When you are searching for the best index funds, there are two primary questions to answer prior to buying shares:
- Which index do you want to track?
- How much do those shares cost?
Buying index funds is like buying a commodity. For example, when comparing brands of sugar at a grocery store, the only differences are the prices and the names on the packages — the contents are generally the same.
It’s a simplified example, but the point remains the same with regard to buying index funds: If you are looking at two index funds that track the same index, buy the cheaper one! Because over time, it could mean literally tens of thousands of dollars, even hundreds of thousands, in your nest egg instead of in some fund provider’s account.
Amazingly, many people don’t do this, which is why there are hordes of extremely expensive index funds still on the market. So today, we’re going to highlight a host of these overly expensive index funds across a number of categories, as well as a couple of cheap options — that way, if you find that you’re in one of these pricey losers, you can get out.
We will include each fund’s expense ratio and include any loads charged to investors. A front load is charged when buying shares; a deferred load is charged when selling shares; and a level load, also known as a 12b-1 fee, is included in the expense ratio. Index funds should be cheap — and they certainly should not charge a load.
(Also, if you want to venture outside of the mutual fund world, know that in many cases, there are plenty of cheap (even cheaper sometimes!) exchange-traded funds, too.)
S&P 500 Index Funds
Every investor should have some exposure to the S&P 500 index — the collection of blue chips that essentially represent “the market.” There are literally dozens of passive, S&P 500-tracking funds to choose from. Also, S&P 500 funds have some of the biggest spreads between the most and least expensive, showing investors how much they could save.
The State Farm S&P 500 Index B (SNPBX), for instance, charges a whopping 1.43% expense ratio and a 5% deferred load. In contrast, the Schwab S&P 500 Index (SWPPX) charges a mere 0.09% expense ratio and no load.
The amount you would save on an investment in SWPPX over SNPBX is eye-popping. Let’s say you invested $10,000 in both funds and never contributed again, and the S&P 500 returned 6% for the next 30 years. Your return in the SNPBX would be $36,784 — a roughly 270% return, which sounds pretty good. But that’s nowhere near the 560% return you’d get with the SWPPX, which would end up being worth about $55,904 after 30 years. That means you’re giving up more than $19,000 on expenses and lost opportunity!
Four more expensive S&P 500 index funds:
- Nuveen Equity Index (FCEIX): 1.37% expense ratio, 1% level load
- Invesco S&P 500 Index Fund (SPICX): 1.33% expense ratio, 1% level load
- Deutsche S&P 500 Index Fund (SXPCX): 1.32% expense ratio, 1% level load
- Wells Fargo Index (WFINX): 1.31% expense ratio, 1% level load
And another cheap option in addition to Schwab’s SWPPX:
- Fidelity Spartan 500 Index (FUSEX): 0.095% expense ratio, no load
Large Growth Index Funds
Index funds that hold large-cap growth stocks typically track indices such as the Russell 1000 Growth index, the Nasdaq Composite or the Nasdaq-100.
Here are three of the most expensive growth index funds:
- Shelton Nasdaq-100 Index (NDXKX): 0.99% expense ratio, no load
- Praxis Growth Index A (MGNDX): 0.84% expense ratio, 5.25% front load
- USAA Nasdaq-100 Index (USNQX): 0.59% expense ratio, no load
Here are two cheap, large growth index funds:
- Fidelity Nasdaq Composite Index (FNCMX): 0.29% expense ratio, no load
- Vanguard Growth Index (VIGRX): 0.22% expense ratio, no load
Large Value Index Funds
Large value stock index funds typically track the Russell 1000 Value index or the S&P 500 Value index.
Similar to growth index funds, there aren’t many large value index funds on the market. But we were able to come up with three that are on the expensive side and two that are good and cheap.
Here are three of the most expensive large value index funds on the market:
- Power Dividend Index A (PWDAX): 1.51% expense ratio, 5% front load
- Praxis Value Index A (MVIAX): 0.94% expense ratio, 5.25% front load
- Fidelity Large Cap Value Enhanced Index (FLVEX): 0.45% expense ratio, no load
Here are two large-cap value index funds that are significantly cheaper:
- Vanguard Value Index (VIVAX): 0.22% expense ratio, no load
- Vanguard High Dividend Yield Index (VHDYX): 0.16% expense ratio, no load
Mid-Cap Index Funds
Like large-cap index funds, mid-cap index funds cover the growth and value objectives, as well as a blend of the two. In this grouping, we’ll highlight mid-cap blend funds, which usually track the S&P MidCap 400 index and sometimes the Russell Mid Cap Index.
