Index funds are a means for investors of modest means to get into the stock market, but the better you become at investing, the less desirable they are. In short, an index fund is simply a mutual fund where, instead of a portfolio manager making selections, the capital allocation is delegated to whoever determines the index methodology.

This article will provide insight into what index funds are, the cheapest ones, and how you can take full advantage of them. Let us begin.

• What is Index Fund
• What is ETF
• What is The Cheapest Index Fund
• What is The Cheapest S & P 500 ETF
• What Is The Difference Between ETF and Index Fund
• What Are The Best Index ETFs
• Low Cost Index Funds
• Cheapest Way to Buy ETFs
• Which ETF Does Warren Buffett Recommend
• Can You Lose on Index Funds
• When Should You Buy Index Funds
• What Are The Disadvantages of ETFs
• Are ETFs Riskier Than Mutual Funds?
• What ETF to Buy Before a Recession
• What is The Average Return on Index Fund
• List of ETFs
• The 45 Cheapest Index Funds in The ETF Universe

What is Index Fund

An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. Those rules may include tracking prominent indexes like the S&P 500 or the Dow Jones Industrial Average or implementation rules, such as tax-management, tracking error minimization, large block trading or patient/flexible trading strategies that allows for greater tracking error, but lower market impact costs. Index funds may also have rules that screen for social and sustainable criteria.

What is ETF

An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges, and ETF shares trade throughout the day just like an ordinary stock.

Some well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange-traded fund is marketable security, meaning it has an associated price that allows it to be easily bought and sold.

What is The Cheapest Index Fund

The cheapest index funds are usually the best to buy. Why? Because index funds all essentially do the same thing: They passively track a market index. And since they essentially accomplish the same goal, it doesn’t make sense to buy expensive index funds.

S&P 500 index funds track the S&P 500 index, which consists of about 500 U.S. large-company stocks, as measured by market capitalization.

Here are two of the cheapest mutual funds tracking the S&P 500:

• Schwab S&P 500 Index (SWPPX): The expense ratio is 0.02%, or $2 for every $10,000 invested. There is no minimum initial investment.
• Fidelity 500 Index (FXAIX): The expense ratio is also 0.015%. There is no minimum initial investment.

These are incredibly low expenses, especially when compared to some of the average expense ratios for mutual funds, which are typically more than ten times these expenses, often up to 1.5%.

What is The Cheapest S & P 500 ETF

S&P 500 ETFs give investors a variety of ways to buy the largest 500 companies in America, but with so many options, how do you know which funds to choose?

Vanguard S&P 500 ETF (VOO)

Few investment firms have helped customers cut costs more than the Vanguard Group, whose founder Jack Bogle pioneered the use of index funds over actively managed mutual funds. Vanguard had no fear when it ventured into the ETF space, either. Its S&P 500 ETF makes a great core holding in any portfolio.

With a tiny 0.03% expense ratio, VOO is one of the cheapest ETFs available today. It doesn’t have the volume of its predecessor, SPY, but it still trades over 3 million shares per day and is available at every major brokerage. VOO currently has over $100 billion in assets under management and has mirrored the S&P 500 almost exactly since its inception in 2010, returning 13.49% compared to the S&P’s 13.52%.

What Is The Difference Between ETF and Index Fund

An Exchange-traded fund (ETF) is an investment fund operating on the stock exchange holding assets such as stocks, bonds or commodities. These funds track a specific index and accordingly will design its basket of securities. They offer the benefit due to their low costs, tax-efficiency and features similar to trading stock.

An index fund, on the other hand, is a mutual fund or an ETF constructed to follow a specific industry or index such as the S&P 500. It may design the portfolio based on the implementation rules such as:

• Tax management
• Tracking minimization of errors
• Large block-trading
• Rules which screen social and sustainable criteria.

Below are some of the ETF and Index Funds Differences:

1. ETF is a fund that will track a stock market index and trade like regular stocks on the exchange whereas index funds will track the performance of a benchmark index of the market.
2. The pricing for ETF takes place throughout the trading day but index funds get priced at the closing of the trading day.
3. Trading fees for an ETF are high and expense ratio ranges from 0.1-0.5% which is adjusted to the price whereas index funds have no Transaction fee or commission.
4. In the Indian market, the minimum investment for an ETF is Rs.10,000 and index funds require a lumpsum payment of Rs.5000 or Rs.500 if the SIP (Systematic Investment Plan) is accepted. This amount of minimum investment will vary as per the country and applicable laws. Investment through SIP is not applicable for ETF’s.
5. The pricing for an ETF depends on the demand and supply of securities in the market but pricing for an index fund is as per the NAV (Net Asset Value) of the underlying asset.
6. The aspect of flexibility and liquidity is comparatively higher in ETF as the intra-day pricing enables traders to transact with greater flexibility rather than index funds as the NAV, in this case, is calculated only once a day.
7. A trading/brokerage account is essential for buying and selling of ETF’s but no such requirement in case of an index fund.
8. ETF does not involve any entry/exit load but Brokerage, Management fees, and taxes are charged. Index fund involves Management fees and exit load is applicable in case of liquidation prior to the stipulated time.
9. The application of funds is towards Hedging, Arbitrage and investment of surplus cash for ETF’s but focus for an index fund is the only investment of cash surplus.
10. With respect to investment application, ETF’s can be used for long-term investment and trading strategies but for index/mutual funds it is wealth creation over the long term through equity and debt base.
11. ETFs may have lower tax liability since the trade occurs between investors and the open market and the fund manager is not required to sell assets for raising cash requirements and hence less possible to create capital gains liabilities. Capital gains tax gets applicable to the transaction but will not be impacted if the investor is holding onto the shares. Conversely, index funds involve a transaction between the investor and fund manager and if the investor wants to liquidate their share, trading for the same takes place in the market giving rise to Capital gains or losses.
12. As ETF’s are traded directly on the open market, they are generally difficult to be traded, an index fund is always routed through the fund manager making it relatively easier to buy a genuine buyer or seller and ensure regular functioning.
13. ETF transaction requires a settlement time of 3 days whereas index fund requires just a day offering the holders quicker access to liquid cash following a sale.
14. Though trading of ETFs reflects the real-time environment of the market, as they are not directly associated with the NAV, they are susceptible to manipulations which may not be acceptable to risk-averse investors with preference to stable investment. Index funds cannot be sold short and generally offer more stability for conservative investors.

