The cheapest index funds are often the best to buy because they all do much the same thing: they passively track a market index. Often, it doesn't make sense to buy high-priced index funds, because the cheap ones can achieve the same goal.
It may not make sense to buy a fund that comes with a sales charge, which might be in the form of a front-load (paid when you're buying shares) or a back-load (paid when you're selling shares). Sales charges only make sense when you're getting solid advice and top-notch active management. You don't need this input with index funds if you do a little homework, so always go with no-load funds.
Here are some of the cheapest index funds, as measured by their expense ratios as of May 2021. They're broken into six categories.
Think of it like you're buying a food staple such as bread. Three different brands likely have all the same ingredients, so buy the cheapest one! Follow the same logic when you're buying index funds.
Cheapest S&P 500 Index Funds
These index funds track the S&P 500 index, which consists of about 500 U.S. large-company stocks measured by market capitalization. Schwab S&P 500 Index (SWPPX) has an expense ratio of 0.02%, or $2 for every $10,000 invested. There's no minimum investment to start out.
The Fidelity 500 Index (FXAIX) expense ratio is also 0.015%. There's no minimum investment.
These are very low expenses, especially when they're compared to some of the average expense ratios for mutual funds, which are often more than 10 times these figures, often up to 1.5%.
Cheapest Large Growth Stock Index Funds
Large growth index funds often track the Russell 1000 Growth index, the Nasdaq Composite, or the Nasdaq-100. They invest in the largest U.S. company growth stocks by market capitalization.
You'll get many of the same stocks as in S&P 500 index funds, but these will be only growth stocks, and they tend to be more aggressive. They have a higher risk compared to other stocks, but they also have higher potential long-term returns.
The Vanguard Growth Index Fund Admiral Shares (VIGAX) is one of the cheapest mutual funds tracking a large-cap growth U.S. stock index. Its expense ratio is 0.05%, or $5 for every $10,000 invested. The minimum initial investment is $3,000. There's also the Vanguard Growth ETF (VUG) with a 0.04% expense ratio and no minimum investment if you have less than $3,000 to invest.
The Fidelity NASDAQ Composite Index (FNCMX) expense ratio is 0.29%, or $29 for every $10,000 invested. There is no minimum investment.
Both funds are highly rated, so you get good quality at a low cost.
Cheapest Large Value Stock Index Funds
There aren't many stock index funds that track value stock indices. There are a few that are quite costly, and a few that are good and cheap. Value stocks are often underappreciated in the market, so they sell at a discount. Mutual funds that pay dividends are often value funds. Value stock index funds tend to track the Russell 1000 Value index or the S&P 500 Value index.
The Vanguard High Dividend Yield Index Admiral Shares (VHYAX) expense ratio is 0.08%, or $8 for every $10,000 invested. The minimum initial investment is $3,000. Vanguard High Dividend Yield ETF (YVM) is similar but with no minimum.
Vanguard Value Index Admiral Shares (VVIAX) has an expense ratio of 0.05%, or $5 for every $10,000 invested. The minimum initial investment is $3,000. Vanguard Value ETF (VTV) is similar but with no minimum.
Value funds can be good if you're looking for long-term growth or current income from investments.
Cheapest Mid-Cap Stock Index Funds
As with large-cap index funds, you can find mid-cap stock index funds that track a growth index, a value index, or an index that blends the two styles. Mid-cap stock mutual funds that track indices, such as the S&P MidCap 400 index or the Russell Mid Cap Index, often include a blend of both growth and value.
The Northern Mid Cap Index (NOMIX) expense ratio is 0.15%, or $15 for every $10,000 invested. The minimum startup investment is $2,500.
Vanguard Mid Cap Index Admiral Shares (VIMAX) has an expense ratio of 0.05%, or $5 for every $10,000 invested. The minimum initial investment is $3,000. Vanguard Mid-Cap ETF (VO) is the equivalent ETF with no minimum.
Mid-cap stocks often carry more market risk than large-cap stocks, but they tend to perform better in the long run. They often have less market risk than small-cap stocks, but they can perform just as well. Mid-caps fall into a "sweet spot" of investing that can be a good fit for long-term investors who are willing to take more risk for higher returns.
