Exchange-traded funds (ETFs) and mutual funds both come with ongoing costs, but not all investors will understand exactly how these costs are calculated.
A fund’s expense ratio is simply the annual cost of managing and operating the fund, expressed as a percentage of its total assets under management (AUM). These fees cover a wide range of services.
Portfolio management includes the cost of buying and selling the fund’s holdings. Administration refers to day-to-day operations like accounting and compliance. Marketing and distribution cover the fund’s advertising and placement on broker platforms. Passive funds also pay index licensing fees, as tracking a benchmark like the S&P 500 isn’t free.
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Unlike a trading commission or service charge, you don’t pay a fund expense ratio out of pocket. Instead, the fund quietly deducts the cost from your returns over time. That means your investment earns slightly less than it otherwise would.
The higher the fee, the bigger the drag on your net long-term performance. That’s why most investing experts, regardless of whether they favor active management or passive indexing, agree on one thing: All else being equal, the lower the fee, the better.
“Investing involves many variables that are outside the investor’s control, but one of the few variables that remain controllable are expense ratios,” says Blake Rudy, associate wealth manager at Fairway Wealth Management. “Paying more for management fees does not necessarily translate into higher returns, and frankly, it is usually the opposite.”
But what counts as low? For index ETFs, expense ratios can now run just a few basis points (one “basis point” is 0.01%). Active or specialty funds that use derivatives, alternatives or leverage may cost more. At the extreme end, hedge fund-like products can charge both a base fee and performance fees.
Fund companies know investors are paying attention. That’s led to a steady fee war across the industry. Fidelity, for instance, introduced its Zero lineup of mutual funds, which charge a 0% expense ratio. They do this by using custom benchmarks, securities lending and sampling techniques.
ETF issuers have responded in kind, launching ultra-low-cost products that allow investors to get diversified exposure with minimal drag on returns.
Here are seven ETFs with some of the lowest expense ratios on the market today:
| ETF | Expense ratio |
| SPDR Portfolio S&P 500 ETF (ticker: SPLG) | 0.02% |
| Vanguard Total Stock Market ETF (VTI) | 0.03% |
| iShares Core Dividend ETF (DIVB) | 0.05% |
| JPMorgan BetaBuilders U.S. Equity ETF (BBUS) | 0.02% |
| Schwab High Yield Bond ETF (SCYB) | 0.03% |
| BNY Mellon U.S. Large Cap Core Equity ETF (BKLC) | 0% |
| BNY Mellon Core Bond ETF (BKAG) | 0% |
SPDR Portfolio S&P 500 ETF (SPLG)
“Most active fund managers underperform their benchmark over the long term,” Rudy explains. “The relative underperformance, in addition to an increased fee, can be a critical mistake when building a diversified portfolio.” A great example is the S&P Indices Versus Active (SPIVA) study, which found that over the past 15 years, 89.5% of U.S. large-cap funds underperformed the S&P 500.
Investors can obtain affordable S&P 500 exposure by buying SPLG. This ETF replicates the holdings of the index for a low 0.02% expense ratio. For a $10,000 investment in SPLG, investors can expect $2 annually in fee drag. State Street Global Advisors cut SPLG’s expense ratio to 0.02% from 0.03% in 2023 along with multiple other funds in its low-cost “Portfolio” lineup of ETFs.
Vanguard Total Stock Market ETF (VTI)
“The impact of higher fees compounding year over year can erode long-term returns,” Rudy says. “The value stemming from lower expense ratios rises in tandem with an investor’s time horizon.” If fees are too high, investors may find that their fund of choice chronically lags its benchmark. This is called tracking error, and minimizing fees goes a long way toward mitigating it.
For example, consider VTI. This ETF tracks more than 3,500 market-cap-weighted stocks via the CRSP U.S. Total Market Index. Over the trailing 10-year period, VTI’s total net asset value (NAV) annualized return has been just one basis point shy of its benchmark. This was helped in part not only by Vanguard’s disciplined portfolio management and index sampling techniques, but also by a low 0.03% expense ratio.
iShares Core Dividend ETF (DIVB)
“Every basis point saved is a compounding machine,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. “Cut a fee from 0.50% to 0.03% and the gap can snowball into five-figure savings over 20 years on a modest $10,000 initial stake.” This is especially important for investors looking to responsibly invest a windfall, such as an inheritance or lottery prize.