What Are The Best Index ETFs

When it comes to an index fund like this, one of the most important factors in your total return is cost. Included are two mutual funds and three ETFs:

1. Fidelity ZERO Large Cap Index (FNILX)

The Fidelity ZERO Large Cap Index mutual fund is part of the investment company’s foray into mutual funds with no expense ratio, thus its ZERO moniker. The fund doesn’t officially track the S&P 500 – technically it follows the Fidelity U.S. Large Cap Index – but the difference is academic. The real difference is that Fidelity doesn’t have to cough up a licensing fee to use the S&P name, keeping costs lower for investors.

Expense ratio: 0 percent. That means every $10,000 invested would cost $0 annually.

2. Vanguard S&P 500 ETF (VOO)

As its name suggests, the Vanguard S&P 500 tracks the S&P 500 index. It had $496 billion in assets, as of April 2020, making it one of the largest funds on the market. This ETF began trading in 2010, and it’s backed by Vanguard, one of the powerhouses of the fund industry.

Expense ratio: 0.03 percent. That means every $10,000 invested would cost $3 annually.

3. SPDR S&P 500 ETF Trust (SPY)

The SPDR S&P 500 ETF is the granddaddy of ETFs, having been founded all the way back in 1993. It helped kick off the wave of ETF investing that has become so popular today. As of May 2020, it had $269 billion in assets, ranking it among the most popular ETFs. The fund is sponsored by State Street Global Advisors — another heavyweight in the industry — and it tracks the S&P 500.

Expense ratio: 0.09 percent. That means every $10,000 invested would cost $9 annually.

4. iShares Core S&P 500 ETF (IVV)

The iShares Core S&P 500 ETF is a fund sponsored by one of the largest fund companies, BlackRock. With nearly $189 billion in assets (as of May 2020), this iShares fund is one of the largest ETFs and like other large funds, it tracks the S&P 500. With an inception date of 2000, this fund is another long-tenured player.

Expense ratio: 0.04 percent. That means every $10,000 invested would cost $4 annually.

5. Schwab S&P 500 Index Fund (SWPPX)

With nearly $40 billion in assets (as of May 2020), the Schwab S&P 500 Index Fund is on the smaller side of the heavyweights on this list, but that’s not really a concern for investors. This mutual fund has a strong record dating back to 1997, and it’s sponsored by Charles Schwab, one of the most respected names in the industry. Schwab is especially noted for its focus on making investor-friendly products, as evidenced by this fund’s razor-thin expense ratio.

Expense ratio: 0.02 percent. That means every $10,000 invested would cost $2 annually.

Low Cost Index Funds

Jim Holtzman, a wealth advisor at Legend Financial Advisors, says with more exchange-traded index funds available, it’s become easier for investors to lower costs. Some of the best follow the S&P 500 and have costs under 0.10%, or $10 for every $10,000 invested annually. But investors don’t have to stick with a broader market, as many sectors and niche funds are available at costs much lower than for actively managed funds. Here are five of the top low-cost index funds.

Vanguard Total Stock Market ETF

Morris Armstrong, a fee-only registered investment advisor in Cheshire, Connecticut, says he uses VTI in many of his investment portfolio models. It is a market-cap weighted index of more than 3,500 stocks, from large through small-cap, and can be used as a core domestic holding. VTI ranks No. 23 in U.S. News’ Large Blend ETFs rankings. “It provides such broad coverage at such a low cost,” he says. “It has been said that boring is beautiful and classics never go out of style. I think that can be applied here as well.” It has a 0.03% expense ratio.

Vanguard 500 Index Admiral

Robert Johnson, professor of finance at Creighton University’s Heider College of Business, says he considers VFIAX the best low-cost index mutual fund for the majority of investors. The fund tracks the S&P 500 index, a large-cap index, making the fund suitable as a core holding. “Most investors will benefit from exposure to a broad index that does not take sector bets, resulting in lower volatility than some of the sector index funds,” Johnson says. Morningstar gives VFIAX a five-star, gold rating. The expense ratio is 0.04% and has a minimum investment of $3,000.

iShares Russell 2000 ETF

IWM follows the small-cap index, Russell 2000. John Person, founder of Persons Planet, a trading education and advisory company, says small-cap growth stocks and indexes should outperform mega-cap blue-chip stock indexes. Small-cap indexes have lagged large-cap in recent years, but with the Federal Reserve keeping interest rates low for the foreseeable future, that should spur growth, he says.

That could benefit small-cap stocks which can grow more easily because of their size. IWM is the biggest of the U.S. small-cap index ETFs by assets under management, with $48 billion. That makes it highly liquid and easy to trade. It has an expense ratio of 0.19%.

JPMorgan Diversified Return International Equity ETF (JPIN)

Daniel Milan, a financial advisor and managing partner at Cornerstone Financial Services, likes this multi-factor index ETF. Its benchmark uses three time-tested factors (value, momentum and quality) to select international stocks. The holdings are weighted by volatility on a sector and regional level. “We are really big believers in factor analysis, and we think the approach is beneficial for retail investors,” he says. The factors JPIN uses have historically outperformed, he says. Indexes that use multiple factors tend to be slightly more than market-weighted index funds, but he says at 0.37%, JPIN is fairly priced to its peers.

iShares PHLX Semiconductor ETF (SOXX)

Holtzman says investors can use index funds in two ways, as core holdings to get exposure to broader markets, and as satellite holdings to amplify certain sectors or subsectors. It’s much cheaper to use index funds to get targeted, niche exposure than individual stocks.

The technology sector has seen sharp gains, and much of that comes from the semiconductor industry, and he has used an index fund to efficiently overweight that subsector and can efficiently sell when the index fund reaches his target. The biggest semiconductor index ETF by assets under management and one of the cheapest is SOXX, which has $2.3 billion in AUM and costs 0.46%.

Cheapest Way to Buy ETFs

Step 1: Target the country, region, or sector you want to trade with

ETFs can be a tool for you to bet on how a country, region, or sector will perform. For example, if you think that the US market will go up, you can buy an ETF that tracks a stock index compiled of US stocks, such as the S&P 500 Index. If you think that not the whole US market but the technology sector will go up, you can buy an ETF that tracks a stock index containing US technology stocks, for example, the NASDAQ 100.

For targeting and filtering ETFs you will need an ETF screener. Use justETF for EU-domiciled ETFs and ETF.com for US ETFs.

Step 2: Filter for the ETFs by size and expense ratio

You will find several ETFs you can choose from, so some criteria can help in filtering. The ETFs with bigger sizes are better as they are more liquid, which means more people trade with them. The ETF size is specified in AUM or assets under management. There is a rule of thumb you can follow: the ETFs with AUM higher than $100 million are usually more liquid.

