In investing, there’s one surefire way to keep more of your money, and that’s paying less for an investment vehicle. Low-cost index funds offer investors a diversified mix of holdings and help them retain more money so their earnings can compound faster.
As exchange-traded funds become more popular, it's helped bring down investment costs. Many of the top ETF index funds that follow the S&P 500 (.SPX) have costs under 0.1%, meaning they cost $10 for every $10,000 invested. But investors don’t have to stick with broader market to find the best index funds, since many sector and niche funds are available at cheap prices.
Here are nine top low-cost index funds.
Vanguard Total Stock Market ETF
When it comes to core holdings and domestic equities, Morris Armstrong, a fee-only registered investment advisor in Cheshire, Connecticut, says he favors VTI. It is a market-cap weighted index, that follows the CRSP U.S. Total Market, holding more than 3,500 stocks, which range from small- to large-cap stocks. VTI also has an enticing expense ratio: 0.03%. Core funds like VTI will closely track the index and give investors the market return, rather than try to hit home runs, he says. “A core [fund] should be solid and something which you can build upon, whether your home or body or portfolio,” he says.
Vanguard Growth ETF
Chuck Self, chief investment officer at iSectors in Appleton, Wisconsin, likes VUG for investors seeking broad exposure to U.S. large-cap growth firms. “Since this fund is a full replication of the CRSP U.S. Large Cap Growth Index, the companies are larger, more profitable and have greater growth characteristics than other growth indices,” he says. VUG selects holdings based on six growth factors, including expected long- and short-term growth in earnings per share and return on assets. With a fee of 0.04% and a focus on growth, “it is the best large-cap-growth index fund available,” Self says.
Invesco's S&P 500 Equal Weight ETF
JR Robinson, founder of Financial Planning Hawaii, says he uses RSP in his clients' portfolios. With a 0.2% expense ratio, it's a bit higher than the other equity index ETFs. “I think it provides broader large-cap diversification than the standard market-cap weighted indexes,” Robinson says. RSP takes all of the S&P 500 stocks and weights them equally. That increases a buyer’s exposure to more mid-cap names and also lowers concentration, meaning losses in one big stock won’t drag down the entire ETF, which can happen with market-cap weighted ETFs.
Health Care Select Sector SPDR Fund
XLV tracks health care stocks from within the S&P 500, weighted by market cap and is one of the current favorite picks from John Person, founder of PersonsPlanet.com, a trading education and advisory service company. The health care sector is currently lagging the broader S&P 500, which makes it cheaper to own than normally. XLV pulls its holdings from the S&P 500, so it focuses on the largest U.S. health care companies. It’s the oldest and largest fund in the segment, with a 20-year track record. With an 0.13% expense ratio, it’s also cheaper than similar health care funds like iShares U.S. Healthcare ETF (IYH) and First Trust Health Care AlphaDEX Fund (FXH).
Energy Select Sector SPDR ETF
After a strong run earlier this year, energy prices are faltering versus the broader S&P 500 as production growth continues and global demand moderates. Soft prices make a fund like XLE attractive on the pullback, making this fund another pick by Person. XLE is a highly liquid fund with exposure to the giants of the oil and gas industries, as it selects its holdings from the S&P 500 versus the total market. Many energy companies pay dividends, and XLE has a distribution yield of 3.52%. It’s one of the largest energy funds around, with $11 billion in assets and has a low expense ratio of 0.13%. Plus its year-to-date return is up 11%.
SPDR S&P Oil and Gas Equipment and Services ETF
With broad market index funds highly priced, Steven Jon Kaplan, CEO of True Contrarian Investments in New York, is looking at subsector ETFs. His current favorite is XES, a fund of oil and gas equipment and service companies. The drop in crude oil prices in the spring has hit this fund’s valuation. It has an equal-weight strategy, so it avoids a lot of the common energy names investors likely already hold. He likes that the energy sector has “the heaviest insider buying in history of the components of energy companies during the past few week, a good sign that investors in the know see a good value,” he says. The fund's expense ratio is 0.35%.
iShares 20+ Year Treasury Bond ETF
TLT tracks a market-weighted index of U.S. Treasury debt with maturities of 20 years or more, making it a solid choice for investors seeking exposure to the long end of the Treasury curve. It's very sensitive to long-term, interest-rate movements. Self calls TLT “the best deflationary index fund available.” He says a strongly diversified portfolio should have a small portion in a long-term Treasury bond fund to guard against deflationary forces, as seen over the past few months. “TLT fits the bill well,” he says. The fund carries a 0.15% expense ratio.
SPDR Bloomberg Barclays Investment Grade Floating Rate ETF
For investors looking to add short-term debt exposure to their fixed-income portfolio holdings, Self suggests FLRN. The ETF tracks an index of investment-grade, U.S. dollar-denominated floating rate notes, with maturities ranging between one month and five years. Although all the issues are in U.S. dollars, 40% of the fund is holdings from other countries, such as the U.K. and Canada, to name a couple. “As short-term interest rates rose over the past few years, this 15-basis points expense ratio fund had increasing returns,” Self says.
Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF
BCI lets buyers know right in its name that it won't cause tax headaches. Commodity ETFs can be costly and their commodity pool structure means investors get hit with a K-1 tax form, which is extra work. BCI’s 0.25% expense ratio is higher than some equity ETFs, but Self says “it would be difficult to find a better fund with a lower expense ratio in the alternative space.” The structure also means investors submit Form 1099 instead. Self says BCI’s strategy invests in a broadly diversified group of commodity futures weighted by both trading volume and world production. “This construction better balances exposures to different commodity sectors compared to many other index funds,” he adds.