A low-cost index fund can be a good way to invest in the stock market for both beginners and advanced investors. Index funds can reduce your risks compared to investing in individual stocks, and they are a good choice if you also want to minimize the time and money you spend investing. In addition, index funds can offer attractive returns, in part by lowering the costs you pay.
With all these advantages, it is not surprising that the legendary investorWarren Buffett recommends index funds(especially a Standard & Poor's 500 index fund) for most investors.
Here's more information about how index funds work and a list of some of the cheapest index funds on the market.
What is an index fund?
Aindex fundsis an investment fund that tracks a specific collection of assets, called an index. The index may include stocks, bonds and other assets, including commodities such as gold. The best known index is(S&P 500), which includes approximately 500 of the largest publicly traded U.S. companies. Other popular indices include the Nasdaq Composite, theDow Jones Industrial Averageand Russell 2000.
An index fund is a passive investment that tracks the assets included in the index. The index fund does not do thatactively invest in the market. Instead, it simply tries to match the performance of the index by holding the same assets in the same proportions as the index.
An index fund can be bought and sold as an exchange-traded fund (ETF) or as a mutual fund. (Here's the difference between ETFs and mutual funds.)
What are the different indexes?
Index funds can track any market index. Here are some of the most popular stock indices:
- S&P500:The S&P 500 index tracks approximately 500 of the largest companies in the United States.
- Dow Jones industrial sector:OfDow Jones Industrial Averageis often mentioned in the financial media and follows 30 of the largest companies in the US.
- Nasdaq Composite:OfNasdaq Compositemeasures the performance of more than 3,000 companies listed on the Nasdaq stock exchange and is known for its heavy exposure to the technology sector.
- Russel 2000:OfRussel 2000tracks the performance of approximately 2,000 of the smallest publicly traded companies in the United States.
- Russel 3000:The Russell 3000 is a broad stock market index that tracks the performance of approximately 96 percent of the investable U.S. stock market.
How to Invest in Low-Cost Index Funds
The two most important things to know about investing in low-cost index funds are the long-term returns of the index and the costs of owning the index fund. This means that you achieve the potentially greatest return, while paying the fund company as little as possible to achieve this return.
Long-term returns
Investors looking for atop index fundsfirst have to see what the return can yield.
The long-term performance of an index is a good measure of how the index might do in the future, but it is not a guarantee. Each fund will show its performance over a period of 1 to 10 years, but also from the inception of the fund. This shows the annual return over these periods, so that you get an idea of what you can earn in an average year.
Equity funds are likely to outperform bond funds in the long term, butbonds can outperform stocks over a shorter period of time. During periods of rising interest rates, bond prices will fall.
For example, the S&P 500 has returned about 10 percent per year over long periods, although it has outperformed over the past decade, averaging 12.6 percent from 2013 to 2022. The Nasdaq Composite has shown even better returns compared over the past decade, with an annual return of more than 13 percent from 2014 to September 2023.
The S&P 500 and Nasdaq Composite are widely followed indexes, but many fund companies create their own proprietary indexes that are not as widely known. So you want to look at the index fund's long-term returns over time to see how it might perform.
And when investing in investment funds, don't forget the importance of the average return. This technical holding period essentially means that a fund's performance moves toward its long-term average. Thus, funds that have outperformed their long-term averages over the past two years are more likely to return to their long-term averages than maintain their above-trend performance. It is important to note that average return is one of many investment concepts and does not guarantee future performance.
Cost
Imagine if you could choose between a Big Mac at two McDonald's restaurants. Both serve the same hamburger, but charge a higher price. You can literally buy the same thing but pay more for it in one place than in another.
And it's the same problem with index funds that are based on the same index. The most important point for index fund investors is to avoid unnecessary costs, and a few checks can help you do this.
To check the price of a fund, you can look it up and determine it with a quick searchcost ratio. The expense ratio tells you what percentage of your investment you pay to the fund company as compensation. For example, a typical index fund might charge an expense ratio of 0.06 percent. This means that you pay an annual fee of €6 for every €10,000 you have invested in the fund. It is important to remember that lower expense ratios are better for investors because they result in higher returns on investments.
Another cost to be aware of is called asales tax. The sales charge is essentially a commission to the seller, and it's money that comes straight out of your pocket. The good news is that it is easy to avoid these fees as many fund management companies offer no-load funds. And it's a fee that only applies to mutual funds, so if you're buying an ETF, you can rest easy.
To find no-load mutual funds, you can search for them on brokerage sites such asThe Fidelity InvestmentInCharles Schwab.
9 S&P 500 Index Funds with the Lowest Costs
The S&P 500 is one of the most followed indexes in the world and has a number of index funds that track this index. Like that McDonald's hamburger, the returns of these funds will be about the same over time, so the key differentiator is each fund's expense ratio.
Here are 9 of the cheapest funds that track the S&P 500:
- Fidelity 500 Indexfonds (FXAIX)– Cost percentage: 0.015 percent
- Fidelity ZERO Large Cap-index (FNILX)– Cost percentage: 0 percent
- iShares Core S&P 500 ETF (IVV)– Cost percentage: 0.03 percent
- Schwab S&P 500 Index Fund (SWPPX)– Cost percentage: 0.02 percent
- SPDR S&P 500 ETF Trust (SPY)– Cost percentage: 0.095 percent
- State Street S&P 500 Index Fund Klasse N (SVSPX)– Cost percentage: 0.16 percent
- T. Rowe Price Equity Index 500 Fund (PREIX)– Cost percentage: 0.20 percent
- Vanguard 500 Index Admiraal Aktier (VFIAX)– Cost percentage: 0.04 percent
- Vanguard S&P 500 ETF (VOO)– Cost percentage: 0.03 percent
It's also worth noting that many other funds are 'closet trackers', meaning they don't technically track an index, but in practice do so because of what they own. Many such funds also charge much more in fees than the low-cost funds mentioned above and may not deliver the same high performance.
Cheap index funds vs. ETFs versus investment trusts
You can buy low-cost index funds as ETFs or mutual funds, and well-known indexes like the S&P 500 have both available. For example, the list above includes both types. (The three-letter ticker symbols are for ETFs, while the five-letter symbols are for mutual funds.)
In many cases, the type of fund you can buy will determine the platform you use. This means that some platforms such as401(k) retirement plansThis only allows you to buy mutual funds. Likewise, while ETFs are generally available at allbrokers that enable stock trading, you may not be able to purchase all mutual funds depending on the broker's relationship with the fund company. For example, most brokers don't have a no-fee Fidelity fund, so you'll have to go to Fidelity to get it.
In general, stock index funds have a lower expense ratio than stock index ETFs, as you can see in the chart below. But mutual funds as a whole are more expensive because they are typically actively managed rather than passively managed, as is the case with most ETFs. Additionally, mutual funds may have a sales tax, while index ETFs may not.
But given the ability to choose any S&P 500 fund, there's little reason to prefer an ETF over a mutual fund, or vice versa. Ultimately, you are looking for the cheapest fund that delivers the same overall investment performance.
In short
As you can see, the main difference between index funds that track the same index is really just the price. That's why experts tell investors to focus on fund costs when looking at funds based on well-known indexes like the S&P 500. A fee that doesn't end up in the fund manager's pocket is money spent. can be fooled. years.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
