Best Low Cost Index Funds

An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio that tracks a particular market index, such as the Dow Jones Industrial Average or the S&P 500. Since index funds are passively managed, the fund manager does not choose specific stocks in an effort to outperform the market. Instead, the fund manager merely purchases and holds the index equities in the same ratio as they are represented in the index.

How does that relate to the everyday investor? Well, index funds are considered extremely important to a portfolio due to their numerous benefits and stable returns. However, it is important to invest in the right index fund to attain the greatest returns. 

Quick Look at the Best Low-Cost Index Funds:

• Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQGM: PDBC)
• Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD)
• iShares U.S. Treasury Bond ETF (BATS: GOVT)
• SPDR S&P 500 ETF Trust (NYSEARCA: SPY)
• Vanguard Total World Stock Index Fund Admiral Shares (MUTF: VTWAX)
• SPDR Portfolio MSCI Global Stock Market ETF (NYSEARCA: SPGM)
• Vanguard Balanced Index Fund Admiral Shares (MUTF: VBIAX)
• Vanguard Total Stock Market Index Fund Admiral Shares (MUTF: VTSAX)
• BNY Mellon Core Bond ETF (NYSEARCA: BKAG)
• Fidelity 500 Index Fund (MUTF: FXAIX)
• Vanguard Total Stock Market (NYSEARCA: VTI)
• IShares Core S&P Total US Stock Market (NYSEARCA: ITOT)
• Schwab US Broad Market ETF (NYSEARCA: SCHB)
• IShares CORE S&P Small-Cap ETF (NYSEARCA: IJR)
• Vanguard Small-Cap ETF (NYSEARCA: VB)
• Schwab U.S. Mid-Cap ETF (NYSEARCA: SCHM)
• Vanguard Mid-Cap ETF (NYSEARCA: VO)
• Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX)
• Vanguard Large-Cap ETF (NYSEARCA: VV)
• Vanguard S&P 500 ETF (NYSEARCA: VOO)

Index Funds vs. Low-Cost Index Funds

Index funds aim to replicate the performance of a market index such as the Nasdaq 100. Regardless of the state or performance of the general market, these funds follow the benchmark of these indexes.

They aim to provide broad exposure, low costs and steady returns to investors. They are not actively managed. Index funds are considered an excellent investment opportunity to build savings and build for the future. They can be a great choice for investors at all experience levels.

Low-cost index funds are similar to regular index funds but focus on pooled investments with low expense ratios or annual fees. Index funds can eat into your investment returns over time, meaning low-cost index funds, typically with expense ratios of 0.10% or less, help to lower costs.

Actively managed funds can come with quite large fees, usually over 1%. As a result, low-cost index funds can be a great way to grow your returns and ease your mind when it comes to costs.

Advantages

Low-cost index funds come with several advantages that make them popular among investors.

• Lower expense ratios: Index funds are passively managed, but they come with expense ratios. A low-cost index fund aims to offer the lowest expense ratios possible to reduce costs and offer stronger returns.
• Tax efficiency: Compared to actively managed funds, index funds often produce lower payouts for capital gains. Index funds track a market index and do not trade their holdings as frequently. 
• Greater diversification: Diversification is the key to any successful portfolio. Exposure to a number of stocks or bonds is key and something that low-cost index funds will give you. Achieving greater diversification reduces your risk and helps you build your portfolio successfully.
• Consistent returns: Investing in the right low-cost index funds can result in consistent returns across a variety of markets.

Factors to Consider When Choosing

Although low-cost index funds may sound tempting, it is important to consider if they are right for you. 

Expense Ratio

A high expense ratio can eat into your profits over time and be a deciding factor in choosing whether to invest in index funds. If the expense ratio is essential to your strategy, then a low-cost index fund may be better for you. Low-cost index funds charge different expense ratios, so research which one is best.

Tracking Error

The discrepancy between an index fund's performance and that of the market index it monitors is known as the tracking error. Investors should favor funds with lower tracking errors since they show that the fund closely tracks the index.

Investment Minimums

Not everyone begins investing with the same capital. Minimum investments may be required by a fund or broker. Some brokers allow investors to buy fractional shares, lowering the minimum investment required. Make sure to research a fund's minimum investment requirement.

Fund Performance History

The track record of a fund's performance holds significance since it provides investors with an indication of the fund's historical success. It showcases how a fund has improved through good and bad stages, its overall trend and what you can expect.

Past performance is not indicative of future performance, although it is a strong tell.

Fund Size

Fund size plays a part in your decision. The fund size is the total value of the assets held, and larger funds tend to be more liquid and have lower tracking errors and lower expense ratios than smaller funds.

If you are looking to maximize your potential, consider these key factors before jumping into a low-cost index fund.

Where to Buy Index Funds

Lower Costs, Higher Returns

While there are no guarantees in investing, low-cost index funds may provide a stable return in addition to the other benefits discussed in this article. Concentrating on profits is crucial, but cutting expenses cannot be overlooked.

Low-cost index funds can be a viable way of improving your top and bottom lines. With numerous funds available, research can help find the right fit to attain your investment goals.

Frequently Asked Questions