The 3 Best Low-Cost Index Funds – Motley Fool

This post was originally published on this site

Index funds have made investing dramatically cheaper for investors since Jack Bogle and the Vanguard Group introduced the first publicly available index fund in the mid-1970s. Since then, exchange-traded funds have been a game-changer in the fund world. Index-tracking ETFs typically have low expense ratios, in part because operating expenses are less considerable with passive investing strategies that don’t require any in-house stock analysis. If you want full exposure to the U.S. stock market, you’ll find that Schwab US Broad Market (NYSEMKT:SCHB), iShares Core S&P Total U.S. Stock Market (NYSEMKT:ITOT), and Vanguard Total Stock Market (NYSEMKT:VTI) are some of your cheapest choices in the fund market today.

Index Fund

Expense Ratio

Assets Under Management

Schwab US Broad Market

0.03%

$9.2 billion

iShares Core S&P Total US Stock Market

0.03%

$9 billion

Vanguard Total Stock Market

0.04%

$575 billion*

Data source: Fund providers, ETFdb.com. *Includes both ETF and mutual fund classes.

The low-cost disruptor

Schwab entered the ETF market less than a decade ago, but it has worked hard to develop a reputation as a low-cost provider of exchange-traded funds. The financial giant has brought out an array of ETFs and traditional index mutual funds with rock-bottom expenses and no minimum investments, and it prides itself on lacking the tier-based approaches that some of its competitors use to offer lower fees to those with higher investing balances. By doing so, Schwab argues that it will make its funds accessible to all investors and ensure that investors keep more of their hard-earned returns.

In addition to having low expense ratios, Schwab ETFs are available on a commission-free basis to Schwab accountholders. That acts as a draw for new investors to choose Schwab as their broker, and the company hopes that doing so will pay off with higher-margin sales of other financial products. With the fund holding more than 2,000 stocks and doing a good job of tracking the Dow Jones US Broad Stock Market Index, the Schwab ETF has delivered on its simple promise of offering market-matching performance to its investors.

ETF mosaic.

Image source: Getty Images.

Moving into the low-cost realm

On the other end of the spectrum, iShares has historically been the giant in the ETF arena. It traditionally appealed to institutional investors who valued liquidity over cheap expenses, and you usually wouldn’t have found the older line of iShares products among the lowest-cost ETFs in the industry.

But that changed when iShares introduced its core series ETF concept in 2012. Rather than cutting costs on its successful existing ETFs, iShares created a new class of funds designed to appeal to individual investors looking for rock-bottom expenses. The iShares Total US Stock Market ETF is its least expensive fund choice, tracking the S&P Total Market Index. That different benchmark gives the iShares ETF a slightly different portfolio than the Schwab ETF, but slightly greater trading volume could make the fund easier to trade for those who expect to make more frequent purchases and sales of the ETF.

The Vanguard choice

Finally, Vanguard Total Stock Market represents the largest and longest-established ETF on this list. The fund has a slightly higher expense ratio of 0.04%, but it dwarfs its low-cost peers in terms of size. Vanguard’s unique structure combines its mutual fund and ETF assets into a single corporate structure divided into different share classes, and that’s how the fund giant achieves maximum scale and expense savings.

The Vanguard ETF tracks the CRSP US Total Market Index, which is yet another take on getting maximum breadth from stocks throughout the stock market. Like Schwab, Vanguard offers its ETFs on a commission-free basis to its brokerage account holders, and with close tracking of its benchmarks over the years, the Vanguard ETF has done a good job of giving its investors the market performance they seek.

Think cheap

With index funds, there’s little reason to pay more than you have to. These three ETFs have cost advantages over their peers, and choosing one of them will keep more of your hard-earned money in your own pocket.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.