Index funds hold certain advantages.
One of the best ways to get a higher investment return is to pay less in fees. Index funds offer diversified holdings and help investors keep more money so their earnings can compound faster. Index funds usually have low fees because no one gets paid to actively manage the portfolio, says Steve Azoury, financial advisor and owner of Azoury Financial. Many of the lowest-fee index funds follow the S&P 500 in part, and some index funds follow niche sectors. Those funds can be one of the best, low-cost ways to invest in those areas. Here are eight of the top low-cost index funds.
Invesco S&P 500 Quality ETF (ticker: SPHQ)
Todd Rosenbluth, senior director of exchange-traded fund and mutual fund research for CFRA, says SPHQ is particularly well-suited for the current market environment because its index, the S&P 500 Quality Index, includes companies with the strongest return on equity, lowest financial leverage and favorable accounting practices in the broader S&P 500. This index uses these qualities to create a fundamental weighting, rather than a market-cap weighting, to rank companies. SPHQ has an annual expense ratio of 0.15%, or $15 for every $10,000 invested, and he says that’s modest for a U.S. equity ETF, particularly one that is a slice of the broader market.
Fidelity 500 Index Fund (FXAIX)
FXAIX is Fidelity’s answer to a mutual fund to track the S&P 500. Azoury chooses this fund because it’s one of the cheapest mutual funds tracking the bellwether index, charging 0.015% annually. It has only a 4% turnover rate, meaning it sells only 4% of its holdings annually — which cuts down on transaction costs, he adds. “That helps make it stable and consistent,” he says. The fund is up about 3% this year, closely tracking the S&P 500. Although FXAIX tracks the S&P 500, it doesn’t spread investments out equally but determines how to weight each holding.
Invesco QQQ Trust (QQQ)
QQQ is a modified market-cap-weighted index of around 100 of the largest stocks listed on the Nasdaq. The fund only invests in nonfinancial stocks, which makes it much different from a broad-based, large-cap portfolio. Robert Wyrick Jr., chief investment officer for Post Oak Wealth Advisors, likes QQQ in the current environment for what it doesn’t invest in, such as energy, real estate and almost no materials or utilities, saying those sectors should be avoided because they are “getting hammered and (that) will probably continue as we come out of the downturn.” Although QQQ is seen as a “tech” fund, it’s not a pure-play tech fund; rather, it’s a mix of tech, growth and other large-cap holdings. A big ETF in terms of assets under management, QQQ also comes with a low fee of 0.2%. Wyrick points out QQQ’s roughly 25% year-to-date gain sharply outperforms the broader S&P 500.
iShares ESG MSCI USA ETF (ESGU)
Sustainable investing is becoming a bigger trend, and Mark DiOrio, chief investment officer at Brookstone Capital Management, says it’s easier to make environmental, social and governance investing part of a core portfolio. He says iShares has a suite of these ESG index ETFs, including his pick, ESGU. This is a mid- to large-cap fund that selects and weights stocks with strong ESG characteristics. “You get cheap, broad market exposure and the screening methodology keeps you in line with ESG principles,” he says. “You can invest comfortably in an index fund that aligns with your values.” The fund’s expense ratio is 0.15%.
Technology Select Sector SPDR Fund (XLK)
For a narrowly focused fund that covers the U.S. technology sector, Scott Krase, founder and president at CrossPoint Wealth, says he chooses XLK for low-cost exposure. “It’s obvious that the tech sector has been red-hot in recent months thanks to cloud computing, artificial intelligence and its inherent strength with increased adoption of emerging technologies,” he says. This is a large-cap technology fund, which means it’s less volatile than funds that focus on small- and mid-cap stock. Its expense ratio is 0.13%. “Cost is an important factor when considering investments, and in the long run, less expensive funds like this ETF can easily outperform expensive ones,” Krase says.
iShares Edge MSCI US Min Vol USA ETF (USMV)
USMV tracks an index of U.S. firms, with a goal to keep volatility low. Jamie Ebersole, founder and CEO at Ebersole Financial, says the ETF provides broad stock market exposure by using an algorithm that chooses high-quality companies with consistent growth characteristics and little share-price movement. “While there is no guarantee how the ETF will perform in the future, they have been a good core position in portfolios for those seeking to participate in the performance of the markets with lower volatility,” he says. This ETF could lag during market rallies, but it may reduce downside risk. USMV “can make a significant positive difference in your portfolio over the longer term,” he adds.
Vanguard Total World Stock Index Fund (VTWAX)
Most U.S. investors are underweight in non-U.S. holdings. Don McDonald, financial advisor at Vestory, suggests one way investors can get a globally diversified portfolio is to look at global index funds such as VTWAX. “While the global portfolio has lagged over the past decade, the idea is to accept a steadier potential average … over time,” McDonald says. “That is borne out by looking at the S&P 500 versus a global portfolio from Jan. 1, 2000, to June 30, 2020.” According to McDonald, a globally diversified portfolio would’ve outpaced the growth of the S&P 500 over this period. The fund contains more than 8,600 holdings. VTWAX is a mutual fund, with an expense ratio of 0.1%. It’s also available as an ETF with the ticker symbol VT and a lower expense ratio of 0.08%.
VanEck Vectors Junior Gold Miners ETF (GDXJ)
The current economic and political environment bodes well for gold, says John Person, founder of Persons Planet, a trading education and advisory company. There’s ultra-low interest rates and monetary stimulus that make gold attractive, as it can potentially stoke inflation. With the added uncertainty from the pandemic and social unrest, gold’s historic status as a safe-haven investment continues to shine. Person chooses GDXJ because it is composed of global small-cap gold and silver mining firms. Small-caps can outperform in a rising market, although they are more volatile. At 0.53%, GDXJ’s expense ratio is higher than plain-vanilla indexes, but it gives investors with a greater risk appetite unique, global exposure.
Best low-cost index funds to buy:
— Invesco S&P 500 Quality ETF (SPHQ)
— Fidelity 500 Index Fund (FXAIX)
— Invesco QQQ Trust (QQQ)
— iShares ESG MSCI USA ETF (ESGU)
— Technology Select Sector SPDR Fund (XLK)
— iShares Edge MSCI US Min Vol USA ETF (USMV)
— Vanguard Total World Stock Index Fund (VTWAX)
— VanEck Vectors Junior Gold Miners ETF (GDXJ)
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Update 08/10/20: This article was published previously and has been updated with new information.