10 Best Low-Cost Index Funds

These are 10 of the best low-cost index funds to invest in.

It’s well documented that, net of fees, most actively managed funds underperform a stock market index like the S&P 500 over the long term. Thus, investors who accept that they cannot beat the market reliably can opt to match its performance instead. This can be done by investing in index funds, which hold a portfolio of stocks according to pre-determined rules and screens set by providers like S&P Global and MCSI. For many investors, mitigating easily controllable risk factors like high fees and under-diversification provides the largest boost to long-term returns. Here’s a list of the 10 best low-cost index exchange-traded funds, or ETFs, to buy and hold in 2022.

iShares Core S&P 500 ETF (ticker: IVV)

The benchmark for retail and professional investors alike is the S&P 500, a market-capitalization-weighted index of around 500 large companies trading on U.S. exchanges. Today, the index is quoted as a measure of U.S. large-cap performance and is the yardstick for many fund managers to compete against. A low-cost way of investing in the S&P 500 is via IVV, which charges an expense ratio of just 0.03%. For a $10,000 investment, this works out to around $3 in annual fees. Compared to actively managed funds that can charge upward of 1% or more, this is extremely cost efficient. As an ETF, IVV can be easily bought and sold on most brokerage platforms, with a very low bid-ask spread thanks to its high daily volume and assets under management, or AUM.

iShares Core S&P Total US Stock Market ETF (ITOT)

The S&P 500 is a great investment for those bullish on large-cap U.S. stocks. However, the U.S. market doesn’t end there. Beyond the S&P 500, there’s another 3,000-plus mid- and small-cap stocks worth tracking. These stocks are more volatile but may deliver slightly higher long-term returns. To invest in the total stock market, investors can buy ITOT, which tracks the S&P Total U.S. Stock Market index. In total, ITOT holds 3,617 stocks with around 82% of them large-cap names. Thus, the ETF performs similar to IVV and the two together make for a great tax-loss harvesting pair. ITOT costs an expense ratio of 0.03%.

SPDR S&P 500 ETF Trust (SPY)

IVV might be one of the cheapest S&P 500 ETFs, but it is by no means the largest and most popular. That distinction goes to SPY, which boasts over $370 billion in AUM with an average of 50 million-plus shares traded daily. Thanks to its massive economy of scale, SPY is highly popular with retail and institutional traders alike. The ETF sports a minuscule bid-ask spread and a well-developed options chain. Traders who want the best fills on their orders will often opt for SPY instead of IVV. Thus, if you’re looking for a trading instrument, SPY might be a better pick. The ETF is less suitable for a long-term hold due to its higher expense ratio of 0.09% but is still inexpensive compared to many actively managed funds.

Invesco NASDAQ 100 ETF (QQQM)

Investors bullish on mega-cap U.S. growth stocks and the technology sector can buy QQQM, which tracks the Nasdaq-100 index. This market-capitalization index holds 101 of the largest non-financial sector stocks traded on the Nasdaq stock exchange. Compared to the S&P 500, the Nasdaq-100 is more volatile, with greater risk but also potential for higher returns. If you’re looking for increased exposure to stocks like Meta Platforms Inc. (META), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Alphabet Inc. (GOOG, GOOGL), the Nasdaq-100 is ideal. A good ETF to buy here is QQQM, which is the “mini” version of Invesco’s popular QQQ ETF. Compared to QQQ, QQQM has less volume and AUM, but also a lower expense ratio of 0.15%.

iShares Core U.S. Aggregate Bond ETF (AGG)

If you’ve heard a financial news pundit talk about the “AGG,” they’re referring to the performance of the Bloomberg US Aggregate Bond Index and the ETF that tracks it. This is a market-capitalization-weighted index ETF of U.S. government Treasurys and investment-grade corporate bonds of all maturities. If ITOT represents the total U.S. stock market, then AGG represents the total U.S. bond market. Passive investors often hold an allocation to bond ETFs like AGG to dampen volatility and reduce drawdowns during market crashes. As an intermediate-duration bond ETF, AGG provides a good blend between protection, yield and interest rate sensitivity. The ETF costs an expense ratio of 0.03%.

iShares U.S. Treasury Bond ETF (GOVT)

AGG contains an allocation to corporate bonds, which are debt securities issued by companies. Some investors may not like corporate bonds due to their higher default risk and stronger correlation with the stock market. When stocks crash, corporate bonds tend to fall in value as well. These investors might prefer Treasurys instead, which are bonds issued and guaranteed by the U.S. government. A great way to buy the Treasury universe is via GOVT, which tracks the ICE US Treasury Core Bond Index. This index holds a ladder of Treasurys with maturities ranging from one to 30 years, all with a AAA credit rating. GOVT has a lower yield to maturity, or rate of return assuming an investors holds it until its maturity date, than AGG but might provide better protection during a crash. The ETF costs an expense ratio of 0.05%.