The ETFs with lower expense ratios are better. The expense ratio shows what is the average annual fee of the ETF. The ETFs with lower than 0.1% expense ratios are very good. 

Step 3: Choose the ETF domicile, stock exchange, and currency

The domicile means the country where the ETF was issued. The majority of the ETFs have EU or US domicile. Different domiciles most probably would mean different taxation for you. We are not here to give you tax advice, so always check this topic with your accountant. One more thing. After January of 2018, EU investors usually cannot buy US-domiciled ETFs due to the new PRIIPS regulation.

The stock exchange listing does not equal to the domicile. An ETF can be traded on several stocks exchanges. Choose the stock exchange with the lowest commission. The commission depends on your broker.

The different stock exchanges could mean different currencies. Choose an ETF with the same currency as your brokerage to avoid currency conversion fees.

Step 4: Find your broker

After you decided which ETF you want to buy, you have to find a good online broker. You need to take into account the broker’s fees, trading platform, accessible markets to trade, and how easy it is to open an account. Safety is also highly important, but since we recommend only safe brokers, you do not have to worry much here.

After you opened your account you will need to deposit money into it.

Step 5: Buy the ETF

You have the target, the account, and the cash. The last step is to push the buy button. You log in to your online trading platform, search for the ETFs you wish to buy and click buy. When placing an order, you can choose from different order types. 

Step 6: Monitor your ETF positions regularly

You are done, your ETFs are bought. Now it is key to monitor your investments. If you bought the ETF for holding it for a longer term, you might check it on a monthly or yearly base.

For short time buyers, the position management could mean setting up the stop-loss price of where to cut the losses and the target price of where you want to sell the ETF with a profit.

Which ETF Does Warren Buffett Recommend

Warren Buffett, also known as the Oracle of Omaha, is an iconic American investor who has amassed over $60 billion through his investments. Buffet is known for his value investing approach and his holding company, Berkshire Hathaway, has consistently made him one of the world’s wealthiest people. As of 2020, he had a reported net worth of $68.9 billion.

Vanguard 500 Index Fund Investor Shares (VFINX)

The Vanguard 500 Index Fund Investor Shares is one of the most cost-effective mutual funds that offers exposure to U.S. large-capitalization stocks. Issued on Aug. 31, 1976, it seeks to track the performance of the Standard & Poor’s 500 Index, its benchmark index.

The fund seeks to achieve its investment goal by investing all, or a substantial portion, of its total net assets in stocks comprising its benchmark index. The fund implements a passive indexing strategy, which minimizes its turnover ratio and expense ratio. As of March 22, 2020, it has a turnover rate of 3.9% and charges an expense ratio of 0.14%.

The Vanguard 500 Index Fund Investor Shares also currently has total net assets of $500.9 billion. Its top holdings include blue-chip stocks, such as Apple, Inc., Microsoft Corp., Exxon Mobil Corp., Johnson & Johnson, and Buffett’s holding company, Berkshire Hathaway, Inc.

Since it offers a low expense ratio and is tied to the S&P 500 Index, the Oracle of Omaha would probably recommend investing in the Vanguard 500 Index Fund Investor Shares.

Vanguard Value Index Fund Investor Shares (VIVAX)

Launched on Nov. 2, 1992, with the sponsorship of Vanguard, the Vanguard Value Index Fund Investor Shares seeks to provide investment results corresponding to the performance of the CRSP U.S. Large-Cap Value Index, its benchmark index. As of March 22, 2020, the fund has generated an average annual return of 9.10% since its inception.

The Vanguard Value Index Fund Investor Shares’ benchmark index is broadly diversified and includes primarily U.S. large-cap value stocks. To achieve its investment goal, the fund employs an index strategy and seeks to invest all of its net assets in stocks comprising its benchmark index. The fund is managed by the Vanguard Equity Investment Group and charges an expense ratio of 0.17%.

The Vanguard Value Index Fund Investor Shares holds 329 stocks in its portfolio, which has total net assets of $80.6 billion. As of February 29, 2020, it offers an attractive 30-day SEC yield of 2.88%. The fund replicates its benchmark index’s sector weights and allocates its portfolio as follows: 21.43% to financial services, 20.19% to healthcare, 12.04% to consumer defensive, 10.62% to industrials, and 7.01% to utilities.

In terms of modern portfolio theory, this fund has a nearly perfect degree of correlation to the S&P 500 Index and outperformed the index by 1.19%. Since it is passively managed and has a high correlation to the S&P 500 Index, Buffett would consider an investment in the Vanguard Value Index Fund Investor Shares.

Fidelity Spartan 500 Index Investor Shares (FXAIX)

The Fidelity Spartan 500 Index Investor Shares is another mutual fund that provides low-cost exposure to the S&P 500 Index, its benchmark index. Issued on Feb. 17, 1988, by Fidelity, this fund seeks to achieve its investment objective by investing at least 80% of its total net assets in common stocks comprising the S&P 500 Index.

The fund’s investment advisor, Geode Capital Management, employs a passive strategy, which helps to minimize its costs. Consequently, the fund has a turnover ratio of 4% and charges a low net expense ratio of 0.015%. The Fidelity Spartan 500 Index Investor Shares holds 505 stocks in its portfolio, which has total net assets of approximately $219.3 billion.

In terms of modern portfolio theory, the fund is perfectly correlated to and experiences the same degree of volatility as the S&P 500 Index. Although the Oracle of Omaha recommends Vanguard funds, the Fidelity Spartan 500 Index Investor Shares’ low expense ratio and indexing approach would probably be a suitable investment for Buffett.

Vanguard Short-Term Treasury Fund Investor Shares (VFISX)

In addition to recommending low-cost funds tied to the S&P 500 Index, Buffett recommends investing a small portion of cash in short-term government bonds. Issued in October 1991 by Vanguard, the Vanguard Short-Term Treasury Fund Investor Shares provides low-cost exposure to the U.S. short-term government bond market. The fund is managed by the Vanguard Fixed Income Group and charges a low net expense ratio of 0.2%.

The Vanguard Short-Term Treasury Fund Investor Shares aims to provide its investors with income with a limited degree of volatility. To achieve its investment goal, the fund invests 97.6% of its total net assets in U.S. short-term Treasury securities. The fund holds 124 bonds in its portfolio, which has total net assets of $8.2 billion.

On average, this mutual fund’s portfolio of bonds has an average effective duration of 2.2 years, which indicates it carries a low degree of interest rate risk. Since the Vanguard Short-Term Treasury Fund Investor Shares is considered a low-risk investment and has a low average effective duration, it offers a moderate 30-day SEC yield of 0.83%, as of March 22, 2020.

