These top index funds are ideal for passive, cost-conscious investors.
Whether in mutual fund or exchange-traded fund, or ETF, form, index funds are a great pick for beginner and advanced investors alike. Studies have shown that most actively managed funds fail to outperform their index counterparts over the long term. Even if an active fund manages to outperform, the difference in gross returns is often eaten up by the higher expense ratios charged. With an index fund, investors can instead focus on controllable sources of risk: under-diversification, high fees and poor investment behaviors. While an index fund won’t beat the market, it’s also much less likely to underperform it. As Jack Bogle, the founder of Vanguard and pioneer of the index fund, put it: “gunning for average is your best shot at finishing above average.” Here are the 10 best low-cost index funds to buy today.
Fidelity 500 Index Fund (ticker: FXAIX)
The benchmark most investors compare their returns to is the S&P 500. The index tracks 500 large-cap U.S. companies representative of the broad U.S. market from all 11 stock market sectors and is notoriously difficult to beat. Many actively managed funds and hedge funds have tried and failed to outperform it over long periods of time. Investors who wish to replicate its performance can buy FXAIX, which is one of Fidelity’s longest-running and most popular mutual funds. Since its inception in 1988, FXAIX has returned an annualized 10.5% with dividends reinvested. Another bonus is its rock-bottom expense ratio, which currently sits at just 0.015%, or $1.50 for every $10,000 invested, annually.
Vanguard Balanced Index Fund Admiral Shares (VBIAX)
VBIAX remains a popular hands-off investment for many mutual fund investors thanks to its low-cost structure. The fund itself is comprised of two allocations: U.S. stocks, which track the Dow Jones U.S. Total Stock Market Index; and U.S. bonds, which track the Bloomberg Aggregate Bond Index. These two segments are held in a 60/40 stocks/bonds allocation, which has historically resulted in a portfolio with a good risk-adjusted return suitable for a wide range of investors. Thus, VBIAX is a great way of owning both the U.S. stock and bond markets passively. The fund costs an expense ratio of 0.07% and requires a minimum investment of $3,000.
Schwab Total Stock Market Index Fund (SWTSX)
The U.S. stock market doesn’t end at just the S&P 500. While the index’s constituents dominate the overall market by capitalization, there’s thousands of additional mid- and small-cap stocks worth indexing. A good “buy it all” option here for investors trying to index the entire investable U.S. market is SWTSX. This index fund tracks the Dow Jones U.S. Total Stock Market Index. SWTSX currently holds over 3,500 large-, mid- and small-cap U.S. stocks weighted by market capitalization. Over the trailing 10 years, the fund has returned 12.81% annualized, underperforming its benchmark index by only 0.04%. This is known as tracking error, and the best index funds like SWTSX are able to keep this difference minimal. SWTSX costs an expense ratio of 0.03%.
Vanguard Total International Stock Index Fund Admiral Shares (VITAX)
One potential shortcoming with VBIAX is its lack of international stocks. While U.S. stocks have performed exceptionally well over the last decade, this wasn’t always the case. From 2000 to 2002 after the dot-com bubble, U.S. stocks fell for three consecutive years. Then, they suffered another massive crash during the 2008 financial crisis. To mitigate situations like this, investors should consider international stock index funds like VITAX. VITAX holds stocks from developed markets like the U.K., Canada, Australia and Japan, and also owns stocks from emerging markets like China, Brazil and Mexico in accordance with their market capitalizations. The fund costs an expense ratio of 0.11%.
