Back in 1884, Charles Dow, the co-founder of Dow Jones & Co. Inc., realized that investors needed a straightforward way to gauge the performance of the stock market and the overall economy at a glance.
To solve this problem, he created the first widely reported stock market index, called the Dow Jones Transportation Average. This was a price-weighted benchmark of 11 large transportation companies considered central to the economy at the time — nine railroads, a courier and a steamship company.
This index was quickly joined by the Dow Jones Industrial Average, a broader (and also price-weighted) index designed to track the parts of the economy outside of utilities and transport.
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Fast-forward to 2024, and both are still in use today, but their relevance has been overshadowed by more sophisticated indexes made possible by advancements in mathematics and computing.
Major providers like S&P Global Inc. (ticker: SPGI), MSCI Inc. (MSCI), FTSE Russell and Solactive now manage thousands of different benchmarks, each with its own unique methodologies for gaining exposure to various parts of the market in a systematic, algorithmic way.
Regardless of how these indexes weigh their stocks — by price, market capitalization, some fundamental metric like yield or free cash flow, or even equally — they all share some similar traits: transparency, reliability, lower turnover and cost-effectiveness. Thanks to these indexes, more and more investment strategies can now be automated in a systematic manner.
The effectiveness of indexes later led to the creation of the first commercially successful fund tracking them in 1976, called an index fund. That year, John Bogle, the founder of Vanguard, debuted the First Index Investment Trust, which tracked the S&P 500.
These indexes have been incredibly hard to outperform as a whole — the latest S&P Versus Active (SPIVA) scorecard found that over the past 15 years, 88% of all U.S. large-cap funds have failed to beat the annualized returns of the S&P 500.
“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.”
Today, investors can find low-cost index funds in both mutual fund and exchange-traded fund (ETF) forms, tracking not only the S&P 500 but also other notable broad market benchmarks like the Nasdaq-100 index or the MSCI EAFE index, and even ones for specific sectors like technology or energy.
Here are 10 of the best low-cost index funds and ETFs to buy today:
| Index Fund | Expense ratio |
| Vanguard 500 Index Fund Admiral Shares (VFIAX) | 0.04% |
| Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) | 0.04% |
| iShares MSCI World ETF (URTH) | 0.24% |
| BNY Mellon U.S. Large Cap Core Equity ETF (BKLC) | 0.00% |
| Vanguard Total Stock Market ETF (VTI) | 0.03% |
| Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) | 0.10% |
| iShares Core U.S. Aggregate Bond ETF (AGG) | 0.03% |
| Fidelity Zero Total Market Index Fund (FZROX) | 0.00% |
| Vanguard Dividend Appreciation ETF (VIG) | 0.06% |
| Invesco Nasdaq 100 ETF (QQQM) | 0.15% |
Vanguard 500 Index Fund Admiral Shares (VFIAX)
“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. If you want to instead match the U.S. market’s returns, consider VFIAX.
Investors who bought and held VFIAX over the past 10-year period up to Aug. 31 would have received an annualized, pre-tax total return of 12.9%. All this comes at a minimal 0.04% expense ratio, but keep in mind that as a Vanguard Admiral Shares mutual fund, VFIAX has a $3,000 minimum investment requirement.
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
“Index funds can help investors achieve long-term success through their low costs, broad diversification, low turnover and relative predictability,” Comegys says. When it comes to these factors, few index funds can beat VTSAX, which tracks the broadly diversified, market-cap-weighted CRSP U.S. Total Market Index.
This mutual fund charges the same low 0.04% expense ratio as VFIAX does but holds thousands more mid- and small-cap stocks excluded by the S&P 500. Thanks to its broad nature, there’s little need to frequently add and drop constituents, resulting in a low portfolio turnover rate of just 2.2%.
iShares MSCI World ETF (URTH)
“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.” A great example is URTH.
This ETF tracks the MSCI World Index, a benchmark of over 1,400 U.S. and international developed market stocks from countries like Germany, France, the U.K., Japan, Canada and Switzerland. It’s an effective way to quickly diversify across developed economies. URTH charges a 0.24% expense ratio.
BNY Mellon U.S. Large Cap Core Equity ETF (BKLC)
“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 virtually eliminate the drag caused by fund fees, investors can buy BKLC, which tracks the Solactive GBS United States 500 Index TR (Total Return). This ETF charges a true 0% expense ratio — aside from the implicit bid-ask spread and possible brokerage commissions, it is effectively free to invest in.
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.”
This ETF tracks the same index as VTSAX does but at a slightly lower 0.03% expense ratio. As an ETF, it also does not have the same $3,000 minimum investment requirement of VTSAX. Instead, the minimum to invest in VTI is simply the price of a single share, around $272 or less if fractional trading is available.
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Vanguard Total World Stock Index Fund Admiral Shares (VTWAX)
“Broad-market index funds use highly efficient investment strategies with minimal portfolio turnover, which means fewer taxable capital gains distributions for investors,” Comegys says. Consider VTWAX, which holds over 9,900 global stocks yet manages to achieve a minimal 4.3% turnover rate.
The low turnover is made possible by the fund’s benchmark, the FTSE Global All Cap Index. This benchmark holds thousands of large-, mid- and small-cap stocks from all 11 market sectors, covering U.S., international developed and emerging markets. VTWAX currently has a 0.1% expense ratio.
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. For example, investors can complement VTI with an aggregate bond ETF like AGG.
This ETF tracks the Bloomberg U.S. Aggregate Index, which is designed to measure the broad bond market. It holds over 11,800 issues, ranging from government Treasurys and mortgage-backed securities to investment-grade corporate bonds. Right now, AGG is paying a 4.2% 30-day SEC yield.
Fidelity Zero Total Market Index Fund (FZROX)
“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.” In contrast, all trades for a mutual fund are executed once per day at market close, with investors receiving the same price.
If you’re on Fidelity’s brokerage platform, a great index mutual fund to automate investments for is FZROX. This fund tracks the proprietary Fidelity U.S. Total Investable Market Index, and like BKLC, it charges a 0% expense ratio. It also has no transaction fees or 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. The index ETF for this role is VIG, which tracks the S&P U.S. Dividend Growers Index for a 0.06% expense ratio.
The companies held in VIG are mostly blue-chip companies excluding real estate investment trusts (REITs), screened for a 10-year history of consecutive dividend increases, with the top 25% yielding companies eliminated. This ETF currently pays an above-average 1.7% 30-day SEC yield.
Invesco Nasdaq 100 ETF (QQQM)
Growth investors who prioritize total returns over dividend yield can make effective use of index funds, too. A great candidate for their needs might be QQQM, which tracks the 100 largest non-financial stocks found in the Nasdaq-100 index. Currently, it tilts strongly toward U.S. tech stocks.
QQQM’s paltry 0.7% 30-day SEC yield is not going to turn heads, but historically it has been a top performer, with a 14% total annualized return since its inception in 2020. The low yield also makes it fairly tax efficient in a brokerage account. QQQM charges a 0.15% expense ratio.
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10 Best Low-Cost Index Funds to Buy originally appeared on usnews.com
Update 09/04/24: This story was previously published at an earlier date and has been updated with new information.