Vanguard FTSE Developed Markets ETF (VEA)

Some degree of international diversification in an investment portfolio is prudent. This hedges against the possibility of the U.S. market underperforming for extended periods of time, like it did from 2000 to 2009. The international developed markets hold some of the world’s largest and most important companies, including Nestle SA (NESN), Samsung Electronic Co. Ltd. (005930), AstraZeneca PLC (AZN), Shell PLC (SHEL), Toyota Motor Corp. (7203), LVMH Moet Hennessy Louis Vuitton SE and the Royal Bank of Canada (RY). A great way of gaining exposure to 4,115 stocks from international developed markets is via VEA, which tracks the FTSE Developed All Cap ex US Index. This ETF costs an expense ratio of 0.05%.

Vanguard FTSE Emerging Markets ETF (VWO)

Emerging markets like China, India, Brazil, Taiwan and South Africa pose higher risks and volatility owing to geopolitical or economic factors, but can reward investors with higher returns over the long term. Case in point, from 2003 to 2007 emerging-market equities strongly outperformed U.S. equities with four consecutive years of double-digit returns. Investors can buy emerging-market stocks without currency conversion via VWO, which tracks the FTSE Emerging Markets All Cap China A Inclusion Index. Notable top holdings include Taiwan Semiconductor Manufacturing Co. Ltd. (2330), Tencent Holdings Ltd. (700) and Alibaba Group Holding Ltd. (9988). The ETF costs an expense ratio of 0.08%.

Vanguard Total International Stock ETF (VXUS)

Investors can index a complete international stock portfolio by combining VEA and VWO in various proportions. However, this approach requires manual rebalancing, plus the hassle of figuring out how much of each to hold. For a hands-off approach, investors can buy VXUS, which tracks the FTSE Global All Cap ex US Index and holds 7,896 stocks from international developed and emerging markets. Right now, VXUS is around 25% VWO and 75% VEA. Vanguard will automatically rebalance holdings periodically and adjust the fund’s proportions based on how the world’s stock market capitalization weightings change over time. The ETF costs an expense ratio of 0.07%.

Vanguard Total World Stock ETF (VT)

Investors who want to buy the whole world’s investable stock market can mix-and-match ITOT, VEA and VWO in various proportions for a three-fund stock portfolio. Alternatively, they can reduce it down to a two-fund stock portfolio by just buying ITOT and VXUS. However, the simplest approach is buying VT, which tracks the FTSE Global All Cap Index. This one-ticker solution holds 9,435 large-, mid- and small-cap stocks from U.S., international developed and emerging markets. The fund is currently in a 60/40 U.S. to non-U.S. proportion, but Vanguard will change this as the world’s stock market composition evolves over time. With VT, there’s no need to try and time the market or overweight geographies you think will outperform. It is as hands off as stock investing gets. The ETF costs an expense ratio of 0.07%.

10 best low-cost index funds to buy now:

— iShares Core S&P 500 ETF (IVV)

— iShares Core S&P Total US Stock Market ETF (ITOT)

— SPDR S&P 500 ETF Trust (SPY)

— Invesco NASDAQ 100 ETF (QQQM)

— iShares Core U.S. Aggregate Bond ETF (AGG)

— iShares U.S. Treasury Bond ETF (GOVT)

— Vanguard FTSE Developed Markets ETF (VEA)

— Vanguard FTSE Emerging Markets ETF (VWO)

— Vanguard Total International Stock ETF (VXUS)

— Vanguard Total World Stock ETF (VT)

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10 Best Low-Cost Index Funds originally appeared on usnews.com

Update 09/14/22: This story was published at an earlier date and has been updated with new information.

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