Cheapest Small Cap Stock Index Funds
These small-cap stock index funds track an index that blends both growth and value styles. They track small-cap indices like the Russell 2000 Index or the S&P SmallCap 600 index.
The Northern Small Cap Index (NSIDX) expense ratio is 0.15%, or $15 for every $10,000 invested. The minimum startup investment is $2,500.
The Schwab Small Cap Index (SWSSX) expense ratio is 0.04%, or $4 for every $10,000 invested. There's no minimum investment to get started.
Small-cap stocks are riskier than large- and mid-cap stocks, but they can deliver very good returns in the long run, especially if you can keep expenses low.
Cheapest International Stock Index Funds
International stock index funds often track the MSCI EAFE Index or the MSCI ACWI index, both of which consist of the stocks of companies outside the U.S.
Vanguard Total International Stock Index Admiral Shares (VGTSX) has an expense ratio of 0.11%, or $11 for every $10,000 invested. The minimum investment is $3,000.
The Schwab International Index Fund (SWISX) expense ratio is 0.06%, or $6 for every $10,000 invested. There is no minimum initial investment.
International stock index funds provide a smart, easy way to capture the entire market outside the U.S. A diversified portfolio will usually include some of these stocks.
Cheapest Bond Index Funds
There are many kinds of bond index funds, but the best and most common are those that capture the entire U.S. bond market. These track the Bloomberg Barclays Capital Aggregate US Bond Index, which covers all major types of bonds, including taxable corporate bonds, Treasury bonds, and municipal bonds.
The Vanguard Total Bond Index Admiral Shares (VBTLX) expense ratio is 0.05%, or $5 for every $10,000 invested. The smallest initial investment is $3,000. Vanguard Total Bond Market ETF (BND) is the equivalent ETF with a 0.035% expense ratio. There's no minimum investment.
The Northern Bond Index (NOBOX) has an expense ratio of 0.15%, or $15 for every $10,000 invested. The minimum investment is $2,500.
One cheap total bond market index is enough for most investors to include in a portfolio of mutual funds.
How to Buy the Cheapest of the Cheap?
Some of the best no-load mutual fund companies, such as Vanguard Investments, offer share classes of index funds with lower expense ratios if you make a higher initial investment.
You get the cheapest S&P 500 index fund with an expense ratio of 0.04% if you can reach the initial requirement of $3,000 for the Vanguard 500 Index Fund "Admiral" share class (VFIAX). The Vanguard S&P 500 ETF (VOO) has a 0.03% expense ratio with no minimum investment.
Index Funds FAQs
How Many Index Funds Should I Own?
The number of index funds you own should depend on how narrowly those indexes are focused. If you're looking at an S&P 500 fund and a total bond market fund, those two index funds may be all you need. However, if you want to buy a small-cap fund, then you might want to balance that out with a large-cap fund. If you want to buy an international stock fund, then you might want to balance that out with a domestic stock fund. The more specific you get, the more funds you need to buy to replicate a diverse portfolio.
Where Can I Buy Index Funds?
Index funds like the ones discussed here can be bought through a broker. You'll need a brokerage account or a retirement account to purchase these funds. Opening one of these accounts is similar to the process of opening a bank account. Once you have your account, find the fund you want to buy and place a buy order. Keep in mind that not all brokerages offer the same funds, so if you have a specific fund in mind, then you'll want to ensure you open an account with a brokerage that offers access to that fund.
How Are Index Funds Taxed?
When you buy indexed mutual funds, you will incur taxes on three occasions. First, any dividends from holdings (or in the case of bonds, interest payments) will be passed onto you and you will owe taxes on those dividends. Mutual funds also pass along any capital gains from sales within the funds, and you will be taxed on those gains according to whether they were short-term or long-term gains. However, as an index fund investor, you're less likely to incur as many capital gains taxes as you would with actively managed funds. Finally, if the value of the mutual fund shares has grown, you will incur capital gains taxes (either long-term or short-term) when you sell your mutual fund shares.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.