Check Out Index Funds With Low Expense Ratios
By
Lee McGowan is a certified financial planner, a certified financial analyst, and a fee-only financial advisor. He is the president and senior wealth advisor at Monument Group Wealth Advisors. His analysis and commentary have been published in The Wall Street Journal, Investor's Business Daily, and The Journal of Financial Planning (where he also served on the Advisory Board).
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Updated on October 31, 2021
Reviewed byCharles Potters
Fact checked byAriana Chávez
x While cheaper doesn't necessarily mean better, thebest S&P 500 index fundstend to be the ones with the lowestexpense ratios. You shouldn't base your decision to invest in an S&P 500 index solely on price, but if you plan to invest long-term, the seemingly small differences in fees can add up to a sizeable amount of money.
Here are some qualities ofindex fundsyou'll want to look at before buying:
Analyze the Tracking Error
Thetracking erroris a measure of an index fund's effectiveness in replicating or matching the performance of the benchmark index, which in this case is the S&P 500. One drawback of researching and analyzing this is that mutual fund families do not publicly display the tracking error of their index funds. However, there are a few data points you can research to analyze performance tracking.
Research sites such as Morningstar, Lipper, and Kiplinger show how close the historical performance of the fund has been to the target benchmark. If the returns are below the benchmark by roughly the same amount as the fund's expense ratio, the tracking error is close.
Note
Here's an example: If a fund has an expense ratio of 0.2%, a five-year annualized return of 10%, and a benchmark return of 10.2%, the tracking error is precise.
Analyze the Expense Ratio
After looking at the historical performance, take into account the expense ratio. This will tell you how well the fund has tracked the benchmark index in the past. For example, if an S&P 500 index mutual fund has an expense ratio of 0.2%, a five-year annualized return of 10%, and a low tracking error, it might have an annualized return of roughly 9.8%. This means that the only difference between the index and the mutual fund's return is the fund's expenses.
Before Investing
Before deciding on an index fund to invest in, be sure to keep in mind other fees, such as trading costs. For example, if you already have an account at Vanguard, you may be charged a transaction fee to purchase a mutual fund like the Schwab S&P 500 Index, which is outside the Vanguard fund family. Typical transaction fees range between $10 and $20.
If you are dollar-cost averaging by periodically purchasing shares of your S&P 500 index fund, the expense ratio may be lower, but the trading fees can make the fund more expensive than other options.
Here's a list of some of the cheapestS&P 500funds you can buy with $1,000 or less:
01of 06
Fidelity 500 Index Fund
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Symbol:FXAIX
Net Expense Ratio: 0.015%
Minimum Initial Investment:$0
02of 06
Schwab S&P 500 Index Fund
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Symbol:SWPPX
Net Expense Ratio: 0.02%
Minimum Initial Investment:$0
03of 06
State Street S&P 500 Index Fund
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Symbol:SVSPX
Net Expense Ratio:0.16%
Minimum Initial Investment:$1,000
04of 06
Vanguard 500 Index Fund Admiral Shares
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Symbol:VFIAX
Net Expense Ratio:0.04%
Minimum Initial Investment:$3,000
05of 06
T. Rowe Price Equity Index 500 Fund
:max_bytes(150000):strip_icc()/GettyImages-114996129-56820b8d3df78ccc15b91aa1.jpg "See a List of the Cheapest S&P 500 Index Funds (5)")
Symbol:PREIX
Net Expense Ratio: 0.19%
Minimum Initial Investment:$2,500 taxable account, $1,000 IRAs
06of 06
USAA S&P 500 Index Fund Member Shares
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Symbol:USSPX
Net Expense Ratio: 0.25%
Minimum Initial Investment:$3,000
Although S&P 500 index funds are all constructed to match and track the S&P 500, they are not the same across the board. Most notable are the differences in fees among funds.
A difference in fees between 0.01% and 0.03% may not be significant, but differences of 0.05% or more between funds can make a significant difference in your wealth through your working years leading into retirement.
Frequently Asked Questions (FAQs)
How do you buy index funds?
To buy an index fund, you'll need access to the markets through a brokerage. You can use a standard brokerage account or a specialized retirement account with tax benefits. These accounts function much like bank accounts, but once you add money, you can invest it in assets such as stocks, bonds, and S&P 500 index funds.
What's the difference between an index fund and a mutual fund?
All of the funds listed here are both index funds and mutual funds, but the two terms aren't always synonymous. An index fund pools funds from investors to invest passively in an index like the S&P 500, but it could be a mutual fund or an exchange-traded fund (ETF). A mutual fund may be a passively managed index fund, but it could also be an active fund with managers who try to beat the market rather than indexing.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Fidelity. "Fidelity 500 Index Fund."
Charles Schwab. "Schwab S&P 500 Index Fund."
State Street Global Advisors. "State Street S&P 500 Index Fund - Class N."
Vanguard. "Vanguard 500 Index Fund Admiral Shares."
T. Rowe Price. "Equity Index 500 Fund."
Yahoo! Finance. "USAA 500 Index Fund Member Shares (USSPX)."