As of March 22, 2020, the Vanguard Short-Term Treasury Fund Investor Shares has generated an average annual return of 3.90% since its inception. Based on trailing 10-year data, this fund experiences a low degree of volatility and provides satisfactory returns on a risk-adjusted basis.

In terms of modern portfolio theory, the Vanguard Short-Term Treasury Fund Investor Shares is best suited for conservative fixed-income investors with a short-term investment horizon seeking to gain exposure to the U.S. Treasury market.

Since Buffett recommends his estate trustee invest 10% of his wife’s portfolio to short-term government bonds, the Oracle of Omaha would probably be comfortable with an investment in the Vanguard Short-Term Treasury Fund Investor Shares.

Can You Lose on Index Funds

Well, probably not – because this would entail all stocks in an index effectively going to zero. Even if these companies all went bankrupt simultaneously, investors would likely recover some money back based on the book value of the firm as it sells off assets in liquidation.

Index Funds and Potential Losses

There are few certainties in the financial world, but there is almost zero chance that any index fund could ever lose all of its value.

There are a few reasons for this. First, virtually all index funds are highly diversified. Most index funds attempt to mirror some large basket or index of stocks, such as the S&P 500, by simply buying and holding identical weights of each stock as the index itself. Thus, because an index fund’s holdings are well diversified, it is virtually impossible that all of these holdings’ market prices would fall to zero destroying the value of the entire index.

Consider randomly picking 100 companies. The odds that a single company of the 100 will go bankrupt might be quite high. However, the odds that each and every one of the 100 companies will go bankrupt and leave shareholders with zero equity is essentially nil. Thus, an investment in a typical index fund has an extremely low chance of resulting in anything close to a 100% loss.

When Should You Buy Index Funds

For most long-term investors, any time can be the best time to invest in index funds; however, certain market conditions give index funds an advantage over their actively-managed fund counterparts. There are also times when stock index funds are best, and when bond index funds are best.

There is no foolproof method for predicting what types of mutual funds will perform better than others during any given timeframe, especially short-term periods, such as one year or less. However, some conditions can make index funds a smarter investment choice than actively-managed funds. 

During a strong bull market— when stock prices are rising across all sectors and mutual fund types—active fund managers may lose their advantage because strategic buying and selling has just as much chance of losing to the major market indices as matching or beating them.

For example, in 2006, when the market was in the final calendar year of its previous bull run, Vanguard 500 Index(VFINX)beat more than 75% of large blend funds. In 2010 and 2011, when stocks were in full recovery mode after the 2008 bear market, VFINX beat 70% and 80% of category peers, respectively.¹

Weak economic conditions often lead people to bonds. However, bond markets can be difficult to navigate, and bond fund managers with active-management strategies often learn this the hard way: by losing to index funds like Vanguard Total Bond Market Index(VBMFX). For instance, when the economic recovery slipped in 2011, and stock funds were fortunate to escape negative returns, VBMFX beat 85% of all intermediate-term bond funds.

What Are The Disadvantages of ETFs

Less Diversification

For some sectors or foreign stocks, investors might be limited to large-cap stocks due to a narrow group of equities in the market index. A lack of exposure to mid- and small-cap companies could leave potential growth opportunities out of the reach of ETF investors.

Intraday Pricing Might Be Overkill

Longer-term investors could have a time horizon of 10 to 15 years, so they may not benefit from the intraday pricing changes. Some investors may trade more due to these lagged swings in hourly price. A high swing over a couple hours could induce a trade where pricing at the end of the day could keep irrational fears from distorting an investment objective.

Costs Could Be Higher

Most people compare trading ETFs with trading other funds, but if you compare ETFs to investing in a specific stock, then the costs are higher. The actual commission paid to the broker might be the same, but there is no management fee for a stock. Also, as more niche ETFs are created, they are more likely to follow a low-volume index. This could result in a high bid/ask spread. You might find a better price investing in the actual stocks.

Lower Dividend Yields

There are dividend-paying ETFs, but the yields may not be as high as owning a high-yielding stock or group of stocks. The risks associated with owning ETFs are usually lower, but if an investor can take on the risk, then the dividend yields of stocks can be much higher. While you can pick the stock with the highest dividend yield, ETFs track a broader market, so the overall yield will average out to be lower.

Leveraged ETF Returns Skewed

A leveraged ETF is a fund that uses financial derivatives and debt to amplify the returns of an underlying index. Certain double or triple leveraged ETFs can lose more than double or triple the tracked index. These types of speculative investments need to be carefully evaluated. If the ETF is held for a long time, the actual loss could multiply fast.

For instance, if you own a double leverage natural gas ETF, a 1% change in the price of natural gas should result in a 2% change in the ETF on a daily basis. However, if a leveraged ETF is held for greater than one day, the overall return from the ETF will vary significantly from the overall return on the underlying security.

Are ETFs Riskier Than Mutual Funds?

According to Mackenzie Investments, a Canadian provider of both mutual funds and ETFs, “There is no notable research that demonstrates that ETFs are riskier than mutual funds. The risk or volatility associated with any fund structure, whether ETF or mutual fund, is influenced by various factors.” Ultimately, for both mutual funds and ETFs, risk comes down to the underlying securities.

Whether structured as a mutual fund or an ETF, there are risks inherent to participating in markets by buying a basket of securities.

Inherent risks

The potential risks associated with mutual funds and ETFs that invest in market-based securities include:

• Currency risk
• Inflation risk
• Interest-rate risk
• Liquidity risk
• Market risk
• Country risk
• Credit risk

Similar to mutual funds, ETFs are susceptible to the standard market risks listed above. But the mistaken belief that ETFs carry more risk than their mutual fund counterparts is false and not based on any existing research or data.

What ETF to Buy Before a Recession

Consumer Staples Select Sector SPDR ETF (XLP)

Purpose: Tracks the performance of the Consumer Staples Select Sector Index.

Total Assets: $8.14 billion (as of 4/15/15)

Inception Date: Dec. 16, 1998

Average Daily Volume: 7.4 million

Dividend: 2.55%

Expenses: 0.15%

Top 3 Holdings:

The Procter & Gamble Co. (PG): 12.43%

The Coca-Cola Co. (KO): 8.76%

Wal-Mart Stores Inc. (WMT): 6.97%

April 2008 High (pre-crash): $28.49

February 2009 Low (bottom of market crash): $20.36

Analysis: A loss is a loss, but XLP held up extremely well relative to its peers during the most difficult time. (For more, see: The Consumer Staples XLP ETF.)

iShares US Healthcare Providers (IHF)

Purpose: Tracks the performance of the Dow Jones U.S. Select Health Care Providers Index.

