These funds thrive on efficiency.
If you’ve been investing for a few decades, the current environment for fees and expenses seems like paradise. The Investment Company Institute estimates that in the year 2000 the average equity mutual fund charged annual fees of 0.99 percent, or $99 on every $10,000 invested. By 2016, that average was 0.63 percent on average — a decline of 36 percent. Similarly, bond funds dropped from 0.76 percent in expenses in 2000 to 0.51 percent in 2016. Thanks to a great combination of efficient technology and more competition, it is cheaper than ever before to build a diversified nest egg. Here are eight different options spanning most major asset classes to get you started.
iShares Total U.S. Stock Market ETF (ticker: ITOT)
The ITOT is almost unbelievably inexpensive, charging a minuscule expense ratio that’s perhaps as close as you will ever get to buying a stock-based fund for free. The index fund is exactly what the name implies, with ITOT benchmarked to the S&P 1500 Composite index that combines the large-cap Standard and Poor’s 500 index, the S&P 400 MidCap index and the S&P 600 SmallCap index to offer the broadest possible exposure to the entire U.S. stock market.
Expense ratio: 0.03 percent, or $3 annually per $10,000 invested
Vanguard S&P 500 ETF (VOO)
The VOO is a more focused fund on only large-cap stocks that make up the S&P 500. But this fund is iconic because it is one of the most popular places on the planet to stash your investment cash; as of this writing this fund alone manages more than $580 billion in assets. When you have scale like that, you can afford to cut your fees to the bone. The VOO’s 0.04 percent in expenses adds up to $232 million annually in fees. Don’t worry about the folks at Vanguard starving to death by offering this fund.
Expense ratio: 0.04 percent
Schwab Growth ETF (SCHG)
You may think that in order to get the cheapest index funds that you have to settle for a broad, vanilla investment. The SCHG proves that wrong by allowing investors to make a tactical bet on the largest growth-oriented companies instead of simply settling for a mixed bag. Benchmarked to the Dow Jones US Large-Cap Growth Total Stock Market index, the fund includes the largest 750 companies that meet growth characteristics in both their revenue and profitability.
Expense ratio: 0.04 percent
iShares Value ETF (IUSV)
Moving away from growth, the other side of the coin is value. And that’s what you’ll find in the IUSV. This fund is linked to the Russell 2500 Value index, which includes smaller stocks that meet certain characteristics that indicate these picks are undervalued in the current environment. This iShares fund may not get as much attention as some of the flagship Vanguard funds, but is still super cheap and is one of the older funds in the space with an inception date way back in 2000.
Expense ratio: 0.05 percent
Schwab Dividend Equity ETF (SCHD)
Another subtle but important shift you may want to make in your portfolio is a bias toward income-producing dividend stocks. That’s where the SCHD comes in. The fund is indexed to the Dow Jones U.S. Dividend 100 index, which includes 100 large companies that meet certain requirements around both their current dividend yield and their five-year dividend growth rate.
Expense ratio: 0.07 percent
iShares Aggregate Bond ETF (AGG)
The AGG will allow you to move away from stocks and into bonds, via a broad-based fund that targets high-quality investments. It is designed to hold both government and corporate bonds, but is limited only to those that win the highest investment grade ratings. The fund is an aggregate bond index, however, because it mixes up durations and holds debt that matures in as little as one year as well as debt that takes as long as 30 years to mature.
Expense ratio: 0.05 percent
Vanguard Long-Term Bond ETF (BLV)
What if you just want to think about longer-term bonds, since these investments tend to offer better yields in exchange for more risk? After all, with a duration of 20 years or more, a lot could go wrong to limit payback to investors, and that naturally demands a higher rate of return. If this is your strategy, the BLV is your best option. This fixed-income mainstay yields 3.5 percent currently thanks to a focus on longer duration securities — and does so in an incredibly cost-effective manner.
Expense ratio: 0.07 percent
Vanguard Short-Term Bond ETF (BSV)
The flip side of the long-term bond ETF is, of course, the Vanguard Short-Term Bond ETF. The expense ratio of the BSV is equally low, but the difference here is all about duration. You only get a paltry 1.8 percent yield in the short-term bond fund, but a focus on only investment-grade debt and maturity that is less than five years all but guarantees these bond payments will be made on time. The tradeoff for that certainty, of course, is yield. But if you just want a crash-proof place to invest money that offers more than a bank savings account, this ETF is it.
Expense ratio: 0.07 percent
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8 Cheap ETFs to Build Your Nest Egg originally appeared on usnews.com
