One of the inescapable costs that fund investors encounter is the expense ratio. This is a fee expressed as an annual percentage, deducted continuously from your total investment.
For example, if you invest $10,000 in a fund with a 0.5% expense ratio, you pay $50 in fees annually. The expense ratio encompasses various costs, with the management fee being a primary component. This is what fund managers charge for their services — essentially, it’s how they earn their keep.
However, the management fee isn’t the only contributor to the expense ratio. Other factors such as portfolio management, administration, marketing and distribution fees can also add up, increasing the total cost for investors.
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This is particularly evident in actively managed funds, where fund managers engage in extensive stock research, portfolio selection and management. These activities require significant time and resources, leading to higher turnover and, consequently, higher overall costs.
In contrast, index funds offer a more cost-effective alternative. These funds aim to replicate the holdings and performance of a specific benchmark, like the S&P 500, by purchasing all or a representative sample of the index’s constituent stocks. This approach allows investors to gain exposure to the index’s risk and return profile without the need for active management.
Since index funds operate on the principle of mimicking a benchmark rather than outperforming it, they inherently incur lower turnover and management expenses, making them an attractive option for those seeking broad diversification at a lower cost.
They’re no slouches when it comes to performance, either. Consider the latest results from S&P Dow Jones Indices’ SPIVA scorecard, which benchmarks actively managed funds against their category indexes. Over the past 15 years, SPIVA found that 92.2% of all U.S. large-cap funds have underperformed the S&P 500 index.
“The idea behind index investing is ‘if you can’t beat ’em, join ’em,'” says Robert Johnson, professor of finance at Creighton University’s Heider College of Business. “For the vast majority of investors, the KISS mantra — ‘keep it simple, stupid’ — should guide their investment philosophy.”
Rodney Comegys, global head of the equity indexing group at Vanguard, agrees with Johnson: “Beating the market is a zero-sum game — it’s impossible for all investors in aggregate to outperform the market, as investors can’t all be above average. Index funds can help investors achieve long-term success through their low costs, broad diversification, low turnover and relative predictability.”
Here are 10 of the best low-cost index funds and exchange-traded funds, or ETFs, to buy:
| Fund | Expense Ratio |
| Vanguard Total Stock Market ETF (ticker: VTI) | 0.03% |
| Fidelity Total Market Index Fund (FSKAX) | 0.015% |
| Fidelity ZERO Total Market Index Fund (FZROX) | 0% |
| Vanguard Total World Stock ETF (VT) | 0.07% |
| Vanguard Total World Bond ETF (BNDW) | 0.05% |
| Schwab U.S. Aggregate Bond Index Fund (SWAGX) | 0.04% |
| Vanguard Dividend Appreciation ETF (VIG) | 0.06% |
| iShares S&P 500 Value ETF (IVE) | 0.18% |
| SPDR Portfolio S&P 500 Growth ETF (SPYG) | 0.04% |
| Invesco NASDAQ 100 ETF (QQQM) | 0.15% |
Vanguard Total Stock Market ETF (VTI)
“Broad diversification is a fundamental component of indexing, and when it comes to U.S. stocks, it doesn’t get much more diversified than VTI,” Comegys says. “VTI holds more than 3,700 stocks covering nearly 100% of the investable U.S. stock market and is a core building block in many portfolios.”
The CRSP U.S. Total Market Index tracked by VTI provides market-cap-weighted exposure across large-, mid- and small-cap U.S. stocks spanning all 11 sectors. The ETF charges a very low 0.03% expense ratio and incurs a minimal 3.4% annual portfolio turnover rate, a testament to its efficiency.
Fidelity Total Market Index Fund (FSKAX)
“The returns of the market have been driven by a small percentage of big winners,” Johnson says. “For most, trying to pick winners ex-ante is a loser’s game, so the solution is to invest in diversified index funds where you don’t have to pick the winners.” To put this in play, investors can buy FSKAX.
This mutual fund provides a different approach to targeting the broad U.S. stock market via the Dow Jones U.S. Total Stock Market Index. Investors can expect a very low 0.015% expense ratio, a 1% annual portfolio turnover ratio and no minimum investment requirement.
Fidelity ZERO Total Market Index Fund (FZROX)
“Just as how the stock market returns compound, the deleterious effects of high fees and transaction costs also stack up over time,” Johnson says. “In fact, the late founder and chairman of Vanguard, John Bogle, termed this phenomenon ‘the tyranny of compounding costs.'”