Total Assets: $819.16 million

Inception Date: May 1, 2006

Average Daily Volume: 54,280

Dividend: 0.16%

Expenses: 0.45%

Top 3 Holdings:

UnitedHealth Group, Inc. (UNH): 13.97%

Express Scripts Holding Co. (ESRX): 9.46%

Anthem, Inc. (ANTM): 6.91%

April 2008 High: $49.69

February 2009 Low: $30.13

Analysis: IHF didn’t hold up exceptionally well during the last crisis, and it’s not likely to appreciate if there’s another crisis. However, it’s likely to hold up better than last time since Baby Boomers are entering an age where they will require a great deal of healthcare-related products and services.

Vanguard Dividend Appreciation ETF (VIG)

Purpose: Tracks the performance of the NASDAQ US Dividend Achievers Select Index.

Total Assets: $20.76 billion

Inception Date: April 21, 2006

Average Daily Volume: 879,500

Dividend: 2.13%

Expenses: 0.10%

Top 3 Holdings:

Johnson & Johnson (JNJ): 3.99%

Wal-Mart Stores Inc.: 3.99%

The Procter & Gamble Co.: 3.91%

April 2008 High: $55.19

February 2009 Low: $33.18

Analysis: VIG didn’t hold up well during the last crisis. That might be the case in the future as well. On the other hand, this low-expense ETF tracks the performance of companies that have a record of increasing their dividends over time. Companies such as these almost always possess healthy balance sheets and generate strong cash flow. Therefore, they’re likely to weather the storm. The correct approach here would be to buy VIG on any dips, knowing it’s only a matter of time before these elite companies bounce back.

Utilities Select Sector SPDR ETF (XLU)

Purpose: Tracks the performance of the Utilities Select Sector Index.

Total Assets: $6.38 billion

Inception Date: Dec. 16, 1998

Average Daily Volume: 13.2 million

Dividend Yield: 3.43%

Expense Ratio: 0.15%

Top 3 Holdings:

Duke Energy Corp. (DUK): 9.11%

NextEra Energy, Inc. (NEE): 8.33%

Southern Co. (SO): 7.26%

April 2008 High: $41.31

February 2009 Low: $25.35

Analysis: If you research “recession proof ETFs” you will often find XLU on the list. But this is why you need to be careful with what you’re reading. As you can see, XLU didn’t hold up very well during the last crisis. That’s likely to be next during the next crisis as well. While utilities are generally seen as safe, the problem is that they’re leveraged. Therefore, when interest rates increase, their debts will become more expensive. The debt-to-equity ratios for Duke, NextEra Energy, and Southern Co. are 1.04, 1.44, and 1.17, respectively. These aren’t terrible ratios, but they’re not comforting in a higher interest rate environment, either.

Invesco Dynamic Food & Beverage ETF (PBJ)

Purpose: Tracks the performance of the Dynamic Food & Beverage Intellidex Index.

Total Assets: $266.83 million

Inception Date: June 23, 2005

Average Daily Volume: 91,133

Dividend: 1.28%

Expenses: 0.61%

Top 3 Holdings:

Kraft Foods Group, Inc. (KRFT): 6.53%

The Kroger Co. (KR): 5.08%

General Mills, Inc. (GIS): 5.06%

April 2008 High: $16.82

February 2009 Low: $11.13

Analysis: A manageable decline during the worst of times. And PBJ invests in the best of the best in Food & Beverage. The only reason PBJ is on the Second-Tier list is because of the 0.61% expense ratio, which is marginally higher than the average ETF expense ratio of 0.46%. This heightened expense ratio will eat into your profits and accelerate losses.

What is The Average Return on Index Fund

Since there are so many different types of mutual funds, and there’s no way to track the entire universe, it’s best to look at categories.

Mutual funds invest primarily in stocks, bonds or cash (or some combination). Within each asset class, there are multiple categories. For instance, stock funds can be organized by market capitalization (large-cap, mid-cap, etc.), by country or region, or by business sector, such as healthcare or technology.

Here are the average mutual fund returns for seven major categories used by Morningstar, Inc. The figures represent the average for all mutual funds, including index funds, within the respective category. The 3-,5-,10-, and 15-year figures represent the average annual return over given time periods. The last row is the mean of the seven major categories.

List of ETFs

TD Ameritrade

TD Ameritrade requires a $0 minimum investment and delivers standout features, including extensive — and free — research and data, portfolio-building guidance, $0 commissions for stock, options and exchange-traded fund trades and nearly 300 branches for in-person customer support. Investors have a choice of four trading platforms.

In November 2019, Charles Schwab announced its acquisition of TD Ameritrade. The deal is expected to close at the end of this year. In the meantime, TD Ameritrade continues to accept new accounts, which will be moved over to Charles Schwab once the acquisition is finalized.

TD Ameritrade is best for:

• Beginner investors.
• Advanced traders.
• Investor education/advice.
• Commission-free trades.
• Fund investors.

Charles Schwab Corporation

The Charles Schwab Corp. is a savings and loan holding company, which engages in the provision of wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. It operates through the Investor Services and Advisor Services segments. The Investor Services segment includes retail brokerage and banking services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees.

The Advisor Services segment provides custodial, trading, retirement business, and support services as well as retirement business services, to independent registered investment advisors, independent retirement advisors, and recordkeepers. The company was founded by Charles R. Schwab in 1986 and is headquartered in San Francisco, CA.

Invesco Capital Management

Invesco Ltd. (Invesco), incorporated on September 12, 2007, is an independent investment management company. The Company provides a range of investment capabilities and outcomes, which are delivered through a set of investment vehicles, to help clients achieve their investment objectives. The Company has a presence in the retail and institutional markets within the investment management industry in North America; Europe, Middle East and Africa (EMEA), and Asia-Pacific.

It served clients in more than 100 countries, as of December 31, 2016. The Company’s Jemstep solution provides wealth management home offices and their advisors with a suite of technology solutions that are customizable and are integrated into existing systems. The solution offers advisors an open architecture platform that includes Invesco’s fundamental and factor-based investment strategies.

