Mutual funds have gotten a bad rap over the last few years — especially when comparing them to exchange-traded funds, or ETFs.
The crux of that argument comes down to costs. As passively managed entities — for the most part — ETFs are dirt cheap when compared to actively managed mutual funds. That high cost hurdle is why most mutual funds end up underperforming the broader marketplace and indexes.
But not all mutual funds are bloated, expensive and underperforming.
There are plenty that still do right by investors on the expenses front. These mutual funds offer low-cost diversification as well as market-matching or market-beating returns. A good, low-cost mutual fund can go toe-to-toe with just about any ETF and still have place in many investor’s portfolios.
So don’t give-up on the lowly mutual funds just yet.
Here are seven cheap mutual funds that are still great buys for portfolios.
Cheap Mutual Funds: Vanguard Total World Stock Index Fund Investor Shares (VTWSX)
Expenses: 0.25% or $25 per $10,000 invested
When it comes to diversification, you can’t get much better than the Vanguard Total World Stock Index Fund Investor Shares (VTWSX). The mutual fund has one of the broadest mandates in the business — own the entire world.
The fund tracks the FTSE Global All Cap Index. That includes small-, mid- and large-cap stocks from developed and emerging market nations. U.S. stocks? They’re in there. China? VTWSX has it. All in all, the mutual fund holds 7,510 different stocks. How about that for diversification?
That huge mandate to own the world makes the VTWSX a perfect core holding for stock allocation in a portfolio. And as a mutual fund, dollar cost averaging a small bit into the fund each month is easy.
At first blush, that huge size and depth of holdings makes many people think that the fund is going to be expensive. But as a Vanguard mutual fund, low costs are always the prime directive. VTWSX costs just 0.25% or $25 per $10,000 to own. That makes it cheaper than many ETFs.
When it comes to cheap mutual funds, VTWSX is the broadest option for your core portfolio.
Cheap Mutual Funds: Schwab Fundamental US Large Company Index Fund (SFLNX)
Expenses: 0.35%
Smart-beta or fundamental indexing is all the rage in the ETF world. The idea is that you can screen for various factors to create a portfolio of stocks that should outperform a parent index. Expenses ratios for many smart-beta ETFs are usually much higher than bread-n-butter ETFs — and some active mutual funds for that matter.
The Schwab Fundamental US Large Company Index Fund (SFLNX) is cheaper than many of its smart-beta ETF rivals.
SFLNX utilizes an index created by Research Affiliates — the people who basically created smart-beta years ago — to craft its portfolio. The mutual fund will screen U.S. large-caps for three fundamental metrics. That creates a portfolio of 623 of the “best” stocks of the broader Russell 3000 Index. These stocks have managed to outperform the broader index by about 2% a year over the last 10 years.
Even better is that the SFLNX charges just 0.35% in expenses and only has a minimum investment of $100. There’s no reason why investors can’t have cheap mutual fund access to market-beating returns.
Cheap Mutual Funds: Fidelity Spartan International Index Fund (FSIIX)
Expenses: 0.2%
More than 50% of the world’s total market cap exists outside the United States. At the same time, you’re just as likely to drive a foreign-branded car or use a product owned by an international firm as you are one that is “Made in America.” To that end, owning international stocks is pretty much a must for investors.
However, in recent years the strength of the dollar has clipped much of the appeal — and returns — from international investing. That means saving every extra dollar via low costs is a must.
The Fidelity Spartan International Index Fund (FSIIX) charges a rock-bottom 0.2% in expenses. That’s cheaper than many ETFs in the international space. FSIIX provides exposure to the MSCI Europe, Australasia, and Far East (EAFE) Index. This is the benchmark index of developed market stocks and it’s chock full of household names like Nestle SA (ADR) (NSRGY) and Toyota Motor Corp (ADR) (TM).
The discount on fees has helped it beat other mutual funds in the international space as well. Over the last ten years, the fund has beaten rivals in the foreign large-cap blend space by an average of 0.30% per year. While that may not seem like much, it’s enough to help beat back some of the dollar’s compounding at a faster rate.
Cheap Mutual Funds: Northern Trust Bond Index (NOBOX)
Expenses: 0.15%
While everyone is quick to point out that Vanguard is the indexing king, high-net-worth asset manager Northern Trust (NTRS) is no slouch either. It’s one of the largest indexers around — with billions in assets under its indexed strategies. And as such, it offers plenty of low cost mutual funds for investors. On the fixed income side, its Northern Funds Bond Index (NOBOX) is one of the cheapest.