To eliminate expense ratios entirely, investors can buy FZROX. This fund is part of Fidelity’s ZERO lineup of mutual funds, all of which charge 0% expense ratios. It tracks the proprietary Fidelity U.S. Total Investable Market Index, which is similar in composition to the Dow Jones U.S. Total Stock Market Index.
Vanguard Total World Stock ETF (VT)
“Broad-market index funds use highly efficient investment strategies with minimal portfolio turnover, which means fewer taxable capital gains distributions for investors,” Comegys says. A great example of this is VT, which despite holding over 9,800 stocks manages to keep turnover low at 4.3%.
This ETF provides investors with one-ticker exposure to the global stock market by tracking the FTSE Global All Cap Index. It holds U.S. stocks at 60%, international developed stocks at 30% and emerging market stocks at 10%. All this can be had for a low 0.07% expense ratio.
Vanguard Total World Bond ETF (BNDW)
“It is possible to build a simple, diversified portfolio with just two ETFs: a broad market equity index ETF and a diversified bond index ETF,” says Brian Huckstep, chief investment officer at Advyzon Investment Management. To complement VT, investors can buy BNDW, which provides exposure to global bonds.
BNDW tracks the Bloomberg Global Aggregate Float Adjusted Composite Index. It achieves this by allocating its portfolio equally between two underlying Vanguard bond index ETFs covering domestic and international bonds, respectively. The ETF charges a 0.05% expense ratio.
[SEE: 9 of the Best Bond ETFs to Buy Now.]
Schwab U.S. Aggregate Bond Index Fund (SWAGX)
“All else being equal in terms of benchmark and fees, I always prefer a mutual fund,” Huckstep says. “This is because trading ETFs involves a bid-ask spread, which is an implicit cost that many people do not consider.” For a low-cost bond index mutual fund, investors can consider SWAGX.
This fund tracks the Bloomberg U.S. Aggregate Bond Index, which benchmarks the performance of thousands of U.S. government-issued Treasurys, mortgage-backed securities and investment-grade corporate bonds. It charges a 0.04% expense ratio and has no minimum investment requirement.
Vanguard Dividend Appreciation ETF (VIG)
“A consistently increasing dividend can be a signal of a firm’s strong balance sheet, disciplined capital allocation and commitment to returning value to shareholders,” Comegys says. “VIG offers investors low-cost, diversified access to such companies.” The ETF charges a 0.06% expense ratio.
VIG tracks the S&P U.S. Dividend Growers Index, which screens companies for a minimum 10 years of consecutive dividend growth and sufficient trading liquidity. Companies are ranked by their annual yield, and the top 25% of companies are removed to eliminate those that offer high yields but whose dividends may not last.
iShares S&P 500 Value ETF (IVE)
Index investing doesn’t mean just tracking the broad market. By employing specialty indexes, funds can also target specific styles or stocks, such as growth or value. A great example of the latter is IVE, which passively tracks the S&P 500 Value Index for a 0.18% expense ratio.
IVE’s benchmark essentially picks out the stocks from the S&P 500 that have the best value characteristics when it comes to price-to-book, price-to-earnings and price-to-sales ratios. Currently, its top holding is Berkshire Hathaway Inc. (BRK.B), Warren Buffett’s conglomerate holding company.
SPDR Portfolio S&P 500 Growth ETF (SPYG)
The opposite of IVE is SPYG, which tracks the S&P 500 Growth index. Companies in this index are selected for higher-than-average sales growth, changes in price-to-earnings ratios and momentum. As part of SPDR’s low-cost “Portfolio” lineup, it charges a 0.04% expense ratio.
SPYG’s current portfolio is heavily tilted toward technology, communication and consumer discretionary sector companies. Notable top holdings include Microsoft Corp. (MSFT), Apple Inc. (AAPL), Nvidia Corp. (NVDA), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Alphabet Inc. (GOOG, GOOGL).
Invesco NASDAQ 100 ETF (QQQM)
Another popular index many growth investors like to track is the Nasdaq-100. This index holds 100 of the largest non-financial-sector stocks listed on the Nasdaq exchange. Practically, it results in high exposure to many of America’s leading mega-cap tech sector stocks.
To invest in the Nasdaq-100 index, investors can buy QQQM for a 0.15% expense ratio. Top holdings in this ETF currently include Microsoft, Apple, Nvidia, Amazon, Meta Platforms, Broadcom Inc. (AVGO), Tesla Inc. (TSLA), Alphabet and Costco Wholesale Corp. (COST).
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10 Best Low-Cost Index Funds to Buy originally appeared on usnews.com
Update 02/28/24: This story was previously published at an earlier date and has been updated with new information
