The 5 Best Index Funds with Low Expense Ratios You Can Invest in Right Now

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Index funds are the best way to instantly diversify your investment portfolio. Rather than manually selecting individual stocks, index funds are your gateway to many different stocks, bonds, and other types of securities, all at once.

But not all index funds cost the same. An expense ratio is the cost you pay to manage your account. The higher the expense ratio, the more you pay to have that fund managed.

Instead of paying more than you need to, look for an index fund with the lowest expense ratio. Here’s how to find them and which ones are best for your portfolio.

What are index funds?

Index funds are baskets of securities that track a specific index, such as the S&P 500 or the total US stock market. Index funds can be mutual funds or exchange-traded funds (ETFs).

Index funds are considered passive investing, where you try to match the performance of a benchmark. Active investing, on the other hand, is when investors pick individual stocks or funds in an attempt to beat the market. According to research, passive investing usually wins.

Why are index funds so popular?

If you want to invest without doing a lot of extra work, index funds are the best way to get involved.

“Index funds save investors the cost, time and effort of actively managing their portfolio,” said Emily Cozad, a portfolio analyst for Buckingham Advisors† “Index funds give an investor exposure to each of the positions within a specified index without having to buy each individually.”

Index funds are a great investment choice that don’t have a lot of overhead, says Jordan Hanson, a CFP and financial advisor at HCR Wealth Advisors

“Index funds are popular because they provide instant, broad diversification at a very low cost,” Hanson says. “Index funds have seen their popularity boom in recent years as actively managed mutual funds and exchange-traded funds continued to underperform.”

What is a good expense ratio?

Expense ratios are what you pay someone else – whether that be an individual or a company – to manage the fund. Expenses include portfolio management, administration and other related costs.

Pro tip

If you want the best index funds, look for the ones that don’t require too much extra cost on your part. But you’ll have to do your research first.

It is usually an annual percentage of the total amount you invest in the fund. For example, an expense ratio of 0.5% on $10,000 is $50. On $100,000, it is $500. A good rule of thumb is that anything below 0.2% is considered a low rate and anything above 1% is considered high by many experts.

“Expense ratios have a direct impact on the fund’s returns to the shareholder, so funds with extremely high expense ratios need to be considered carefully,” says Cozad, adding that a good expense ratio depends on whether it’s actively or passively managed.

“A good expense ratio is slightly below 0.20%, which is the current average,” Hanson says. “With respect to index funds, a good expense ratio is even lower, just under 0.05%. There are now even funds with no expense ratio.”

5 Best Index Funds With Low Expense Ratios

Good expense ratios are the lowest. The less additional costs you pay, the higher your net return. Here are some of the best low-cost index funds for their low expense ratios.

Schwab S&P 500 Index Fund (SWPPX). Expense Ratio: 0.02% Vanguard S&P 500 ETF (VOO). Expense ratio: 0.03% Fidelity ZERO Large Cap Index (FNILX). Expense Ratio: 0% Fidelity 500 Index Fund (FXAIX): Expense Ratio. 0.015%Vanguard Value Index Fund Investor Shares (VVIAX). Expense ratio: 0.05%

“All of these funds also have extremely low expense ratios, which allow investors to keep more of the total return for themselves,” Hanson says.

Index Fund FAQ

Are index funds safe investments?

While all investments involve some degree of risk, index funds are less risky compared to actively managed stocks.

Because an index fund gives the investor immediate exposure to various holdings (within the fund), the investor has increased the diversification of his portfolio, reducing his overall risk.

How do you invest in an index fund?

You must open an account with any brokerage firm, such as a retirement account or a traditional brokerage account. NextAdvisor recommends companies like Fidelity, Vanguard, and Charles Schwab, just to name a few. Check out NextAdvisor’s best online brokerssaid five financial experts.

Your investments should be long-term goals that you don’t plan to achieve until you decides to retirewhenever that may be.

Who should invest in index funds?

Index funds are not restrictive. If you want to invest in it, you can and should.

“Index funds cover a wide variety of sectors and asset classes, helping to reduce risk and provide instant portfolio diversification,” Hanson says. “Index funds are also easier and less time consuming to research than individual stocks due to the nature of a fund’s holdings.”

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