Retail

Invesco is a provider of retail investment solutions to clients in markets, including the United States, the United Kingdom, Canada, Continental Europe and Asia. The Company offers retail products within various asset classes. Its retail products are primarily distributed through third-party financial intermediaries, including wirehouses, fund supermarkets, regional broker-dealers, insurance companies, banks and financial planners in North America, and independent brokers and financial advisors, banks and supermarket platforms in Europe and Asia.

Institutional

The Company provides investment solutions to institutional investors globally, with a presence in North America, Europe, Middle East and Africa (EMEA) and Asia-Pacific. The Company offers a suite of domestic and global strategies, including traditional and quantitative equities, fixed income (including money market funds for institutional clients), real estate, private equity, financial structures and absolute return strategies.

Regional sales forces distribute its products and provide services to clients and intermediaries across the world. The Company has a client base that includes public entities, corporations, unions, non-profit organizations, endowments, foundations, pension funds, financial institutions and sovereign wealth funds.

MSCI

MSCI Inc. offers products and services to support the needs of institutional investors throughout their investment processes. Its segments include Index, Analytics and All Other segments. All Other segment comprises environmental, social and governance (ESG) and Real Estate segments. Its indexes are used in various areas of the investment process, including index-linked product creation and performance benchmarking, as well as portfolio construction and rebalancing, and asset allocation.

The Analytics segment uses analytical content to create products and services, which offer institutional investors an integrated view of risk and return. MSCI’s ESG products include MSCI ESG Ratings, MSCI ESG Business Involvement Screening Research and MSCI ESG Governance Metrics. MSCI’s Real Estate products comprise private real estate benchmarks and indexes branded IPD Group Limited (IPD) and include Portfolio Analysis Service (PAS), IPD Rental Information Service (IRIS) and IPD Global Intel.

WisdomTree Investments

WisdomTree Investments, Inc. is an asset management company that focuses on exchange-traded funds (ETFs). The Company’s family of ETFs includes funds that track its own indexes, funds that track third party indexes and actively managed funds. It operates as an exchange-traded product sponsor and asset manager providing investment advisory services in the United States, Europe, Canada and Japan.

These activities are reported in its U.S. business segment that comprises it’s the United States business and Japan sales office, which primarily engages in selling its United States listed ETFs to Japanese institutions, and International Business segment, that comprises its European business and Canadian business. Its United States listed products include International Hedged Equity ETFs, Equity ETFs, Fixed Income ETFs, Currency ETFs, Alternative Strategy ETFs and Commodity ETFs. Its portfolio of Non-the United States listed products include WisdomTree UCITS ETFs, Boost ETPs.

SPDR S&P 500 Trust ETF

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol (NYSE Arca: SPY). SPDR is an acronym for the Standard & Poor’s Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest ETF in the world. SPDR is a trademark of Standard and Poor’s Financial Services LLC, a subsidiary of S&P Global. The ETF’s CUSIP is 78462F103 and its ISIN is US78462F1030.

The fund has a net expense ratio of 0.0945%. The value of one share of the ETF is worth approximately 1/10 of the cash S&P 500’s current level. On April 9, 2013 the average daily volume was 117 million shares, the highest volume in any ETF. The sponsor is SPDR Services LLC, a wholly owned subsidiary of American Stock Exchange LLC. Dividends are distributed quarterly, and are based on the accumulated stock dividends held in trust, less any expenses of the trust.

Legg Mason

Legg Mason, Inc. is a global asset management company, which provides investment management and related services to institutional and individual clients, company-sponsored mutual funds and other pooled investment vehicles through financial intermediaries. Legg Mason’s investment advisory services include discretionary and non-discretionary management of separate investment accounts in numerous investment styles.

The company’s investment products include proprietary mutual funds ranging from money market and other liquidity products to fixed income and equity funds, other domestic and offshore funds offered to both retail and institutional investors and funds-of hedge funds.

It conducts business through asset managers which provide separate account investment management services to institutional clients, including pension and other retirement plans, corporations, insurance companies, endowments and foundations and governments, and to high net worth individuals and families and also sponsor and manage various groups of mutual funds. Legg Mason was founded in 1899 and is headquartered in Baltimore, MD.

Franklin Templeton Investments

Franklin Resources Inc. is an American multinational holding company that, together with its subsidiaries, is referred to as Franklin Templeton; it is a global investment firm founded in New York City in 1947 as Franklin Distributors, Inc. It is listed on the New York Stock Exchange under the ticker symbol BEN, in honor of Benjamin Franklin, for whom the company is named, and who was admired by founder Rupert Johnson, Sr. In 1973 the company’s headquarters moved from New York to San Mateo, California. As of December 31, 2019 Franklin Templeton held US$698 billion in assets under management (AUM) on behalf of private, professional and institutional investors.

Franklin Templeton has over 455 different open-ended mutual funds and 7 closed-end funds in the fund family. Included in these are 27 state and federal tax-free income funds, an area of investment pioneered by Franklin.

Prominent funds in the fund family include the Templeton Growth Fund, Inc. (opened 1954, $8.8 billion in AUM, the Mutual Shares fund (opened 1949, $7.9bn assets, and the Mutual Discovery Fund (opened 1992, $14.5 billion assets and the Templeton Growth (Euro) Fund A (acc) ($6.2bn assets.

The Franklin Income Fund (FKINX, assets $61.1 billion is a mutual fund in Morningstar’s “conservative allocation” category and “large/value” style box. The fund was created in 1948 and has paid uninterrupted dividends for 60 years. The Franklin Income Fund is constructed primarily of dividend-paying stocks and bonds (2%).

The Hartford

The Hartford Financial Services Group, Inc., usually known as The Hartford, is a United States-based investment and insurance company. The Hartford is a Fortune 500 company headquartered in its namesake city of Hartford, Connecticut. It was ranked 156th position in Fortune 500 in the year of 2018. The company’s earnings are divided between property-and-casualty operations, group benefits and mutual funds.

The Hartford is the 12th-largest property and casualty company in the United States. They sell products primarily through a network of agents and brokers, and have also been the auto and home insurance writer for AARP members for more than 25 years.

DWS Gr GmbH

DWS Group GmbH & Co KgaA is a Germany-based company that provides integrated investment solutions. The Company offers active, passive and alternative investments across a wide range of asset classes, including Hedge Funds, Sustainable Investments, Private Equity, Liquid Real Assets, Real Estate, Equities and Fixed Income. It invests primarily in the areas of environmental, social and governance.

The Company’s clients include corporations, central banks, insurers, pension funds, public institutions, financial institution, not-for-profit organizations, as well as private investors. The Company is active in around 22 countries in Europe. Deutsche Bank AG is a majority shareholder of the Company.

