Exchange traded funds have exploded in popularity in recent years, but one of the biggest drawbacks in ETF investing is the fees involved. However, buyers of the Schwab U.S. Broad Market ETF (SCHB), the Schwab U.S. Large-Cap ETF (SCHX) and the Vanguard S&P 500 ETF (VOO) get all the benefits of ETF investing while paying the lowest fees in the market.
ETF Investing Comes At A Price
The majority of long-term investors don’t want to read the Wall Street Journal every day and spend hours and hours sorting through earnings reports and SEC filings to keep up with what’s going on in the market. They want a place to invest their nest egg and allow their money to work for them until retirement. They aren’t looking to own the top-performing portfolio in the world. They simply want to take advantage of the roughly 10% annual return that the U.S. stock market has generated throughout its history and minimize their risk.
When choosing where to invest, these retirement-minded, long-term investors, should focus on two issues: diversity and cost. The reason why so many investors choose ETFs is because they provide instant diversification in a single transaction. When you buy a share of an S&P 500 tracking ETF, for example, you are getting a fractional ownership stake in 500 stocks without paying 500 trading fees.
But it is important to remember that the fund managers that run these ETFs aren’t operating charities. An annual fee is deducted from the fund each year to pay for the management services and operating costs of the fund. If you take a fund’s total annual operating expenses and divide them by the average dollar value of the its assets under management, you get a number called the expense ratio. As with any fee, the lower the expense ratio, the better.
Diversified equity ETFs can have expense ratios as high as around 2.0%, but the average ratio is around 0.54%.
Some specialized ETFs are actively managed using unique investing strategies, but there are plenty of funds out there that are designed to simply match the boring old 10% gain of the overall stock market. If this is the type of investment you are looking for, here are the three ETFs with the absolute lowest expense ratios in the business, according to etfdb.com.
Vanguard S&P 500 ETF (VOO)
The VOO ETF is designed to track the S&P 500 Index, which is a group of 500 “blue chip” U.S. companies. When news reporters say the “stock market” was up or down on a given day, it is likely that they are referring to the S&P 500 Index. The VOO ETF gives investors a simple means of investing in the S&P 500 at an expense ratio of only 0.05%.
Schwab U.S. Large-Cap ETF (SCHX)
All three of the ETFs mentioned here are relatively safe and extremely diversified investments. However, the SCHX ETF is likely the safest of all. The SCHX is invested in the 750 largest publicly-traded U.S. companies. Many of these companies aren’t experiencing the strong growth that smaller companies are, but they are also unlikely to fail during an economic downturn. The SCHX ETF’s expense ratio is only 0.03%.
Schwab U.S. Broad Market ETF (SCHB)
The SCHB ETF has more than 1,500 equity holdings and could easily serve as the centerpiece for any diversified, long-term investing strategy. Best of all, SCHB’s miniscule 0.03% expense ratio is the best that Wall Street has to offer.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.