10 Best Low-Cost Index Funds to Buy
Unlocking High Performance at a Minimal Cost: Explore the Leading Index Funds on the Market
Every day poses a challenge for stock pickers, whether individuals or institutions, seeking to outpace the market. The S&P Indices Versus Active (SPIVA) scorecard by S&P Dow Jones Indices offers a biannual comparison of actively managed funds against their benchmarks, revealing that over the last 15 years, about 88% of U.S. large-cap funds failed to beat the S&P 500. This highlights the effectiveness of index investing, emphasizing simplicity and cost-effectiveness. Survivorship bias complicates identifying consistently outperforming funds, as poorly performing ones are often closed, skewing historical data. Rodney Comegys from Vanguard stresses the zero-sum nature of market beating, advocating for index funds due to their low costs, diversification, and predictability, offering investors a pathway to long-term success.
Fidelity 500 Index Fund (FXAIX)
“Market returns have largely been fueled by a select few high-performing stocks,” Johnson explains. “Attempting to predict these winners in advance is often futile, making diversified index funds the optimal choice.” A convenient option to access these winners is through FXAIX.
This enduring passive mutual fund, established in 1988, mirrors the S&P 500 with an exceptionally low expense ratio of 0.015%. From its inception to March 31, 2024, it has yielded an impressive 10.9% compound annual growth rate. Similar to many Fidelity funds, FXAIX imposes no minimum investment requirements or transaction fees.
Fidelity ZERO Large Cap Index Fund (FNILX)
“Similar to how stock market returns compound, the negative impact of high fees and transaction costs accumulates over time,” Johnson explains. “In fact, the late founder and chairman of Vanguard, John Bogle, termed this phenomenon ‘the tyranny of compounding costs.'”
To completely eliminate the compounding effect of fund fees, investors can opt for FNILX, one of Fidelity’s zero-expense-ratio funds. This fund mirrors the Fidelity U.S. Large Cap Index, closely resembling the S&P 500 in performance and composition. True to its name, FNILX imposes no expense ratio.
Vanguard S&P 500 ETF (VOO)
“Utilizing highly efficient investment strategies with minimal portfolio turnover, broad-market index funds minimize taxable capital gains distributions for investors,” explains Comegys. A prime illustration is VOO, which mirrors the S&P 500 with a mere 2.2% portfolio turnover rate.
VOO provides identical exposure to the S&P 500 as FXAIX but in an ETF structure. This allows investors to trade shares throughout the trading day. With a modest 0.03% expense ratio and a current price of approximately $468 per share, VOO offers accessible investment opportunities. Additionally, for investors with access to fractional trading through their brokerage, VOO allows exposure to the market for any chosen dollar amount, no matter how small.
iShares Core U.S. Aggregate Bond ETF (AGG)
Brian Huckstep, chief investment officer at Advyzon Investment Management, suggests that investors can construct a simple, diversified portfolio using just two ETFs: a broad market equity index ETF and a diversified bond index ETF. To complement equity ETFs like VOO or VTI, investors can consider a bond ETF like AGG.
AGG tracks the Bloomberg U.S. Aggregate Index, a widely-followed benchmark of domestic bond market performance. With over 11,600 holdings including government Treasurys, mortgage-backed securities, and investment-grade corporate bonds, AGG offers broad diversification. Charging a 0.03% expense ratio and providing monthly distributions, AGG presents a cost-effective option for investors.
Schwab 1000 Index Fund (SNXFX)
Despite the advantages of ETFs, mutual funds still offer certain benefits. “When benchmark and fees are equal, I always lean towards a mutual fund,” says Huckstep. “This preference arises from the fact that trading ETFs incurs a bid-ask spread, an implicit cost often overlooked by many.”
For investors seeking to automate periodic contributions, mutual funds may be more appealing since transactions are settled once per day at market close. SNXFX, which mirrors the proprietary Schwab 1000 Index with a 0.05% expense ratio and no minimum investment requirements, presents a strong option for this purpose.
Vanguard Dividend Appreciation ETF (VIG)
“According to Comegys, a consistent increase in dividends can signify a company’s solid balance sheet, disciplined capital allocation, and commitment to shareholder value. VIG provides investors with cost-effective, diversified exposure to such firms, boasting a 0.06% expense ratio.
VIG tracks the S&P U.S. Dividend Growers Index, which mandates holdings to demonstrate a decade-long streak of consecutive dividend growth. Stocks meeting this criterion are ranked by annual yield, with the top quartile excluded to eliminate potential yield traps. VIG currently offers a 1.7% 30-day SEC yield.”
Schwab U.S. Dividend Equity ETF (SCHD)
For dividend investors seeking an alternative to VIG, SCHD presents another popular index option. This ETF targets three key components of dividend investing through the Dow Jones U.S. Dividend 100 Index: dividend quality, growth, and yield. With a reasonable 0.06% expense ratio, SCHD aims to deliver value to investors.
To achieve its objectives, SCHD’s index computes a composite score based on metrics such as free cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate. The top 100 scoring companies are included in the index. Presently, investors can anticipate a 3.8% 30-day SEC yield.
S&P 500 Dividend Aristocrats ETF (NOBL)
For dividend growth investors seeking even stricter criteria, NOBL offers an option. Tracking the S&P 500 Dividend Aristocrats Index, NOBL selects stocks from the broader S&P 500 that have maintained dividend growth for at least 25 consecutive years, assigning them equal weights.
NOBL’s current portfolio includes numerous 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). With a 0.35% expense ratio, NOBL offers investors a 2% 30-day SEC yield.
Invesco Nasdaq 100 ETF (QQQM)
For growth-oriented investors prioritizing total return over high dividend yields, index ETFs offer viable options. An excellent illustration is QQQM, which mirrors the widely-tracked Nasdaq-100 Index. This index focuses on non-financial-sector, Nasdaq-listed stocks, with a significant emphasis on the large-cap tech sector.
Presently, QQQM’s top holdings include 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). With a 0.15% expense ratio, QQQM offers investors exposure to these high-growth companies.
