Every day presents an uphill battle for stock pickers — whether they’re retail investors or institutional players — when it comes to outperforming the market.
For the latter, folks can look to existing, tangible data that assesses how the average fund fares against its index benchmark … and so far, the results are less than stellar.
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This data is captured by the ongoing S&P Indices Versus Active (SPIVA) scorecard, produced by S&P Dow Jones Indices. This study provides a semi-annual comparison of the performance of actively managed funds against their relevant benchmark indices.
One critical statistic you need to know is quite telling: Over the last 15 years, approximately 88% of all U.S. large-cap funds have underperformed the S&P 500.
To put this into perspective, if you had randomly picked 100 mutual funds or exchange-traded funds, or ETFs, that track large-cap U.S. stocks, on average, only about 12 of them would have managed to beat the S&P 500 over the last decade and a half.
“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.”
Additionally, attempting to identify the handful of outperforming funds in advance is highly challenging, not only because of the unpredictable nature of fund performance but also due to survivorship bias.
This bias occurs because funds that perform poorly are often closed and removed from the record, skewing historical data in favor of those that have survived, irrespective of their performance relative to peers. This makes it difficult to predict which funds will outperform in the future based on past data.
“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,” says Rodney Comegys, global head of the equity indexing group at Vanguard. “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 mutual funds and ETFs to buy today:
| Fund | Expense Ratio |
| Vanguard Total Stock Market ETF (ticker: VTI) | 0.03% |
| Fidelity 500 Index Fund (FXAIX) | 0.015% |
| Fidelity ZERO Large Cap Index Fund (FNILX) | 0% |
| Vanguard S&P 500 ETF (VOO) | 0.03% |
| iShares Core U.S. Aggregate Bond ETF (AGG) | 0.03% |
| Schwab 1000 Index Fund (SNXFX) | 0.05% |
| Vanguard Dividend Appreciation ETF (VIG) | 0.06% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 0.06% |
| S&P 500 Dividend Aristocrats ETF (NOBL) | 0.35% |
| 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.”
VTI’s indexing strategy results in a low 0.03% expense ratio and 2.2% portfolio turnover rate. It also comes in mutual fund form as the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), charging a 0.04% expense ratio with a $3,000 minimum required investment.
Fidelity 500 Index Fund (FXAIX)
“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.” An easy way to capture the winners is with FXAIX.
This long-standing passive mutual fund dates back to 1988 and tracks the S&P 500 at a very low 0.015% expense ratio. From inception to March 31, 2024, it has delivered a 10.9% compound annual growth rate. Like many Fidelity funds, FXAIX has no minimum required investment or transaction fees.
Fidelity ZERO Large Cap Index Fund (FNILX)
“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 remove compounding fund fees from the equation entirely, investors can buy FNILX, one of Fidelity’s many zero-expense-ratio funds. This fund tracks the Fidelity U.S. Large Cap Index, which is very similar to the S&P 500 in performance and composition. As its name suggests, FNILX does not charge an expense ratio.
Vanguard S&P 500 ETF (VOO)
“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 is VOO, which tracks the S&P 500 with a 2.2% portfolio turnover rate.
VOO offers the same exposure to the S&P 500 as FXAIX does, but in an ETF structure. This means investors can buy and sell shares as needed throughout the trading day. It charges a low 0.03% expense ratio and currently costs around $468 per share. Of course, if your brokerage allows for fractional trading, you’ll be able to gain exposure to VOO for any dollar amount — no matter how small — you choose.
[SEE: 7 Best Vanguard Funds to Buy and Hold]
iShares Core U.S. Aggregate Bond ETF (AGG)
“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. Investors can therefore complement equity ETFs like VOO or VTI with a bond ETF like AGG.
This ETF tracks the Bloomberg U.S. Aggregate Index, a popular benchmark of domestic bond market performance. It features more than 11,600 holdings that include government Treasurys, mortgage-backed securities and investment-grade corporate bonds. BND charges a 0.03% expense ratio and pays monthly distributions.
Schwab 1000 Index Fund (SNXFX)
While ETFs have their advantages, mutual funds still retain some perks. “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.”
Investors looking to automate periodic contributions may therefore prefer a mutual fund, as transactions are settled only once per day at market close. A great candidate for this role is SNXFX, which tracks the proprietary Schwab 1000 Index at a 0.05% expense ratio with no minimum required investments.
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.” Investors can currently expect a 0.06% expense ratio.
The S&P U.S. Dividend Growers Index tracked by VIG requires holdings to possess a 10-year history of consecutive dividend growth. Eligible stocks are ranked by their annual yield, after eliminating the top quartile to remove so-called yield traps (stocks whose dividend yields are high because share prices have plunged due to poor performance). VIG currently pays a 1.7% 30-day SEC yield.
Schwab U.S. Dividend Equity ETF (SCHD)
Another popular index alternative to VIG for dividend investors is SCHD. This ETF targets three important components of dividend investing via the Dow Jones U.S. Dividend 100 Index: dividend quality, dividend growth and dividend yield. It also charges a reasonable 0.06% expense ratio.
To achieve these objectives, SCHD’s index calculates a composite score that assesses things like a stock’s free cash flow to total debt, return on equity, dividend yield and its five-year dividend growth rate. The top 100 scoring companies are added to the index. Currently, investors can expect a 3.8% 30-day SEC yield.
S&P 500 Dividend Aristocrats ETF (NOBL)
Dividend growth investors looking for an even more stringent criteria can use NOBL, which tracks the S&P 500 Dividend Aristocrats Index. This index selects stocks from the broader S&P 500 that have grown dividends for at least 25 consecutive years and equally weights them.
Currently, NOBL’s portfolio features many blue-chip companies from the industrials and consumer staples sectors such as Caterpillar Inc. (CAT), 3M Co. (MMM), Procter & Gamble Co. (PG), Coca-Cola Co. (KO) and Walmart Inc. (WMT). It charges a 0.35% expense ratio and pays a 2% 30-day SEC yield.
Invesco Nasdaq 100 ETF (QQQM)
Growth investors who are more interested in total return over high dividend yields can make use of index ETFs too. A great example here is QQQM, which tracks the popular Nasdaq-100 Index. This index targets non-financial-sector, Nasdaq-listed stocks and has a heavy large-cap tech sector focus.
Currently, QQQM’s top holdings feature all of the Magnificent Seven stocks — Microsoft Corp. (MSFT), Apple Inc. (AAPL), Nvidia Corp. (NVDA), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META), Alphabet Inc. (GOOG, GOOGL) and Tesla Inc. (TSLA). It charges a 0.15% expense ratio.
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10 Best Low-Cost Index Funds to Buy originally appeared on usnews.com
Update 04/29/24: This story was previously published at an earlier date and has been updated with new information.