NOBOX tracks the classic Barclays U.S. Aggregate Bond Index. The index provides exposure to the U.S. Treasury, government agency, investment-grade corporate bond, mortgage/asset-backed sectors of the fixed income markets — basically, the entire bond market within one ticker. That means that NOBOX is a great way to add bonds and fixed-income exposure to your core portfolio.
And at an expenses ratio of just 0.15%, it’s a dirt-cheap way to do just that.
That lower expense ratio also means that investors don’t have to sacrifice yield from the bonds as well. With the Federal Reserve keeping rates low, bonds aren’t paying out what they used to. Having a low expense ratio sends more money to your pocket when the fund pays its monthly dividend.
Cheap Mutual Funds: Fidelity Balanced Fund (FBALX)
Expenses: 0.56%
Sometimes, simplicity is best. Overcomplicating a portfolio tends to drag down returns over the longer haul. That’s why basic balanced funds have stood the test of time. These funds offer both stock and bond exposure — usually at a 60/40 split — all within one ticker. It truly is a set-it-and-forget-it option for many investors. And mutual funds are the only way to get your balanced fund fix.
The Fidelity Balanced Fund (FBALX) is one of the lowest-cost and better-performing balanced funds out there. The key is that the mutual funds managers can shift the portfolio’s allocations a bit depending on market conditions. Equities can range between 50% and 70% of its holding.
Likewise, FBLAX isn’t required to hold just boring treasury bonds. It can add slightly more exotic fare such as junk bonds and preferred stocks — up to a 25% limit.
That’s helped the fund stay on par with the S&P 500 in terms of returns, with less risk and drawdowns. The stable nature of its fixed-income holdings — even the riskier ones — has helped it plod along at a steadier rate.
And while 0.56% in expenses is starting to get up there, it still is a lot cheaper than many ETFs and S&P 500 index funds. So the slightly higher expense ratio could be worth it.
Cheap Mutual Funds: Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX)
Expenses: 0.16%
Over long stretches of time, dividends are one of the major factors that contribute to the stock market’s total returns. So adding a focus on dividends is a real winner for your portfolio. But like anything, high expenses can zap the effect of receiving regular payouts in cash. Ultimately, that hurts returns. Once again, Vanguard comes to the rescue.
The Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX) tracks the FTSE High Dividend Yield Index. This is an index of U.S. large-cap stocks that pay above-average dividends relative to the broad market.
“High yield” is tad bit of a misnomer. The mutual fund isn’t full of double-digit unsafe dividend payers that are just one quarter away from a huge cut to their yields. This is a mutual fund full of steady blue chips — like Exxon Mobil Corporation (XOM) and Johnson & Johnson (JNJ) — that churn out bigger-than-average dividends.
What’s great is that investors get access to those dividends for just 0.16% annually in expenses. That means investors get to keep more of those payouts for themselves. VHDYX yields 3.17%. The average mutual fund its category costs 1.2% and has a payout of less than 2%.
Low-cost mutual funds are the way to go when it comes to finding big time dividends.
Cheap Mutual Funds: Fidelity Spartan Real Estate Index Investor Shares Fund (FRXIX)
Expenses: 0.23%
But cheap mutual funds aren’t just for big broad indexes. There are plenty of ways to get low expenses in tactical bets and sectors as well.
Real estate investment trusts (REITs), through their high dividends and capital appreciation, have been one of the market’s best-performing asset classes of all time. They bet directly on commercial real estate and allow retail investors to own apartment buildings, shopping centers and the like.
Their appeal is enhanced via a low-cost mutual fund such as the Fidelity Spartan Real Estate Index Investor Shares Fund (FRXIX).
FRXIX holds some of biggest owners of commercial real estate in the nation by tracking the Dow Jones U.S. Select Real Estate Securities Index. This includes heavy hitters like Simon Property Group Inc. (SPG) and AvalonBay Communities Inc (AVB). All in all, FRXIX makes it easy to add a dose of REITs to your portfolio.
The icing on the cake is that dirt-cheap expenses ratio of 0.23%. That has helped it stay close to its index in terms of returns and has helped it outperform other real estate mutual funds by roughly 1% annually over the last five years.
It’s another prime example of how cheap mutual funds win versus their expensive peers.
As of this writing, Aaron Levitt was long VHDYX.
