In the past several months, index funds, including exchange-traded funds (ETFs), have witnessed record-breaking capital inflows. According to State Street (NYSE:STT), “US-listed ETFs are off to their best start to a year ever, totaling $152 billion through the first two months of 2021.” Put another way, investors are showing real confidence in the markets. With the next round of stimulus checks, there could even be new highs in the markets. Therefore, today’s article introduces eight of the best index funds with ultra-low fees.
Currently, there are over 2,200 U.S.-registered ETFs stateside, all of which track a stock index, a commodity, bonds or a basket of assets. Before funds became so popular, most investors would buy shares in companies they believed would do well in the coming years. With index funds, they can invest in a basket of securities without worrying too much about the effect of short-term volatility seen in individual stocks.
There are differences between index funds and ETFs. However, the market typically uses them interchangeably. For instance, ETFs trade on exchanges just like shares. But index funds are usually bought directly from the fund manager. Expenses and year-end tax consequences are other areas of difference. If you want to know more about which might be better for you, a financial planner can point you in the right direction for your investment objectives.
With that information in mind, here are eight robust index funds with ultra-low fees:
- Fidelity MSCI Consumer Staples Index ETF (NYSEARCA:FSTA)
- Fidelity Total Bond ETF (NYSEARCA:FBND)
- Health Care Select Sector SPDR Fund (NYSEARCA:XLV)
- Invesco Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD)
- iShares Russell Top 200 Growth ETF (NYSEARCA:IWY)
- Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE)
- Schwab US REIT ETF (NYSEARCA:SCHH)
- Vanguard Dividend Appreciation Index Fund ETF Shares (NYSEARCA:VIG)
Index Funds: Fidelity MSCI Consumer Staples Index ETF (FSTA)
52-week range: $28.26 – $40.80
1-year price change: 21%
Dividend yield: 2.59%
Expense ratio: 0.08%, or $8 on a $10,000 investment annually
We start today’s discussion with non-cyclical consumer businesses that include food, beverages and household items, as well as hygiene products. The Fidelity MSCI Consumer Staples Index ETF invests in the consumer-staples sector. With 99 holdings, FSTA tracks the returns of the MSCI USA IMI Consumer Staples Index. The fund began trading in October 2013 and has around $788 million in net assets.
According to the sub-sectoral breakdown of the ETF, beverages (23.39%) and household products (22.31%) make up the highest portions, followed by food and staples retailing sector, which has a 20.24% slice. Additionally, the top 10 names make up over 60% of all holdings. In other words, it is top heavy. Among the leading names are Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO) and Walmart (NYSE:WMT).
Valuation levels in many sectors of the S&P 500 are at high levels. Yet, the consumer-staples segment is not one of those segments. Dips in price might offer a good opportunity to buy FSTA.
Fidelity Total Bond ETF (FBND)
52-week range: $45.08 – $55.41
1-year price change: 6.5%
Dividend yield: 2.26%
Expense ratio: 0.36%
Many investors wonder if bond returns will be negatively affected if interest rates increase in the coming quarters. Although future bond market performance is not always easy to predict, most financial planners concur that long-term portfolios could benefit from exposure to bond funds to collect regular income.
The Fidelity Total Bond ETF provides diversification in the fixed income space and offers current income. The fund invests in government, mortgage, investment-grade corporate and junk bonds. About 85% of the holdings come from the U.S.
FBND, which tracks the Bloomberg Barclays Aggregate Bond Index, has 1,403 holdings. Since its inception in October 2014, assets under management have reached $1.7 billion.
Bond ETFs, like FBND, are baskets of bonds that trade on a stock exchange. Thus, the fund is liquid and easy to trade. I find FBND to be a well-managed and diversified fund. Moreover, the large U.S. allocation of the fund is likely to appeal to many investors, as international bonds typically offer lower yields and inconsistent dividends.
Health Care Select Sector SPDR Fund (XLV)
52-week range: $73.54 – $118.99
1-year price change: 26.4%
Dividend yield: 1.5%
Expense ratio: 0.12%
Over the past year, healthcare has become one of the most important parts of our lives. Vaccine development and manufacturing, as well as antibody treatments against the novel coronavirus, have put the limelight on many established and smaller biopharma companies.
Therefore, our next choice in this list is the Health Care Select Sector SPDR Fund, which mostly focuses on life sciences and biopharma firms. Other companies in the fund include providers of healthcare supplies and equipment. Since its inception in December 1998, funds under management have grown close to $24 billion.
XLV, which tracks the returns of the Health Care Select Sector Index, has 63 holdings. About half of the fund’s assets are concentrated in the top 10 names. Johnson & Johnson (NYSE:JNJ), UnitedHealth (NYSE:UNH), Abbott Laboratories (NYSE:ABT), Pfizer (NYSE:PFE) and AbbVie (NYSE:ABBV) top the roster.
Given the current volatility in broader markets, several of the stocks in the ETF could soon come under increased pressure. A potential decline toward $105 would improve the margin of safety for buy-and-hold investors.
Invesco Dow Jones Industrial Average Dividend ETF (DJD)
52-week range: $25.21 – $43.16
1-year price change: 39%
Dividend yield: 3.30%
Expense ratio: 0.07%
Record-low interest rates have brought investor attention to dividend funds. Therefore, our next choice is the Invesco Dow Jones Industrial Average Dividend ETF. The fund gives access to dividend-paying companies in the DJIA. It is based on the Dow Jones Industrial Average Yield Weighted Index, which focuses on businesses with consistent dividend payments over the past year. Additionally, the index is price-weighted. Both the index and the ETF are balanced twice a year.
