What are some low-cost index funds or ETFs that track broad market indices?

 

     Low-cost index funds and exchange-traded funds (ETFs) have become the cornerstone of many investment portfolios, particularly for those looking to achieve broad market exposure with minimal costs. These funds are designed to track specific market indices, offering investors a way to diversify their investments across a wide range of assets without the need to handpick individual securities. This approach not only simplifies the investment process but also aligns with a long-term, passive investment strategy that has been proven to deliver solid returns over time. In this extended discussion, we'll explore some of the most popular low-cost index funds and ETFs, delve into their benefits, and provide insights on how they can be used effectively in a diversified investment strategy.

 

1. Vanguard 500 index fund (VFIAX)

 

Index Tracked: S&P 500

Expense Ratio: 0.04%

    The Vanguard 500 Index Fund is perhaps the most iconic index fund available today. It tracks the S&P 500, an index that includes 500 of the largest publicly traded companies in the United States, spanning across various sectors. With an incredibly low expense ratio of just 0.04%, VFIAX allows investors to capture the performance of the U.S. large-cap market with minimal cost. The fund’s broad exposure to well-established companies makes it a solid choice for investors seeking long-term growth with relatively lower risk. The S&P 500 is often considered a benchmark for the overall U.S. stock market, and this fund’s performance closely mirrors that benchmark, making it a reliable component of any core portfolio.

 

2. Schwab S&P 500 index fund (SWPPX)

Index tracked: S&P 500

Expense ratio:  0.02%

    Schwab’s S&P 500 Index Fund is another excellent option for those looking to invest in a low-cost vehicle that tracks the S&P 500. With an expense ratio of just 0.02%, SWPPX is one of the cheapest funds available in the market. One of the standout features of this fund is that it has no minimum investment requirement, making it accessible to a broader range of investors, including those just starting their investment journey. Like VFIAX, SWPPX provides exposure to a diversified mix of large-cap U.S. companies, offering potential for steady growth over time. The fund’s low cost and ease of access make it a compelling choice for both new and seasoned investors.

 

3. SPDR S&P 500 ETF (SPY)

Index tracked:  S&P 500

Expense ratio:  0.09%

     SPDR S&P 500 ETF, commonly referred to as SPY, is one of the most traded ETFs globally. It was the first ETF listed in the U.S. and remains one of the most popular due to its high liquidity and tight bid-ask spreads. While its expense ratio of 0.09% is slightly higher compared to some other S&P 500 tracking funds, SPY’s immense trading volume makes it an ideal choice for active traders and investors who value liquidity. SPY is also a favored tool for those looking to implement various trading strategies, such as options trading or short selling, due to its widespread availability and market presence.

 

4. iShares Core S&P 500 ETF (IVV)

Index tracked:  S&P 500

Expense ratio:  0.03%

     The iShares Core S&P 500 ETF (IVV) is another highly regarded fund that tracks the S&P 500 index. With an expense ratio of just 0.03%, IVV is extremely cost-efficient and provides the same broad exposure to U.S. large-cap stocks as its counterparts. This ETF is well-suited for long-term investors looking to hold a core position in U.S. equities. One of the benefits of IVV, in addition to its low cost, is its strong dividend reinvestment program, which can help investors enhance their returns over time. Like SPY, IVV is also highly liquid, making it a practical choice for both buy-and-hold investors and those with a more active trading approach.

 

5. Vanguard total stock market index fund (VTSAX)

Index tracked:  CRSP US Total Market Index

Expense ratio:  0.04%

     The Vanguard Total Stock Market Index Fund (VTSAX) is a favorite among investors who want exposure to the entire U.S. stock market. This fund tracks the CRSP US Total Market Index, which includes small-, mid-, and large-cap stocks across all sectors. The diversity of the holdings in VTSAX makes it a comprehensive option for those seeking extensive market exposure. With a low expense ratio of 0.04%, VTSAX offers a cost-effective way to invest in the full spectrum of U.S. equities, providing greater diversification compared to funds that focus solely on large-cap stocks like the S&P 500. This broad exposure can help smooth out the volatility that sometimes affects more concentrated portfolios, making VTSAX an excellent choice for long-term investors.

 

6. Schwab total stock market index fund (SWTSX)

Index tracked:  Dow Jones U.S. Total Stock Market Index

Expense ratio:  0.03%

     Similar to VTSAX, the Schwab Total Stock Market Index Fund (SWTSX) offers broad exposure to the entire U.S. equity market, including small-, mid-, and large-cap stocks. With an expense ratio of just 0.03%, SWTSX is one of the most affordable options available. Schwab’s reputation for excellent customer service and the fund’s no-minimum investment requirement further enhance its appeal. This fund is particularly attractive to investors who want a diversified portfolio with broad market coverage at a very low cost. The Dow Jones U.S. Total Stock Market Index, which SWTSX tracks, includes thousands of stocks, making this fund a well-rounded option for those looking to capture the performance of the entire U.S. market.