Here are five of the most expensive mid-cap index funds:
- Nuveen Mid Cap Index C (FDXCX): 1.48% expense ratio, 1% level load
- Nationwide Mid Cap Market Index C (GMCCX): 1.35%, 1% level load
- Shelton S&P Mid Cap Index (MIDKX): 1.08% expense ratio, no load
- Principal MidCap S&P 400 Index R1 (PMSSX): 1.04% expense ratio, no load
- Voya Russell Mid Cap Index A (IRMAX): 0.93% expense ratio, no load
Compare those expenses with two of the cheapest mid-cap index funds you can buy:
- Vanguard Mid-Cap Index (VIMSX): 0.23% expense ratio, no load
- Northern Mid Cap Index (NOMIX): 0.15% expense ratio, no load
Small-Cap Index Funds
With small-cap index funds, we’ll highlight the broad market that includes growth and value, such as those that track the Russell 2000 Index or the S&P SmallCap 600 index.
Here are five of the most expensive small-cap index funds:
- State Farm Small Cap Index B (SNRBX): 1.59% expense ratio, 5% deferred load
- Nuveen Small Cap Index C (FPXCX): 1.56% expense ratio, 1% level load
- Nationwide Small Cap Index C (GMRCX): 1.36% expense ratio, 1% level load
- Shelton S&P SmallCap Index (SMLKX): 1.24% expense ratio, no load
- Columbia Small Cap Index B (CIDBX): 1.19% expense ratio, 5% deferred load
Now check out the lower expenses on this pair of small-cap index funds:
- Schwab Small Cap Index Fund (SWSSX): 0.17% expense ratio, no load
- Northern Small Cap Index (NSIDX): 0.15% expense ratio, no load
International Stock Index Funds
Most international stock index funds track the MSCI EAFE index or the MSCI ACWI index. Therefore, these are the indices we’ll focus on for this set of funds.
Here are five of the most expensive international stock funds:
- State Farm International Index B (NFSBX): 1.88% expense ratio, 5% deferred load
- Nationwide International Index (GIICX): 1.38% expense ratio, 1% level load
- Principal International Index R1 (PILIX): 1.19% expense ratio, no load
- Voya International Index Portfolio A (IIIAX): 0.97% expense ratio, no load
- Great-West International Index (MXINX): 0.7% expense ratio, no load
Here are alternative choices for international index funds that are much cheaper:
- Vanguard Total International Stock Index (VGTSX): 0.19% expense ratio, no load
- Schwab International Index Fund (SWISX): 0.19% expense ratio, no load
Bond Index Funds
Most bond index funds track the Barclays U.S. Aggregate Bond index. Bonds generally have lower long-term returns than stocks and many investors use them for income purposes. Therefore, low expenses are especially important for bond funds.
Here are five of the most expensive bond index funds:
- Principal Bond Market Index R1 (PBIMX): 1.11% expense ratio, no load
- MainStay Indexed Bond (MIXNX): 0.92% expense ratio, 3% front load
- VOYA US Bond Index (ILUAX): 0.9% expense ratio, no load
- Nationwide Bond Index A (GBIAX): 0.66% expense ratio, 2.25% front load
- Deutsche US Bond Index A (BONDX): 0.43% expense ratio, 2.75% front load
Now compare those expenses with these cheap bond index funds:
- Vanguard Total Bond Market Index (VBMFX): 0.16% expense ratio, no load
- Northern Bond Index (NOBOX): 0.16% expense ratio, no load
One thing that I can’t help but observe — and that you should too — after reading this:
The highest expense ratios and the loads most commonly occur with insurance companies, such as Principal Financial Group (PFG), State Farm and Nationwide. The lowest expense ratios with index funds are commonly found at Vanguard Investments, Fidelity Investments, and Charles Schwab (SCHW).
Higher expenses will drag down performance over time, especially with index funds. The cheapest index funds are almost always the best to buy.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds FUSEX, VTSMX, VGTSX, SWPPX and VBMFX in some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, South Carolina. Under no circumstances does this information represent a recommendation to buy or sell securities.