Index funds hold certain advantages.
One of the best ways to get a higher investment return is to pay less in fees. Index funds offer diversified holdings and help investors keep more money so their earnings can compound faster. Jim Holtzman, a wealth advisor at Legend Financial Advisors, says with more exchange-traded index funds available, it's become easier for investors to lower costs. Some of the best follow the S&P 500 and have costs under 0.10%, or $10 for every $10,000 invested annually. But investors don't have to stick with a broader market, as many sectors and niche funds are available at costs much lower than for actively managed funds. Here are eight of the top low-cost index funds.
Vanguard Total Stock Market ETF (ticker: VTI)
Morris Armstrong, a fee-only registered investment advisor in Cheshire, Connecticut, says he uses VTI in many of his investment portfolio models. It is a market-cap weighted index of more than 3,500 stocks, from large through small cap and can be used as a core domestic holding. VTI ranks No. 23 in U.S. News' Large Blend ETFs rankings. "It provides such broad coverage at such a low cost," he says. "It has been said that boring is beautiful and classics never go out of style. I think that can be applied here as well." It has a 0.03% expense ratio.
Vanguard 500 Index Admiral (VFIAX)
Robert Johnson, professor of finance at Creighton University's Heider College of Business, says he considers VFIAX the best low-cost index mutual fund for the majority of investors. The fund tracks the S&P 500 index, a large-cap index, making the fund suitable as a core holding. "Most investors will benefit from exposure to a broad index that does not take sector bets, resulting in lower volatility than some of the sector index funds," Johnson says. Morningstar gives VFIAX a five-star, gold rating. The expense ratio is 0.04% and has a minimum investment of $3,000.
iShares Russell 2000 ETF (IWM)
IWM follows the small-cap index, Russell 2000. John Person, founder of Persons Planet, a trading education and advisory company, says small-cap growth stocks and indexes should outperform mega-cap blue-chip stock indexes. Small-cap indexes have lagged large cap in recent years, but with the Federal Reserve keeping interest rates low for the foreseeable future, that should spur growth, he says. That could benefit small-cap stocks which can grow more easily because of their size. IWM is the biggest of the U.S. small-cap index ETFs by assets under management, with $48 billion. That makes it highly liquid and easy to trade. It has an expense ratio of 0.19%.
JPMorgan Diversified Return International Equity ETF (JPIN)
Daniel Milan, a financial advisor and managing partner at Cornerstone Financial Services, likes this multi-factor index ETF. Its benchmark uses three time-tested factors (value, momentum and quality) to select international stocks. The holdings are weighted by volatility on a sector and regional level. "We are really big believers in factor analysis, and we think the approach is beneficial for retail investors," he says. The factors JPIN uses have historically outperformed, he says. Indexes that use multiple factors tend to be slightly more than market-weighted index funds, but he says at 0.37%, JPIN is fairly priced to its peers.
iShares PHLX Semiconductor ETF (SOXX)
Holtzman says investors can use index funds in two ways, as core holdings to get exposure to broader markets, and as satellite holdings to amplify certain sectors or subsectors. It's much cheaper to use index funds to get targeted, niche exposure than individual stocks. The technology sector has seen sharp gains, and much of that comes from the semiconductor industry, and he has used an index fund to efficiently overweight that subsector and can efficiently sell when the index fund reaches his target. The biggest semiconductor index ETF by assets under management and one of the cheapest is SOXX, which has $2.3 billion in AUM and costs 0.46%.
iShares U.S. Aerospace & Defense ETF (ITA)
Milan says ITA is one of his favorite niche index funds, and it follows the Dow Jones U.S. Select/Aerospace and Defense Index. "It's been the No. 1 fund in that subsector for the last 10 years," he says. "It's a nice blend of growth and value." He says because of the many large-cap names ITA holds, he uses it as a satellite position to lower volatility in his portfolios. The fund's one-year return is about 33%, even with a major holding, Boeing Co. (BA), a drag on performance because of the firm's 737 Max problems. "That just makes it a better value," he says.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
XOP follows the Thomson Reuters U.S. Oil & Gas Exploration and Production Index, an equal-weight index that allows a diversified approach to an asset class often dominated by big names. The fund fell sharply in 2019, Person says, as investment managers may have avoided the energy sector, expecting a recession and lower global demand. He says the fund is ripe for a rebound with U.S. employment strong and tensions easing between China and the U.S. He adds energy stocks are in a rare decoupling from oil prices, with crude oil prices on an upswing while energy equities are down. This offers a buying opportunity.
VanEck Vectors Gold Miners ETF (GDX)
With the Fed keeping monetary policy loose and having a higher tolerance for inflation, Person says that should bode well for commodity-based funds. The Fed's stance "should equate to investment fund managers having more long exposure to gold," he says, which is a historic inflation hedge. His index fund choice is GDX, the biggest of the global gold-mining ETFs, with $13 billion in AUM. The expense ratio is 0.52%, which makes it costlier than a simple S&P 500 fund, but still a fair price for access to a niche area.
Best low-cost index funds to buy:
-- Vanguard Total Stock Market ETF (VTI)
-- Vanguard 500 Index Admiral (VFIAX)
-- iShares Russell 2000 ETF (IWM)
-- JPMorgan Diversified Return International Equity ETF (JPIN)
-- iShares PHLX Semiconductor ETF (SOXX)
-- iShares U.S. Aerospace & Defense ETF (ITA)
-- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
-- VanEck Vectors Gold Miners ETF (GDX)
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