Low-fee ETFs aren’t just limited to broad market products like VTI and SPLG. Investors can also access more specialized strategies cheaply. For dividend investors, DIVB may be an enticing core holding. This ETF tracks the Morningstar U.S. Dividend and Buyback Index for a 0.05% expense ratio. Morningstar gave this ETF a “Gold Medal” rating, indicating the research firm believes it will likely outperform on a risk-adjusted basis.
[READ: Vanguard vs. Fidelity: Which Is Best for You?]
JPMorgan BetaBuilders U.S. Equity ETF (BBUS)
“Investors should keep in mind that a low headline fee can still lag if the index replication is sloppy or uses derivatives that drift,” Schulman warns. Sloppy replication means the fund doesn’t hold the right mix of securities to closely match its index. Derivatives like swaps used to provide synthetic exposure can also cause misalignment if the counter-party doesn’t perfectly deliver the index return.
Investors can mitigate these concerns by sticking to reputable fund managers with proven track records and economies of scale. An option you may not have heard of is BBUS, which holds a portfolio of just over 500 domestic large-cap stocks via the Morningstar U.S. Target Market Exposure Index. This ETF has tracked its benchmark closely so far and charges a 0.02% expense ratio.
Schwab High Yield Bond ETF (SCYB)
One rule of thumb with ETF expense ratios is that the more specialized the fund, the more it tends to cost. That’s why sector-specific or style-focused equity funds typically charge more than broad-market index funds. The same logic applies on the bond side: broad, aggregate bond ETFs are usually cheaper, while those targeting niche areas like junk bonds or emerging market debt tend to be pricier.
SCYB bucks this convention. Despite offering exposure to the riskier high-yield bond market, it charges just a 0.03% expense ratio, matching many of the cheapest core bond ETFs. SCYB tracks the ICE BofA U.S. Cash Pay High Yield Constrained Index, which holds more than 1,800 non-investment-grade bonds. These bonds carry higher credit risk but pay bigger coupons, helping SCYB deliver a 7.3% 30-day SEC yield.
BNY Mellon U.S. Large Cap Core Equity ETF (BKLC)
Fidelity may have registered “Zero” as a trademark, but there’s nothing stopping enterprising ETF issuers from copying Fidelity’s strategy in all but name. A great example is BKLC, which is one of the few true zero-expense-ratio ETFs. This ETF tracks the Solactive GBS United States 500 Index, which is similar in composition to the S&P 500 but is significantly cheaper to license as a benchmark.
Still, investors buying this ETF should watch out for some implicit costs. Notably, BKLC trades with a higher 0.07% 30-day median bid ask spread. This means that there is a usually slightly bigger gap between the prices investors can buy and sell this ETF for. In contrast, SPLG, while pricier at a 0.02% expense ratio, trades with a lower 0.01% 30-day median bid-ask spread.
BNY Mellon Core Bond ETF (BKAG)
The Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) are Vanguard and BlackRock’s competing flagship aggregate bond ETFs, respectively. Both provide exposure to a broad swath of Treasurys, mortgage-backed securities and investment grade corporate bonds of multiple maturities. BND and AGG each charge a 0.03% expense ratio, which is already very low.
However, BKAG undercuts BND and AGG entirely by boasting a nonexistent expense ratio just like BKLC does. It does so without gimmicks by tracking the Bloomberg U.S. Aggregate Total Return Index. Investors get monthly distributions currently amounting to a 4.6% 30-day SEC yield. However, as with BKLC, BKAG currently has a higher 0.05% 30-day median bid-ask spread, whereas AGG and BND both come in at 0.01%.
[READ: 7 of the Best High-Yield Bond Funds to Buy Now]
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7 Lowest Expense Ratio ETFs originally appeared on usnews.com
