Perhaps the most important benefit of the ongoing departures from higher-fee, often under-performing actively managed mutual funds is that many investors leaving those laggard funds are heading to low-cost index funds. And that’s effectively helping to drive already paltry fees even lower.
Some index fund sponsors, including venerable names such as Vanguard and Schwab, operate on economies of scale, meaning that the more assets that flow into a particular index, the more latitude the fund issuer has to reduce fees.
So it’s not a coincidence that many cheap index funds are also among the largest index funds.
Another point in favor of cheap index funds is simple math. Say an investor owns an actively managed mutual fund with an annual fee of 1%. Fees are taken out of the performance of the fund, so if an investor puts in $10,000 and that fund gains just 1% in a year, that’ll leave a balance of $9,999 once the fees are collected.
On the other hand, many cheap index funds out there charge 0.1% per year or less. At 0.1%, that same $10,000 would turn into $10,090 after a year.
That doesn’t sound like much, but consider the long-term. $10,000 in the 1%-fee mutual fund at a 7% rate of return would become $56,308 after 30 years, but in the 0.1%-fee mutual fund, you’re looking at $73,872 — a difference of more than $17,000 on a mere $10,000 investment!
Simple math dictates it is a lot easier to generate positive, long-term returns when fees are low.
Consider these cheap index funds if you’re a frugal investor looking to make some portfolio additions.
Cheap Index Funds to Buy: Vanguard Growth Index Fund Admiral Shares (VIGAX)
Expense Ratio: 0.06% annually, or $6 per $10,000 invested
Among growth funds, the Vanguard Growth Index Fund Admiral Shares (MUTF:VIGAX) is one of the cheapest. That point is confirmed by this index fund’s annual fee of 0.06%, which makes it cheaper than 95% of rival funds, according to Vanguard data.
However, to realize the cost benefits of this cheap index fund, investors need to plunk down a minimum investment of $10,000.
Home to over 320 stocks, the Vanguard Growth Index Fund Admiral Shares tracks the CRSP US Large Cap Growth Index. Top holdings in this Vanguard index fund include Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB).
Cheap Index Funds to Buy: Schwab Small-Cap Index Fund (SWSSX)
Expense Ratio: 0.05%
Typically, index funds with annual fees in the area of 0.05% are large-cap funds, but the Schwab Small-Cap Index Fund (MUTF:SWSSX) clearly breaks that mold to ranks as one of the least expensive small-cap index funds on the market today.
SWSSX just celebrated two decades on the market and is currently home to over 1,900 stocks and more than $3.1 billion in assets under management, according to Schwab data.
This cheap index fund also has a small minimum investment, indicating that it is welcoming to a broad swath of investors. Top holdings include stocks like Advanced Micro Devices, Inc. (NASDAQ:AMD) and Take Two Interactive Software Inc (NASDAQ:TTWO).
Cheap Index Funds to Buy: Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
Expense Ratio: 0.11%
The Vanguard Total International Stock Index Fund Admiral Shares (MUTF:VTIAX) is less expensive than 90% of rival funds, according to issuer data. As is the case with the aforementioned Vanguard Growth Index Fund Admiral Shares, VTIAX requires a minimum investment of $10,000.
Still, this is a reasonably priced product among international index funds. Home to a whopping 6,171 stocks, VTIAX tracks the FTSE Global All Cap ex US Index. That index holds stocks from almost 50 countries, both developed and emerging markets. Examples of top holdings include Nestle SA (ADR) (OTCMKTS:NSRGY), Samsung (OTCMKTS:SSNLF) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B).
However, this is mostly a developed market index fund as Japan, the U.K. and Canada combine for over 36% of VTIAX’s weight. Eight of the fund’s top 10 geographic weights are classified as developed markets.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.