The top low-cost index funds to buy.
Most investors, whether professional fund managers, amateur stock pickers or aspiring day traders, often fail to beat a humble index fund. Whether in mutual fund or exchange-traded fund form, these funds provide exposure to a variety of investment indexes developed by leading organizations such as S&P Global, MSCI and FTSE Group. Using a passive approach to picking their underlying investments, index funds deliver efficiency and the ability to achieve the average market return with little effort. Their biggest advantage lies with their low cost and capital efficiency. Whereas past investors would struggle to buy and manage a portfolio of hundreds of stocks, today’s investors can do so through a single ticker, with some of them charging no management fee. Expense ratios continue to fall as fund providers seek to outcompete each other. Here’s a list of the 10 best low-cost index ETFs to buy and hold in 2022.
SPDR S&P 500 ETF Trust (ticker: SPY)
With over $391 billion in assets under management, or AUM, and around 116 million shares trading hands monthly, the SPDR S&P 500 ETF Trust is the world’s largest and most liquid ETF. Tracking the popular S&P 500 index, SPY’s underlying holdings are dominated by megacap stocks such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT). Popular with institutional and retail investors, SPY has a very low bid-ask spread, making it one of the best ETFs with which to trade options. SPY isn’t the cheapest ETF on this list with its 0.095% expense ratio, meaning you’ll pay $9.50 for every $10,000 invested annually. But for an active investor, the better fills, minuscule spread and detailed options chain more than make up for the slightly higher cost. If you find yourself swing or day trading, SPY might be the best index ETF for your needs.
iShares Core S&P 500 ETF (IVV)
Investors bullish on the S&P 500 but with a more long-term, buy-and-hold mentality should consider the iShares Core S&P 500 ETF instead. With $308 billion in AUM and an average monthly volume of 9 million shares, IVV ranks among one of the largest ETFs tracking the S&P 500. Although its bid-ask spread is wider than that of SPY, and its options chain is poor, IVV has a clear advantage for passive investors: Its expense ratio is just 0.03%, or a third of SPY’s. For that price, you get exposure to 500 of the largest and most prominent publicly traded U.S. companies, allowing you to match the returns of the U.S. market with ease. If you want a hands-off index fund to buy and hold for the next decade, IVV is a great option.
Schwab U.S. Dividend Equity ETF (SCHD)
A favorite among dividend growth investors, the Schwab U.S. Dividend Equity ETF is the best low-cost pick for tracking the Dow Jones U.S. Dividend 100 Index. Thanks to its underlying holdings of blue-chip stocks like Coca-Cola Co. (KO) and Lockheed Martin Corp. (LMT), SCHD delivers a great blend of income and growth. The ETF’s current dividend yield stands at 2.9%, which beats the S&P 500’s average yield of 1.4%. Unlike the technology-heavy SPY and IVV, SCHD allocates more of its holdings to the financial, industrials and consumer defensive sectors, making it a potentially better hold during recessionary conditions. SCHD currently has a 0.06% expense ratio.
iShares U.S. Treasury Bond ETF (GOVT)
No investment portfolio is complete without at least a small allocation to investment-grade bonds. When it comes to bonds, the best pick for many investors would be U.S. Treasurys, a type of debt issued by the U.S. federal government. Treasury bonds are considered risk-free when it comes to default and are often seen as a safe asset to buy when the stock market crashes. This tends to send their prices soaring during a crisis. Investors can gain exposure to the broad U.S. Treasury market by buying the iShares U.S. Treasury Bond ETF. GOVT holds a variety of Treasurys with an average weighted maturity of 8.32 years. This gives GOVT a good balance between sensitivity to interest rate risk and the ability to hedge against equity risk, making it a good diversifier for a stock-heavy portfolio. GOVT will cost you 0.05% in fees annually.
iShares Core S&P Total U.S. Stock Market ETF (ITOT)
The S&P 500 is great, but it could be improved with the addition of mid- and small-cap stocks. A small allocation to these stocks will increase volatility but can also boost returns over a longer period. To capture these stocks, investors can invest in the broader U.S. stock market with the iShares Core S&P Total U.S. Stock Market ETF. ITOT is incredibly well diversified, holding a total 3,650 stocks from the U.S. market across all market caps. Buying ITOT is about as passive as investing can get, allowing investors to place their bets on the total U.S. market as opposed to just 500 stocks selected by a committee. With a low 0.03% expense ratio, IVV is a great option to select as the core holding of a retirement portfolio. If you think the U.S. market will perform well in the long term, ITOT is the ETF to buy.
