For mutual funds and exchange-traded funds (ETFs), the biggest drag on performance after transaction costs is typically the management fee, which accounts for the bulk of a fund’s expense ratio.
These fees cover the costs associated with running the fund, and as a general rule, the more complex and hands-on the strategy, the higher the management fee tends to be.
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Actively managed funds, for example, rely on teams of portfolio managers, traders and analysts. These professionals conduct in-depth research, analyze financial statements and evaluate company fundamentals using tools such as valuation models and economic data.
To cover these costs and earn a profit, fund providers must charge higher management fees. While this is great for the fund managers, for investors, it creates a perpetual headwind that can eat into returns.
By contrast, passive funds automate their stock selection and portfolio management by simply tracking the constituents of a benchmark index, such as the S&P 500. This eliminates the need for extensive research and active trading, significantly reducing costs.
The much lower management fee for these passive funds mainly covers licensing the index and a modest profit margin for the fund provider.
Today, fees for index funds — both ETFs and mutual funds — have fallen to as low as 0%. Some funds are therefore free or virtually free to own, aside from potential trading commissions and bid-ask spreads.
The industry continues to engage in a perpetual arms race to lower fees even further, making low-cost index funds an increasingly attractive option for investors looking to maximize returns while keeping expenses to a minimum.
“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.”
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 (ticker: VFIAX) | 0.04% |
| Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) | 0.04% |
| Vanguard Total World Stock ETF (VT) | 0.07% |
| Fidelity ZERO Extended Market Index Fund (FZIPX) | 0.00% |
| Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) | 0.12% |
| Vanguard Total World Bond ETF (BNDW) | 0.05% |
| Schwab 1000 Index Fund (SNXFX) | 0.05% |
| Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX) | 0.08% |
| iShares Core Dividend ETF (DIVB) | 0.05% |
| Invesco NASDAQ 100 ETF (QQQM) | 0.15% |
Vanguard 500 Index Fund Admiral Shares (VFIAX)
“Index funds can help investors achieve long-term success through their low costs, broad diversification, low turnover and relative predictability,” says Rodney Comegys, global head of the equity indexing group at Vanguard. A Vanguard index fund that hits all these points is VFIAX, which tracks the S&P 500.
VFIAX currently charges a 0.04% expense ratio. For a $10,000 investment, this works out to just $4 in annual fees. The portfolio of this ETF rarely changes with a 2.2% turnover rate, which minimizes drag and maximizes tax efficiency. However, you do need a $3,000 minimum investment to access it.
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
“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,” Comegys says. If you want to match the overall U.S. stock market, consider VTSAX, an alternative to VFIAX for investors interested in domestic equities.
This Vanguard index fund tracks the CRSP US Total Market Index, which includes the large-cap stocks found in the S&P 500, but also thousands more mid- and small-cap stocks. As with VFIAX, VTSAX also charges a low 0.04% expense ratio and has a minimal 2.2% annual portfolio turnover rate.
Vanguard Total World Stock ETF (VT)
“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.” Taking this idea to the extreme leads investors to VT.
For a 0.07% expense ratio, VT tracks more than 9,800 global stocks represented by the FTSE Global All Cap Index. By passively investing in VT, investors no longer need to speculate on which size, type, sector or geography of stocks will outperform — their return will be the world market’s long-term average.
Fidelity ZERO Extended Market Index Fund (FZIPX)
“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 fees entirely, investors on Fidelity’s brokerage platform can buy FZIPX. This fund is part of the Fidelity “ZERO” lineup, which has a true 0% expense ratio. FZIPX tracks the Fidelity U.S. Extended Investable Market Index, which holds 2,500 mid- and small-cap companies outside the S&P 500.
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
“Broad-market index funds use highly efficient investment strategies with minimal portfolio turnover, which means fewer taxable capital gains distributions for investors,” Comegys says. Outside of an account like a Roth IRA or 401(k), using an index mutual fund can significantly improve tax efficiency.
Consider VTIAX, which tracks a portfolio of more than 8,600 developed- and emerging-market equities via the FTSE Global All Cap ex US Index. Despite its breadth, VTIAX only turns over around 3.9% of its portfolio on an annual basis. The fund currently charges a 0.12% expense ratio.
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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. For example, investors can combine VT with BNDW for exposure to global bonds.
BNDW uses a highly efficient “fund of funds” structure to wrap two other Vanguard index ETFs holding domestic and international bonds. The result is a 4.2% 30-day SEC yield, a reasonable 10.4% portfolio turnover rate, and a minimal 0.05% expense ratio inclusive of all underlying fund fees.
Schwab 1000 Index Fund (SNXFX)
“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.” Mutual fund transactions, however, are executed only once a day at market close at a consistent price.
Investors on Charles Schwab’s brokerage platform can use SNXFX as a low-cost core holding in their portfolio. This fund charges a 0.05% expense ratio and has no investment minimum nor transaction fees. It tracks the Schwab 1000 Index, which holds the 1,000 largest U.S. stocks covering 90% of the market.
Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)
“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. Thus, focusing on dividend growth companies can be a simple way of investing in quality stocks.
The Vanguard index fund to buy for this role is VDADX. It tracks the S&P U.S. Dividend Growers Index, which screens for a 10-year history of consecutive dividend increases while eliminating the top 25% highest-yielding companies. VDADX pays a 1.7% 30-day SEC yield and charges a 0.08% expense ratio.
iShares Core Dividend ETF (DIVB)
A consistently increasing dividend isn’t the only way a well-run company can return money to its shareholders. Companies can also use excess capital to buy back outstanding shares, thereby decreasing their float, giving shareholders greater ownership stakes and increasing earnings per share.
DIVB exemplifies this mechanic via its dual-mandate benchmark, the Morningstar US Dividend and Buyback Index. This makes it unique compared to most dividend ETFs which only focus on yield or growth. It is also extremely cost effective with a minimal 0.05% expense ratio.
Invesco NASDAQ 100 ETF (QQQM)
Finally, instead of returning excess capital to shareholders in the form of dividends or buybacks, growth-focused companies can elect to reinvest it in research and development. Companies known for this include the “Magnificent Seven” technology stocks, all of which are contained in the Nasdaq-100 index.
To passively track the Nasdaq-100 index, investors can buy QQQM for a 0.15% expense ratio. Top holdings include Nvidia Corp. (NVDA), Microsoft Corp. (MSFT), Apple Inc. (AAPL), Meta Platforms Inc. (META), Alphabet Inc. (GOOG, GOOGL), Amazon.com Inc. (AMZN) and Tesla Inc. (TSLA), to name a few.
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10 Best Low-Cost Index Funds to Buy originally appeared on usnews.com
Update 11/25/24: This story was previously published at an earlier date and has been updated with new information.