The fund started trading in December 2015, and assets under management are $90.7 million. It currently holds 28 companies, and over 60% of the fund is allocated to the top 10 stocks. Put another way, the fund is top heavy.
Chevron (NYSE:CVX), Dow (NYSE:DOW), Walgreens Boots Alliance (NASDAQ:WBA), International Business Machines (NYSE:IBM) and JPMorgan Chase (NYSE:JPM) are among the top names. The ETF saw a record-high price in March. Given the robust dividend-paying blue chips in the roster, this fund could be a strong core addition to most buy-and-hold portfolios.
iShares Russell Top 200 Growth ETF (IWY)
52-week range: $71.86 – $139.93
1-year price change: 53%
Dividend yield: 0.72%
Expense ratio: 0.2%
Our next fund, the iShares Russell Top 200 Growth ETF, invests in large capitalization businesses expected to grow more than the market or their peers. Thus, IWY aims to combine earnings potential with the relative security of large cap companies. Put another way, although share prices of large caps might decline occasionally, they do not get held down for too long.
IWY, which has 106 holdings, tracks the returns of the Russell Top 200 Growth Index. The fund began trading in September 2009, and net assets have reached $3.44 billion. Additionally, about half of the businesses are in information technology (IT), followed by consumer discretionary (17.76%), communication (12.79%) and healthcare (11.8%).
Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are the leading names in IWY. Close to 55% of the assets are in the top 10 stocks.
The recovery seen in the markets over the past year has mainly been led by growth names. Trailing price-to-earnings (P/E) and price-to-book (P/B) ratios of 39.85 and 12.63, respectively, point to a high valuation at this point. Thus, several of these shares in the fund could soon come under pressure. A potential decline toward $125 or even below would improve the margin of safety for investors in the ETF.
Schwab Emerging Markets Equity ETF (SCHE)
52-week range: $18.32 – $34.74
1-year price change: 46%
Dividend yield: 2.01%
Expense ratio: 0.11%
The Schwab Emerging Markets Equity ETF invests in large cap and mid-cap emerging market firms. Since its inception in January 2010, funds have grown to about $9 billion. SCHE, which tracks the FTSE Emerging Index, has 1,543 holdings. The top 10 names comprise around a third of assets.
Chip heavyweight Taiwan Semiconductor Manufacturing (NYSE:TSM), social-media group Tencent (OTCMKTS:TCEHY), Chinese e-commerce leader Alibaba (NYSE:BABA) and food-delivery platform Meituan (OTCMKTS:MPNGY), as well as South Africa-based internet group Naspers (OTCMKTS:NPSNY) are among the leading stocks.
Financials have the largest sectoral weighting with 20.07%. Then come consumer discretionary (18.52%), IT (15.37%) and communication services (11.75%) firms. Trailing P/E and P/B ratios are 18.97 and 2.15, respectively. In the case of a potential profit-taking, long-term investors would find better value below $30. Personally, I like the globally diversified nature of this low-cost fund.
Schwab US REIT ETF (SCHH)
52-week range: $26.31 – $41
1-year price change: Up about 4%
Dividend yield: 1.09%
Expense ratio: 0.07%
Now that the Fed is likely to allow inflation to edge up higher, investors are looking for assets appropriate for a higher-inflation environment. One asset class that could pique many individuals’ interest is real estate.
The Schwab US REIT ETF provides access to a broad range of real estate investment trusts (REITs) stateside. It began trading in January 2011, and net assets are around $5 billion. SCHH, which has 144 holdings, tracks the returns of the Dow Jones Equity All REIT Capped Index. In terms of subsectors, residential, specialized, industrial, office, retail, healthcare and leisure REITs are held in the fund. However, the ETF does not invest in mortgage REITs (mREITS).
The top 10 names constitute around 40% of the ETF. American Tower (NYSE:AMT), Prologis (NYSE:PLD), Crown Castle International (NYSE:CCI), Equinix (NASDAQ:EQIX) and Simon Property (NYSE:SPG) lead the names in the fund.
Year to date, the ETF is up nearly 8%. Real assets, such as those held by REITs, can act as inflation hedges. Those investors who are looking for passive income in 2021 and are bullish on REITs should keep the fund on their radar and buy the dips of this cost-efficient fund.
Vanguard Dividend Appreciation Index Fund ETF Shares (VIG)
52-week range: $87.71 – $145.07
1-year price change: Up about 32%
Dividend yield: 1.6%
Expense ratio: 0.06%
We conclude our discussion of index funds with another dividend fund. The Vanguard Dividend Appreciation Index Fund ETF Shares tracks the returns of the NASDAQ US Dividend Achievers Select Index. It focuses on businesses with a solid record of increasing their dividends year-over-year. Analysts regard dividend growth as an important quality factor.
VIG began trading in April 2006 and has a net asset total of $63.2 billion. In terms of sectors, we see consumer discretionary with 22.5%, followed by industrials (21.1%), healthcare (15.1%) and technology (12.9%).
The fund has 212 holdings, and the top 10 names make up about 35% of net assets. Leading holdings include technology pioneer Microsoft, the world’s largest retailer Walmart, entertainment giant Walt Disney (NYSE:DIS) and healthcare leader Johnson & Johnson.
Companies whose dividend grow consistently are regarded as safe havens in volatile markets. Therefore, businesses in VIG have increased annual dividends for at least 10 consecutive years. Any potential decline toward $130 would improve the margin of safety.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