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
Decidedly persistent inflation rates of up to 7.9% rattled both stocks and bonds recently, sending both into a closely correlated downward trend. The exception here was Treasury Inflation-Protected Securities, or TIPS. As a type of Treasury bond issued by the U.S. government, TIPS are indexed to the inflation rate to maintain purchasing power. As inflation rises, TIPS adjust their principal price to maintain value. Investors looking for a viable inflation hedge can buy the Vanguard Short-Term Inflation-Protected Securities ETF. With a low average duration of 2.7 years, VTIP is relatively insulated from interest rate risk but could generate returns correlated to inflation over the near term. VTIP has a 0.04% expense ratio.
SPDR Gold MiniShares (GLDM)
One of the few assets to not fall at the start of 2022 was gold. While stocks and bonds suffered strong headwinds from a combination of red-hot inflation and anticipated interest rate hikes, gold rallied sharply. Gold’s latest strong price action came at the heels of more uncertainty in the market, fueled by ongoing global economic sanctions against Russia for its invasion of Ukraine. Investors looking to get cheap and easy exposure to gold should consider SPDR Gold MiniShares. This ETF provides exposure to the spot price of gold bullion via physical bars held in a vault, meaning GLDM tracks the gold price very closely. The fees are higher than the other ETFs on this list at 0.18% annually, but it’s still cheap compared to other commodity ETFs of its class.
Vanguard Value ETF (VTV)
Growth stocks outperformed over the last decade, but value stocks might be on the cusp of a resurgence, especially after the latest correction suffered by the growth-heavy Nasdaq-100 index. Value stocks are those perceived as having a cheap price relative to their fundamentals, usually in terms of a low price-book, price-earnings or price-to-free-cash-flow ratio. Over time, this gives them the potential for higher returns. Investors looking to implement a value tilt in their portfolio can do so by buying the Vanguard Value ETF. VTV tracks the CRSP U.S. Large Cap Value Index, which includes stocks like Berkshire Hathaway Inc. (BRK.B), Johnson & Johnson (JNJ) and Proctor & Gamble Co. (PG). VTV costs 0.04%, which is excellent for a thematic index fund.
Vanguard Extended Duration Treasury ETF (EDV)
Investors looking for the strongest hedge for a stock portfolio should consider a small allocation to the Vanguard Extended Duration Treasury ETF. EDV holds U.S. Treasury STRIPS bonds with maturities ranging from 20 to 30 years. STRIPS stands for Separate Trading of Registered Interest and Principal of Securities, also known as a zero-coupon bond. This trait gives EDV a decent negative correlation to equities along with high volatility, which makes it an excellent hedge against stock market crashes. With its average duration of 24.5 years, however, EDV is extremely sensitive to interest-rate risk, with a rising rate environment likely to send its price sharply downward. EDV has a 0.06% expense ratio.
iShares 0-3 Month Treasury Bond ETF (SGOV)
Investors looking for a place to park some cash without fear of loss should consider the iShares 0-3 Month Treasury Bond ETF. SGOV seeks to track the movement of an index comprising U.S. Treasury bonds with remaining maturities less than or equal to three months. The average duration of the ETF is an extremely short 0.12 years, effectively rendering it immune to interest-rate risk. The average yield to maturity is low at around 0.25%, however, so don’t count on SGOV making nice gains anytime soon. Overall, SGOV is best suited for ultra-low-risk investors looking to reduce portfolio volatility and drawdowns as much as possible, or for those with shorter-term liquidity needs. SGOV charges 0.03% annually.
10 of the best low-cost index funds:
— SPDR S&P 500 ETF Trust (SPY)
— iShares Core S&P 500 ETF (IVV)
— Schwab U.S. Dividend Equity ETF (SCHD)
— iShares U.S. Treasury Bond ETF (GOVT)
— iShares Core S&P Total U.S. Stock Market ETF (ITOT)
— Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
— SPDR Gold MiniShares (GLDM)
— Vanguard Value ETF (VTV)
— Vanguard Extended Duration Treasury ETF (EDV)
— iShares 0-3 Month Treasury Bond ETF (SGOV)
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Update 03/16/22: This story was published at an earlier date and has been updated with new information.