SPDR S&P 500 ETF Trust (SPY)
Index funds can also come in ETF form. Index ETFs share the same low-cost advantages as their mutual fund counterparts but have an added bonus: They can be traded on stock exchanges throughout the day, unlike mutual funds. A highly popular S&P 500 index ETF is SPY, which is currently the largest ETF in the world by assets under management, or AUM. Currently, SPY has AUM of $366 billion, with a massive daily trading volume. As such, it’s highly popular with traders and long-term investors alike. The ETF also has a well-developed options chain for those seeking enhanced exposure. SPY costs an expense ratio of 0.09%.
iShares Core S&P 500 ETF (IVV)
SPY’s expense ratio of 0.09% is already fairly low, but it is by no means the cheapest S&P 500 ETF on the market. A lower-cost alternative here is IVV, which costs just 0.03%. With $312 billion in AUM, IVV is still quite large and trades around 3.6 million shares on a daily basis. The most noticeable difference between IVV and SPY is the former’s less-developed options chain, but that generally isn’t a problem for passive investors. For those looking for the lowest-cost S&P 500 ETF for a long-term buy-and-hold investor, IVV is a great pick.
iShares Core U.S. Aggregate Bond ETF (AGG)
Bond index ETFs are a great way of gaining fixed-income exposure in your portfolio at a low cost. Thanks to the liquidity of the ETF creation process, bond ETFs are significantly easier to buy than individual bond issues. A good one-size-fits-all bond index ETF to buy here is AGG, which tracks the Bloomberg US Aggregate Bond Index. AGG holds U.S. government Treasurys, investment-grade corporate bonds and mortgage-backed securities of all maturities. It’s a good way to buy the majority of the investable bond universe, minus some bonds like junk bonds and TIPS. An allocation to AGG can help investors lower volatility while ensuring some income potential. AGG costs an expense ratio of 0.03%.
iShares U.S. Treasury Bond ETF (GOVT)
Investors often hold bonds for safety in the hopes that during a crash, bonds can maintain their value and be used to rebalance into equities. Some bonds do this job better than others. In particular, U.S. government Treasury bonds tend to perform better than corporate bonds during crashes thanks to their much lower credit risk. A good index ETF to gain exposure to Treasury bonds is GOVT, which tracks the ICE US Treasury Core Bond Index. GOVT holds a portfolio of Treasurys with one-to-30-year maturities. This excludes Treasury bills, or T-bills, which have maturities of less than one year. GOVT costs an expense ratio of 0.05%.
Invesco Nasdaq 100 ETF (QQQM)
A popular index among aggressive, growth-oriented investors is the Nasdaq 100 index. This index holds 102 stocks representing 101 of the largest nonfinancial-sector stocks traded on the Nasdaq Stock Market. Historically, the Nasdaq 100 has been more volatile than the S&P 500, capable of strong returns but also large drawdowns, especially during the dot-com bubble. A good ETF to buy the Nasdaq 100 with is QQQM. Over half of QQQM is held in megacap stocks, which includes notables like Tesla Inc. (TSLA), Apple Inc. (AAPL), Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOG, GOOGL). QQQM is best suited for risk-tolerant investors bullish on the U.S. tech sector. The ETF costs an expense ratio of 0.15%.
Vanguard Total World Stock ETF (VT)
VT is the ultimate index fund. This ETF holds over 9,000 stocks from U.S., international-developed and international-emerging markets according to their market-cap weights. All 11 stock market sectors and small-, mid- and large-cap stocks are held in VT. If your goal is to invest in the whole world’s stock market, VT is the easiest way of doing so. With VT, investors can remain completely passive. The ETF automatically rebalances itself and adjusts its U.S.-versus-ex-U.S. holdings as the world’s market composition changes. By buying VT, investors can ensure they receive the average return of the world’s stock market net of fees. VT costs an expense ratio of 0.07%.
10 best low-cost index funds:
— Fidelity 500 Index Fund (FXAIX)
— Vanguard Balanced Index Fund Admiral Shares (VBIAX)
— Schwab Total Stock Market Index Fund (SWTSX)
— Vanguard Total International Stock Index Fund Admiral Shares (VITAX)
— SPDR S&P 500 ETF Trust (SPY)
— iShares Core S&P 500 ETF (IVV)
— iShares Core U.S. Aggregate Bond ETF (AGG)
— iShares U.S. Treasury Bond ETF (GOVT)
— Invesco Nasdaq 100 ETF (QQQM)
— Vanguard Total World Stock ETF (VT)
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Update 12/07/22: This story was previously published at an earlier date and has been updated with new information.