 

7. Vanguard total international stock index fund (VTIAX)

Index tracked:  FTSE Global All Cap ex US Index

Expense ratio:  0.11%

      For investors seeking international diversification, the Vanguard Total International Stock Index Fund (VTIAX) is a top choice. This fund tracks the FTSE Global All Cap ex US Index, which includes stocks from both developed and emerging markets around the world. With a slightly higher expense ratio of 0.11%, VTIAX reflects the complexities of managing a global portfolio, but it remains a cost-effective way to gain exposure to international equities. The fund includes a wide range of companies across various sectors and regions, providing a comprehensive global investment that can serve as a counterbalance to U.S.-centric portfolios. By investing in VTIAX, investors can mitigate the risks associated with being too heavily invested in one country or region, thus enhancing the diversification of their portfolios.

 

8. iShares core MSCI total international stock ETF (IXUS)

Index tracked:  MSCI ACWI ex USA IMI Index

Expense ratio: 0.07%

   The iShares Core MSCI Total International Stock ETF (IXUS) is an ETF that offers broad exposure to international stocks, excluding the United States. IXUS tracks the MSCI ACWI ex USA IMI Index, which includes large-, mid-, and small-cap companies from both developed and emerging markets. With an expense ratio of 0.07%, IXUS is a cost-effective option for investors looking to diversify their portfolios with international equities. The fund’s extensive coverage of global markets makes it an excellent choice for those who want to complement their U.S. investments with international holdings. IXUS’s low cost, combined with its broad international exposure, makes it an appealing option for long-term investors.

 

9. Vanguard FTSE all-world ex-US ETF (VEU)

Index tracked:  FTSE All-World ex US Index

Expense ratio:  0.07%

     The Vanguard FTSE All-World ex-US ETF (VEU) is another solid option for gaining exposure to international markets outside of the United States. This ETF tracks the FTSE All-World ex US Index, which includes stocks from developed and emerging markets, focusing on large- and mid-cap companies. VEU’s expense ratio of 0.07% is competitively low, making it an attractive choice for investors seeking global diversification. The fund’s broad exposure to international markets allows investors to tap into the growth potential of economies outside the U.S., which can be particularly beneficial during periods when U.S. markets are underperforming. VEU is suitable for investors who want to add a global component to their portfolio without the complexities of managing multiple international funds.

 

10. Vanguard total bond market index fund (VBTLX)

Index tracked:  Bloomberg Barclays U.S. Aggregate Float Adjusted Index

Expense ratio:  0.05%

     For those interested in fixed income, the Vanguard Total Bond Market Index Fund (VBTLX) provides broad exposure to the U.S. bond market. This fund tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which includes government, corporate, and mortgage-backed securities. With a low expense ratio of 0.05%, VBTLX is an efficient way to invest in a diversified bond portfolio. Bonds are often used in portfolios to provide income and reduce overall volatility, and VBTLX serves this purpose well by offering a broad mix of investment-grade bonds. This fund is particularly suitable for conservative investors or those nearing retirement who seek a stable source of income with lower risk than equities.

 

Considerations for investors

 

When selecting low-cost index funds or ETFs, investors should consider several key factors:

 

Expense ratio:  Lower expense ratios mean more of your investment returns are preserved. Over time, even small differences in fees can significantly impact your overall returns, particularly in a long-term investment strategy.

 

Liquidity:  ETFs like SPY and IVV are highly liquid, which is advantageous for investors who may need to trade their positions frequently. Mutual funds like VFIAX and VTSAX are also liquid but are generally better suited for long-term investors who are not actively trading.

 

Tax efficiency:  ETFs tend to be more tax-efficient than mutual funds due to their structure. However, the tax efficiency of your investments also depends on your specific situation, including the type of account in which you’re investing (e.g., taxable vs. retirement accounts).

 

Diversification:  Broader index funds and ETFs, such as VTSAX and VTIAX, offer more diversification than funds that track narrower indices like the S&P 500. Consider your overall portfolio and risk tolerance when choosing between these options.

 

Investment goals:  Your investment horizon and goals should align with the characteristics of the index fund or ETF you choose. For example, if you are seeking growth, a fund that tracks the S&P 500 or the total stock market may be appropriate. If you are looking for income or stability, a bond index fund might be a better fit.

 

Conclusion

 

     Low-cost index funds and ETFs that track broad market indices provide a highly effective way to build a diversified, low-cost portfolio. Options like the Vanguard 500 Index Fund, Schwab Total Stock Market Index Fund, and iShares Core MSCI Total International Stock ETF offer investors exposure to different segments of the market, catering to various investment goals and risk tolerances. By carefully selecting these funds based on factors like expense ratio, liquidity, and diversification, investors can optimize their portfolios for long-term success, enjoying the benefits of broad market exposure while minimizing costs.