Standard Life Aberdeen

Trying to set the standard for asset management at home and abroad, Standard Life Aberdeen is a leading UK asset management. With more than £600 billion in assets under management, the company offers active investment strategies to individual and institutional investors and operates some 50 locations in more than 80 countries.

Standard Life Aberdeen dates back to 1825 and its current form is the result of an $11 billion merger between two major UK asset managers, Standard Life and Aberdeen Asset Management. In a major shake-up, in 2018 the company ditched its Standard Life Assurance business and became purely an asset management company.

Bank of Montreal

The Bank of Montreal is a Canadian multinational investment bank and financial services company. Founded in Montreal, Quebec in 1817 as Montreal Bank, its head office remains in Montreal, with its operational headquarters and executive offices located in Toronto, Ontario since 1977.

One of the Big Five banks in Canada, it is the fourth-largest bank in Canada by market capitalization and assets, as well as one of the ten largest banks in North America. It is commonly known by its acronym BMO, which is also its stock symbol on both the Toronto Stock Exchange and the New York Stock Exchange.

In Canada, the bank operates as BMO Bank of Montreal and has more than 900 branches, serving over seven million customers. In the United States, it does business as BMO Financial Group, where it has substantial operations in the Chicago area and elsewhere in the country, where it operates BMO Harris Bank. BMO Capital Markets is BMO’s investment and corporate banking division, while the wealth management division is branded as BMO Nesbitt Burns. The company is ranked at number 131 on the Forbes Global 2000 list.

Euronext N.V.

Euronext NV is a company based in the Netherlands that serves as a parent of the Euronext pan-European exchange group. Euronext offers a diverse range of products and services, combining equity, fixed income securities and derivatives markets in Amsterdam, Brussels, Dublin, Lisbon, London and Paris.

The Company’s businesses comprise listing, cash trading, derivatives trading, market data and indices, post-trade and market solutions, among others. Euronext regulated markets provide a listing venue for companies seeking to raise capital and enter the Eurozone. It provides an electronic trading platform, which enables investors to place orders directly with the exchange.

The Company sells real time, historic and reference data generated from the activity on the Euronext markets. It also calculates and publishes a portfolio of more than 500 benchmark indices, including the AEX-Index and CAC 40 Index. The Company offers technology solutions and services to exchanges and market operators.

SPDR Gold Shares

SPDR Gold Shares (also known as SPDR Gold Trust) is part of the SPDR family of exchange-traded funds (ETFs) managed and marketed by State Street Global Advisors. For a few years, the fund was the second-largest exchange-traded fund in the world, and it was briefly the largest. As of the close of 2014, it dropped out of the top ten.

This ETF denotes a share of gold bullion, unlike many ETFs which represent ownership in a basket of stocks. SPDR Gold Shares are designed to initially track the price of a tenth of an ounce of gold.
If the share price differs from the gold market price, the fund’s manager exchanges blocks of 100,000 shares for 10,000 ounces of gold. The possibility of such exchanges keeps the ETF price roughly in line with the gold price, although the prices can diverge during each day.

As of March 31, 2019, the trust had 24,572,554.8 ounces of vaulted gold in its custody, representing an asset value of $31,697,578,486.50. SPDR Gold Shares is one of the top ten largest holders of gold in the world.

Swedish Export Credit Corporation

The Swedish Export Credit Corporation is a state-owned corporation that serves as an export credit agency. It provides medium- and long-term export credits. It works with the Ministry of Finance.

London Stock Exchange Group

London Stock Exchange Group PLC (LSEG) is a United Kingdom-based global financial markets infrastructure business. The Company business focuses on Information Services, Risk and Balance Sheet Management and Capital Formation. Its segment includes Information Services; Post Trade Services- LCH Group Limited (LCH); Post Trade Services- Cassa di Compensazione e Garanzia S.p.A. (CC&G) and Monte Titoli S.p.A (Monte Titoli); Capital Markets; Technology Services and Other.

In Capital Markets, it operates a range of international equity, exchange-traded fund (ETF), bond and derivatives markets. In Information Services, through Financial Times Stock Exchange (FTSE) Russell, it provides financial indexing, benchmarking and analytic services. It also provides post trade and risk management services. LSEG LSEG Technology develops and operates technology solutions, including trading, market surveillance and post trade systems.

United States Oil Fund

The United States Oil Fund (NYSE Arca: USO) is an exchange-traded fund (ETF) that attempts to track the price of West Texas Intermediate Light Sweet Crude Oil. It is distinguished from an exchange-traded note (ETN) since it represents an ownership claim on underlying securities that the fund has packaged. USO invests in oil future contracts that are traded on regulated futures exchanges.

Direxion

Direxion is a leading ETF provider known mostly for its leveraged and inverse ETFs. It has non-leveraged funds in its exchange-traded product line as well. The firm offers numerous ETFs, and like any successful fund provider, Direxion has quite a few ETFs in development as well.

Deutsche Bank

Deutsche Bank AG is a global financial service provider delivering commercial, investment, private, and retail banking. The Bank offers debt, foreign exchange, derivatives, commodities, money markets, repo and securitization, cash equities, research, equity prime services, loans, convertibles, advice on M&A and IPO’s, trade finance, retail banking, asset management, and corporate investments.

Alerian MLP

Alerian MLP ETF is an exchange-traded fund incorporated in the USA. The ETF tracks the performance of the Alerian MLP Infrastructure Index. The ETF holds U.S. large and mid-cap energy stocks. Its investments are in companies that earn the majority of their cash flow from the transportation, storage, and processing of energy commodities. The holdings are weighted based on market capitalization.

BetaShares

BetaShares is an Australian provider of exchange-traded funds (ETFs) and other ASX-traded funds. The company introduced a range of products into the Australian ETF landscape, including Australia’s first currency hedged ETF, Australia’s first range of commodity ETFs, Australia’s first range of currency ETFs, Australia’s first ETF using Fundamentally based indexes and a range of short exchange traded products. BetaShares is based in Sydney, Australia with offices in Melbourne and Brisbane.

BetaShares is owned and managed by its Australian based management team along with a strategic shareholding from Mirae Asset Financial Group, one of Asia’s largest independent financial services groups.

VanEck

VanEck is an investment management firm headquartered in New York, NY and having satellite offices in Frankfurt, Germany and Australia. Van Eck Associates Corporation and Van Eck Securities Corporation are also referred to as VanEck. VanEck Vectors ETFs (about 75% of assets under management and VanEck Mutual Funds (about 25% of assets under management represent the company’s flagship investment offerings.

