Low-cost index funds provide instant portfolios that might otherwise take years or even decades to build if you cobbled them together on a share-by-share basis. A single investment gives you an ownership stake in every company on whichever index your fund of choice tracks.
They’re among the most popular investments on the market because they mitigate risk, they’re simple and they usually outperform much more expensive actively managed funds.
The problem is that low-cost index funds are so popular that there are now thousands of them to choose from. This list will help you narrow down your options. Here’s a look at the best and most affordable index funds you can buy.
What Is a Low-Cost Index Fund?
Because they’re passively managed, index funds have much lower fees than traditional actively managed mutual funds. But exchange-traded funds can match or beat the tiny expense ratios associated with index funds without the minimum investment requirements. Index fund ETFs are passively managed and mirror broad indexes, just like index funds, but they have the added benefit of trading in shares on the open market. That makes them nearly identical in composition and function, yet more accessible and easier to trade through any brokerage.
How Much Does It Cost To Have an Index Fund?
Traditional index funds are a type of mutual fund, and they typically have minimum buy-in requirements. Index funds from BlackRock, the largest investment firm in the world in terms of assets under management, require a minimum investment of $1,000. Vanguard, the largest issuer of mutual funds, requires a $2,500 to $3,000 minimum investment on its index mutual funds.
Can You Lose Money With Index Funds?
You can lose money with any investment, and index funds are no exception. Millions of portfolios contain index funds because their diverse holdings offer a hedge against risk, but those diverse holdings include stocks and other securities with potentially turbulent pricing.
Despite a recent brief rally, the major stock indexes are still down over the past year — as of Jan. 26, the Dow Jones Industrial Average is off by 0.62%, the S&P 500 by over 6% and the more volatile Nasdaq composite is down by more than 13%.
The biggest index funds in the world track those indexes and others like them. Their investors, therefore, have shouldered 12-month losses that mirror the losses of their corresponding indices almost identically.
Can I Buy Index Funds With $100?
If you choose index fund ETFs, you can start investing with $100 or even $1 as long as you choose a no-fee brokerage that allows for partial-share investing. M1 Finance, Fidelity Investments and Interactive Brokers are among the most popular.
With partial-share investing, it doesn’t matter how much the ETF trades for — you simply invest as much as you have and you’ll own whatever percentage of a share that your money can buy.
The most important number for any ETF is its expense ratio — that’s what it costs to own an ETF, and lower is better. Expense ratios are expressed as percentages of your investment, so a 0.30% expense ratio would cost you $30 per year for every $10,000 you invest.
When searching for low-cost index fund ETFs, ignore the share price and focus on the expense ratio.
10 Best Low-Cost Index Funds
The following is a list of 10 index funds that trade as ETFs and offer wide market exposure and low expense ratios. If two funds had nearly identical holdings, the one with the lower expense ratio made the cut. When two had the same holdings and the same expense ratio, the fund with greater assets under management earned a place on the list.
1. iShares Core S&P 500 ETF (IVV)
Three of the four biggest ETFs in the world all track the same index, the S&P 500. The benchmark S&P contains the 500 biggest U.S. corporations, which serve as a bellwether for the stock market as a whole — and one share of IVV buys you a piece of all of them.
2. Invesco Nasdaq 100 ETF (QQQM)
The tech-heavy Invesco QQQ has long stood alone as the go-to growth fund for tracking the top nonfinancial companies on the Nasdaq 100 — but its relatively high 0.2% expense ratio was always a turnoff. QQQM solved that problem by delivering nearly identical holdings and performance for five fewer basis points.
3. Vanguard Mid-Cap ETF (VO)
The S&P 500 and Nasdaq 100, which the previous two funds track, are both large-cap indexes. VO gives you exposure to almost 350 medium-sized companies on the CRSP US Mid Cap Index. Investors bet on these companies because they’re big enough to have gained traction but still have plenty of room to grow.
4. Vanguard Small-Cap ETF (VB)
The smallest publicly traded stocks offer growth potential that the corporate giants on the S&P 500 and even the mid-caps can’t match — but the trade-off is greater volatility and higher risk. A single share of VB adds ownership of nearly 1,500 small-caps to your portfolio.
5. iShares Core S&P Total US Stock Market ETF (ITOT)
Investors looking for a piece of the entire U.S. stock market could buy IVV, VO and VB to gain exposure to the top large-cap, mid-cap and small-cap indexes. But the quicker and simpler route would be an investment in ITOT, which offers convenient, one-and-done access to the entire U.S. stock market — that’s 3,374 companies in one fund.
6. Vanguard Total International Stock ETF (VXUS)
The first half of the list covers the cheapest index funds for U.S.-based companies. Those looking to add exposure to international stocks should consider VXUS, which mirrors the performance of the FTSE Global All Cap ex US Index. It offers exposure to nearly 8,000 stocks in both developed and emerging countries.
7. Vanguard FTSE Developed Markets ETF (VEA)
International investors who want to isolate only companies based in more stable and familiar developed nations might buy VEA. The fund tracks the performance of a diverse blend of large-, mid- and small-cap companies based in Canada, Europe and the Pacific region.
8. Vanguard Total World Stock ETF (VT)
For the ultimate in global equity diversification, consider VT, which tracks the FTSE Global All Cap Index. The fund includes nearly 10,000 companies from both the U.S. and overseas, including both well-established and still-developing markets.
9. iShares US Treasury Bond ETF (GOVT)
For more complete diversification, investors can balance their stock holdings with lower-risk fixed-income securities like bonds. GOVT offers 131 U.S. Treasurys with maturities ranging from one to 30 years.
10. iShares Core US Aggregate Bond ETF (AGG)
When bond investors refer to the “agg,” they’re talking about the Bloomberg US Aggregate Bond Index. AGG tracks that index and offers broad exposure to U.S. investment-grade bonds.
The index funds you just read about have many close competitors, each of which offers different holdings, blends, objectives, characteristics, historical performance and expense ratios. Before you invest in an index fund, read the fund’s prospectus, which contains all the important facts associated with that fund, to make sure you’re buying one that matches your investment goals and strategy.
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