There are a few good things about booming growth in the index funds and exchange-traded funds industry. Obviously, ETF and index fund issuers are making tidy profits, even from cheap index funds.
Investors are benefiting as well, notably because cheap index funds are increasing in number and getting … well, cheaper.
Low costs are one of the primary reasons advisors and investors have been increasing their ETF usage in recent years. Same goes for professional investors. And ETF and index fund advisors are responding by continuing to pare fees on index funds, many of which are ETFs.
This year, BlackRock (BLK), Charles Schwab (SCHW) and State Street (STT) are among the ETF issuers that pared fees on ETF index funds.
In fact, Schwab’s most recent fee cuts came immediately after a similar move was announced by BlackRock’s iShares unit.
The positive impact of low fees for ETF and index fund investors is palpable.
“In any market, the average return for all investors before costs is, by definition, equal to the market return. Once various costs are accounted for, however, the distribution of returns realized by investors moves to the left, because their aggregate return is now less than the market’s. The actual return for all investors combined is thus the market return reduced by all costs paid. One important implication of this is that, after costs, fewer investors are able to outperform the markets,” according to Vanguard.
With that in mind, let’s have a look at some of the lowest fee ETF index funds on the market today.
Incredibly Inexpensive Index Funds: iShares Core S&P Total U.S. Stock Market ETF (ITOT)
Expenses: 0.03%, or $3 per $10,000 invested
At the outset, we noted that BlackRock’s iShares ETF brand recently lowered fees on some of its ETFs.
To be precise, the company pared expenses on seven of its “core” ETFs — a group of index funds aimed at cost-conscious investors — and that group includes the iShares Core S&P Total U.S. Stock Market ETF (ITOT).
For those who like their index funds cheap, it is hard to beat the iShares Core S&P Total U.S. Stock Market ETF because ITOT’s new expense ratio is a meager 0.03% a year.
ITOT will soon start tracking the S&P Total Market Index.
For now, the ETF’s top holdings include venerable fare such as Apple (AAPL), Exxon Mobil (XOM) and Microsoft (MSFT). Over the past five years, the $2.94 billion ITOT is up nearly 64%, having moved in near lockstep with the S&P 500.
Also notable is the fact ITOT’s lower fees prompted a similar move from the…
Incredibly Inexpensive Index Funds: Schwab U.S. Large-Cap ETF (SCHX)
Expenses: 0.03%
Later on the same day iShares announced its lower fees, it was revealed the already-inexpensive Schwab U.S. Large-Cap ETF (SCHX) would become an even cheaper index fund, seeing its annual fee reduced from 0.04% to 0.03%.
Schwab is known for its lineup of low-cost index funds and inexpensive total-market funds, and the firm’s ETF suite carries on that tradition. Plus, Schwab clients can trade the company’s ETFs commission-free on the ETF OneSource platform for added savings.
The $5 billion SCHX holds more than 760 stocks, including Apple, Microsoft, General Electric (GE) and Amazon (AMZN).
Incredibly Inexpensive Index Funds: Vanguard Total Stock Market ETF (VTI)
Expenses: 0.05%
The Vanguard Total Stock Market ETF (VTI) is one of the ETFs that launched the concept of the total stock market ETF, along with the notion of a cheap index fund in ETF form.
These days, VTI charges 0.05% a year. However — and we should note it is just speculation at this point — it would not be surprising to see VTI eventually match the fees of ITOT and SCHX. After all, the growing number of cheap index funds available to investors today is attributable to what many pundits call the “Vanguard Effect.”
As for the investment merits of VTI, this is an index fund’s index fund. VTI holds nearly 3,800 stocks, and its top 10 holdings combine for just over 15% of the index fund’s weight, according to issuer data.
Led by financial services and technology, six sectors garner double-digit allocations in VTI’s lineup. Top 10 holdings in this low-cost index fund include Apple, Johnson & Johnson (JNJ) and Amazon.
Incredibly Inexpensive Index Funds: Vanguard Small Cap ETF (VB)
Expenses: 0.09%
The Vanguard Small Cap ETF (VB) is not the least expensive small-cap ETF or index fund on the market, but this index fund is pretty darn close. VB’s annual fee of 0.09% makes this ETF 93% less expensive than the average expense ratio of similar funds, according to Vanguard data.
VB holds about 1,500 stocks, 26.7% of which are financial services names and another combined 31.4% of which are industrial and technology stocks.
Investors looking for some added cost savings can opt for the Schwab U.S. Small-Cap ETF (SCHA), which charges 0.08% per year. However, over the past three years, VB has offered modest outperformance over its Schwab rival while being slightly less volatile.
Incredibly Inexpensive Index Funds: Schwab US Dividend Equity ETF (SCHD)
Expenses: 0.07%
Yes, dividend investors can embrace index funds on the cheap too, and it does not get any cheaper among dividend ETFs than the Schwab US Dividend Equity ETF (SCHD). SCHD charges just 0.07% per year.
SCHD “includes 100 stocks that showed consistent dividend payouts for at least 10 consecutive years and targets stocks with high return on equity, high cash flow to debt, high dividend yields and strong dividend growth,” according to ETF Trends.
SCHD’s trailing-12-month dividend yield of 2.94% is about 70 basis points above the yield on 10-year U.S. Treasuries, but the good news this index fund does not qualify as a “high yielder.” Rather, SCHD focuses more on dividend growth than yield, which is a good thing because dividend growers are currently less expensive than their high-yield peers.
Plus, dividend growers tend to outperform high-yield dividend stocks when interest rates rise.
SCHD’s top 10 holdings include Microsoft, Procter & Gamble (PG) and Pfizer (PFE).
Incredibly Inexpensive Index Funds: Vanguard Total Bond Market ETF (BND)
Expenses: 0.07%
Fixed-income investors have some valid options when it comes to low-cost index funds, and the Vanguard Total Bond Market ETF (BND) is one of the best. BND’s expense ratio is just 0.07% per year. That makes BND 91% less expensive than the average expense ratio of similar funds.
BND tracks the Barclays U.S. Aggregate Float Adjusted Index, which means this index fund is heavily allocated to Treasuries. In addition to the 43.2% weight to Treasuries, BND devotes 20.4% of its weight to mortgage-backed securities.
This index fund, which holds over 7,700 bonds, is highly liquid and features an average duration of 5.8 years. Duration measures a bond sensitivity to interest rate changes.
As of this writing, Todd Shriber owned shares of JNJ.
