The Best 3 Index Funds for Expense Ratios
Apr 29, 2023 By Rick Novak

When investing for the long term, it's crucial to minimize costs without sacrificing returns. Investing in low-cost index funds that provide diversified market exposure is one way to reduce costs. Index funds are investment vehicles that seek to mimic the performance of market indices like the NASDAQ Composite or the S&P 500. When choosing an index fund, the expense ratio is an essential factor to consider. The fund manager charges an annual management fee to cover the fund's costs. We'll go over the three index funds with the cheapest expense ratios: the Vanguard S&P 500 ETF (VOO), the Schwab U.S. Broad Market ETF (SCHB), and the iShares Core S&P Total U.S. Stock Market ETF (ITOT). With these products, you can get diverse exposure to the U.S. stock market at a minimal cost. We'll break out each index fund's investment approach, past performance, and other key metrics to help you choose an option that fits your financial goals and comfort level.

The Vanguard 500 Index Fund (VOO) Invests in Stocks

The S&P 500 Exchange Traded Fund (VOO) from Vanguard is a well-known index fund. Stock prices of the 500 largest U.S. publicly traded corporations are measured by the Standard & Poor's 500 Index. The fund's fee ratio of 0.03% ranks it at the bottom of available investment vehicles. Because of its passive management methodology, VOO has a relatively low expense ratio relative to similar funds. Instead of trying to outperform the S&P 500 index, this fund aims to provide results that are identical to the index. This passive approach can reduce transaction costs by reducing management fees and stock turnover. Vanguard's single-ownership structure contributes to VOO's low expenditure ratio. Since Vanguard is a mutual corporation, its shareholders save money thanks to the company's success. Vanguard's organizational structure allows for low fees and the distribution of cost savings to investors.

S&P/T Rowe Price USA ETF (SCHB)

About 2,500 U.S. companies are included in the Dow Jones U.S. Broad Stock Market Index, followed by the Schwab U.S. Broad Market ETF (SCHB). The fund's expense ratio of 0.03% places it among the lowest-cost options. SCHB, like VOO, employs a passive management style to keep management costs low. The fund's low turnover rate helps keep expenses down. Investors can save even more money by taking advantage of Schwab's commission-free trading of SCHB and other ETFs on its platform. Schwab's ETF OneSource program is a one-of-a-kind service that eliminates the commission cost of trading ETFs like SCHB for its customers. Investors seeking to construct a diversified portfolio of low-cost index funds may find this a helpful program.

ITOT stands for the iShares Core S&P Total U.S. Stock Market ETF

About 3,700 U.S. corporations are included in the S&P Total Market Index, which is replicated by the iShares Core S&P Total U.S. Stock Market ETF (ITOT). The fund's expense ratio of 0.03% places it among the lowest-cost options. ITOT's passive management approach is one reason for its low expenditure ratio. The fund's goal is to give investors access to all segments of the U.S. stock market by following the S&P Total Market Index. This diversified exposure has the potential to lower risk and boost long-term returns. Because of its size, iShares can deliver inexpensive index funds like ITOT to investors. Additionally, investors can save money by trading ITOT and other ETFs on the company's platform without paying commissions.

Conclusion

Investing in low-cost index funds is one viable strategy for reaching long-term financial objectives. Low-cost, diversified exposure to the U.S. stock market is available via the three index funds with the lowest expense ratios: the Vanguard S&P 500 ETF (VOO), the Schwab U.S. Broad Market ETF (SCHB), and the iShares Core S&P Total U.S. Stock Market ETF (ITOT). These funds are among the least expensive options because of their low expense ratio of 0.03%. These funds have a history of success and a proven track record of giving investors access to the U.S. stock market for the long term, but previous performance is no guarantee of future outcomes. These funds are significant for long-term investors looking to save money thanks to their cheap fees, passive management style, and high level of diversification.