodities. Foreign consumer-based industries such as healthcare and retail stores, however, are not volatile and present excellent investment opportunities.
  4. Vanguard S&P 500 ETF (VOO)
    With performances of 20% in one year and 15% in three years, it is hard to ignore the benchmark S&P 500. This is an index that billionaire investor Warren Buffett truly believes in, and thus it should appeal to those who believe in the power of growth and blue chip stocks.
  5. Vanguard Short-Term Bond ETF (BSV)
    Investing exclusively in stock index funds does not conform to a sound strategy of diversification. Investors should always have a place where they can park a significant part of their portfolio without having to worry about their funds being exposed to significant risk. A short-term bond index would certainly serve this purpose. Since the BSV is an Exchange-Traded Fund, investors do not have to worry about reviewing and signing complex mutual fund documents; they can take market positions just as easily as if they were trading stocks.

What today's investors must keep in mind is that index funds represent cross-sections of the market and that their choice of funds must reflect their sentiments about the industry. This means that investors who do not feel confident about the S&P 500 should not venture into a fund such as Vanguard's VOO. Another factor to remember is that most index funds tend to follow a long-term and optimistic philosophy.