The Cheapest S&P 500 Index Funds

While cheaper doesn't necessarily mean better, the best S&P 500 Index funds tend to be the ones with the lowest expense ratios. So before you go out and buy the cheapest index funds you can find, be sure to take a look at other qualities of the fund.

Here are some of the qualities of index funds you'll want to analyze before thinking of buying.

Analyzing the Tracking Error and Performance to Find the Cheapest Index Funds

For example, there's something called tracking error, which is a measure of an index fund's effectiveness in replicating or "matching" the performance of the benchmark index.

One drawback with regard to researching and analyzing tracking error is that mutual fund families do not publicly display the tracking error of their index funds. However there are a few data points you can research to analyze performance tracking. You can start with our list of the cheapest S&P 500 Index funds here but you'll also want to compare performance.

You can go to one of the best websites for researching mutual funds and see how close the historical performance of the fund has been to the target benchmark. If the returns are below the benchmark by roughly the same amount as the fund's expense ratio (see below), the tracking error is close. For example, if a fund's expense ratio is 0.20% and it has a 5-year annualized return of 10.00%, and the benchmark had a return of 10.20%, the tracking error is precise. In summary you want the performance of your index funds to be below the benchmark by roughlyl an equal amount as the expense ratio. 

Analyzing the Expense Ratio to Find the Cheapest Index Funds

After looking at the historical performance, while taking the expense ratio into account, which will tell you how well the fund has tracked the benchmark index in the past. For example if an S&P 500 index mutual fund has an expense ratio of 0.20% and the S&P 500 index has a 5-year annualized return of 10.00%, an S&P 500 index fund with a good (low) tracking error might have an annualized return of roughly 9.80. This means that the only difference between the index and the mutual fund's return is attributed to the fund's expenses.

Finally, before looking at our list and buying your chosen S&P 500 Index fund, be sure to keep in mind other fees, such as trading costs. For example, if you already have an account at Vanguard, you may be charged a transaction fee to purchase a mutual fund, such as Schwab S&P 500 Index, which is outside of their fund family. Typical transaction fees range between $10 and $20. So if you are dollar-cost averaging by periodically purchasing shares of your S&P 500 Index fund, the expense ratio may be the lowest but the trading fees can make the fund more expensive than that of the fund company where you invest.

You will find some of the cheapest S&P 500 funds that you can buy with $10,000 or less listed below.