3 Top Index Funds to Buy in October

By Markets Fool.com

Index funds are a proven way to quickly diversify your portfolio in a cost-effective manner. With this in mind, our contributors discuss three index funds below that may be worth buying in October.

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Invest and get paid with this dividend index fund

Dan Caplinger: Dividend stocks never go out of style, and the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) is a good way to get a solid helping of income-producing stocks for your portfolio. Available either as an exchange-traded fund or as a traditional mutual fund, Vanguard Dividend Appreciation currently yields about 2.1%, which is consistent with the overall average of the stock market.

That might sound relatively uninspiring for an index fund that's designed with dividend investors specifically in mind. Yet what sets Vanguard Dividend Appreciation apart is that rather than focusing on current yield like many of its dividend-oriented fund peers do, the Vanguard dividend index fund instead looks at companies that show a strong likelihood of growing their payouts over time. Within the fund, you'll find a number of stocks that have increased their dividends each and every year for decades. That won't always produce the highest current yield, but it does promise to keep the amount of dividend income you receive growing, and that can be extremely valuable for income investors who actually rely on the cash that dividends provide for essential needs. With low expenses and turnover, Vanguard Dividend Appreciation can give you the income and growth you crave.

Biotech should recover in 2017

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George Budwell: The last 12 months haven't been kind to biotech, with the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) falling by over 30%. However, there are several compelling reasons to believe this downtrend will reverse course soon, and perhaps markedly so.

First, the biggest overhang that's been driving biotechs down across the board is the uncertainty regarding the U.S. presidential election and how the winner will ultimately handle the ongoing drug pricing controversy.

My view is that neither candidate will follow through on campaign promises to tackle this rather complex issue. After all, major reform would require the cooperation of the U.S. Congress, and that doesn't seem like a strong possibility, given the immense lobbying power of the healthcare sector in general and the pharmaceutical industry in particular.

If you need a concrete example, just look at how the healthcare lobbying machine shaped the Affordable Care Act, or ACA, in its favor. By spending billions on lobbying, for example, healthcare companies effectively blocked the possibility of a robust government-run health insurance program, leading to the deeply flawed piece of legislation that is now in place. So, color me a pessimist, but I simply don't believe the next president will have much of an impact on drug pricing schemes.

And once this fear subsides, the market will eventually remember that biotech is undergoing an unprecedented innovation boom right now, coupled with the all-important tailwind of an aging global population. In short, biotech should be facing blue skies next year, perhaps making theiShares Nasdaq Biotechnology ETF a downright bargain at current levels.

Banking on an energy revival, eventually

Tyler Crowe: Perhaps I'm repeating myself by saying that the Vanguard Energy ETF (NYSEMKT: VDE) is an index fund worth looking at, but the same reasons that made this ETF attractive last month still apply today. About 66% of the fund is invested in companies that are mostly tied to the exploration and production side of the business -- 39% pure exploration and production, and 27% integrated oil and gas. This means that the ETF is very levered to oil and gas prices and should see some significant gains as oil prices find their footing again.

In the short term, I can't say with any certainty which direction oil will go. Day traders and more short-term minded investors will point to a litany of reasons why prices will go one way or another, but there are so many factors that go into the daily ups and downs of oil prices that it's impossible to say with any certainty what will happen. Looking a little further into the future, though, one thing becomes clearer. There has been a lack of investment in new oil sources over the past several years. These investment dollars were intended to offset the declines that happen every day at every producing well. As that loss from natural decline eats into overall production and there isn't enough investment to make up for it, oil prices will rise. It's all a matter of time.

The Vanguard Energy ETF has had a decent run this year, as oil prices have gone from the $30 per barrel range to around $45 per barrel today. However, there is still some room for crude to climb even higher, as many sources of production are still taking heavy losses at this price. This suggests that Vanguard's Energy ETF still has a runway ahead of it.

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Dan Caplinger has no position in any stocks mentioned. George Budwell owns shares of iShares NASDAQ Biotechnology Index. Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.