The majority of VanEck’s assets are gold investments. The actively managed VanEck Mutual Funds cover the natural resource equities and commodities markets, emerging markets equities, emerging markets bonds, and liquid alternatives asset classes.

The index-based VanEck Vectors ETFs are purpose-built, aimed at providing exposure to asset classes that are underrepresented in investor portfolios, or, offering an alternative approach to established investment categories. The firm’s products are sold nationwide through retail brokers, financial planners, and investment advisors.

The 45 Cheapest Index Funds in The ETF Universe

U.S. Large Blend

Cheapest fund: JPMorgan BetaBuilders U.S. Equity ETF

Expenses: 0.02%

JPMorgan Chase’s (JPM) JPMorgan Asset Management division – a mid-tier player in the ETF space at about $26 billion in assets under management – made a big splash in March when it launched the JPMorgan BetaBuilders U.S. Equity ETF (BBUS, $52.01) – the cheapest U.S. large blend fund at just 2 basis points, undercutting titans such as the Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 ETF (IVV) and SPDR S&P 500 Trust ETF (SPY).

BBUS currently holds a portfolio of 622 stocks that are primarily large-cap in nature (typically more than $10 billion), though it does include about 12% exposure to midsize companies (typically $2 billion to $10 billion) and a handful of small caps ($300 million to $2 billion).

Top holdings are similar to what you’ll find in S&P 500 trackers: Microsoft (MSFT), Apple (AAPL) and Amazon (AMZN) combine to represent about 10% of the fund’s weight (the percentage of the portfolio they represent).

Note: Morningstar listed the SoFi Next 500 ETF (SFYX) as a large blend fund at launch but listed no portfolio information. SFYX seems likely to be recategorized as a mid-cap growth fund. The ETF’s fund summary says the fund is “composed of 500 mid-cap U.S. companies,” and the index it tracks is growth-focused. We will update this list accordingly when more information is provided.

U.S. Large Growth

Cheapest fund: Tie, iShares Core S&P U.S. Growth ETF, Schwab U.S. Large-Cap Growth ETF, SPDR Portfolio S&P 500 Growth ETF

Expenses: 0.04%

There’s plenty of competition for the title of cheapest U.S. small value fund. The iShares Core S&P U.S. Growth ETF (IUSG, $61.30), Schwab U.S. Large Cap Growth ETF (SCHG, $81.29) and SPDR Portfolio S&P 500 Growth ETF (SPYG, $37.80) each charge just 4 basis points, making them the cheapest index funds that offer exposure to a large set of growth stocks.

Each of these funds tracks slightly different indexes covering a broad range of large-cap stocks that exhibit growth characteristics, which can include earnings growth, sales growth and price momentum. The iShares product boasts the broadest portfolio at 538 holdings, versus 421 for SCHG and 295 for SPYG.

Note: Morningstar listed the Sofi Select 500 ETF (SFY) as a large growth fund in Morningstar. Like SFYX, SFY’s Morningstar portfolio page and provider fact sheet list no specific holdings. However, given fund summary and fact sheet descriptions, it seems likely to settle into this Morningstar category and supplant the aforementioned three funds as the cheapest large growth ETF. We will update this list accordingly when more information is provided.

U.S. Large Value

Cheapest fund: Tie, iShares Core S&P U.S. Value ETF, Schwab U.S. Large-Cap Value ETF, SPDR Portfolio S&P 500 Value ETF

Expenses: 0.04%

Once again, iShares, Schwab and SPDR are vying for top billing.

The iShares Core S&P U.S. Value ETF (IUSV, $56.15), Schwab U.S. Large Cap Value ETF (SCHV, $55.70) and SPDR Portfolio S&P 500 Value ETF (SPYV, $31.00) are the cheapest ETFs in this category, with each charging just 4 basis points to invest in hundreds of large-cap value stocks.

Similar to the large-cap growth funds, each of these ETFs tracks slightly different indexes – this time focused on large-cap stocks exhibiting value characteristics such as low price-to-earnings and price-to-sales ratios. Again, iShares’ offering, at 679 holdings, is by far the most diverse portfolio, compared to 358 for SCHV and 383 for SPYV.

U.S. Mid-Cap Blend

Cheapest fund: Schwab U.S. Mid-Cap ETF

Expenses: 0.04%

At one point, Charles Schwab’s (SCHW) exchange-traded funds led a number of categories in lowest expenses, though a few of them have since been matched or undercut by the competition.

But Schwab still leads the way in a few categories, including the mid-cap space, via the Schwab U.S. Mid-Cap ETF (SCHM, $56.90).

This index fund holds more than 500 mid-cap stocks with a weighted average market capitalization of about $7 billion. It features nice sector diversification, with six sectors – led by information technology, industrials and financials – enjoying double-digit weights. There is extraordinarily little single-stock risk, too. Top holdings such as Cadence Design Systems (CDNS), Keysight Technologies (KEYS) and Veeva Systems (VEEV) each account for a little more than half a percent of the fund’s assets.

U.S. Mid-Cap Growth

Cheapest fund: Vanguard Mid-Cap Growth ETF

Expenses: 0.07%

As mentioned earlier, it seems likely that SoFi’s new mid-cap fund SFYX will end up being slotted into this category, automatically making it the lowest-cost ETF in the space.

For now, however, Vanguard Mid-Cap Growth ETF (VOT, $146.07) is the cheapest index fund for mid-cap growth.

VOT is a diversified but not particularly sprawling ETF at 169 holdings that display various growth characteristics. The fund is top-heavy in two sectors: industrials (25.9%) and technology (23.3%). Top holdings right now include architecture and construction software specialist Autodesk (ADSK), medical equipment company Edwards Lifesciences (EW) and financial-tech firm Fiserv (FISV).

U.S. Mid-Cap Value

Cheapest fund: Vanguard Mid-Cap Value ETF

Expenses: 0.07%

Vanguard also holds the mid-cap value crown, and at least at the moment, it faces no threat from SoFi.

Vanguard Mid-Cap Value ETF (VOE, $110.81) is a basket of more than 200 mid-cap companies that are classified as “value” stocks because of favorable readings in metrics including “book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio,” according to its index.

Financials are the biggest weight at nearly a quarter of the portfolio. And despite the term “mid-cap,” many of the ETF’s top holdings are well-established names such as nationally known Clorox (CLX) and Royal Caribbean Cruises (RCL), and large regional presences such as utility FirstEnergy (FE) and East Coast bank stock M&T Bank (MTB).

U.S. Small Blend

Cheapest fund: Schwab U.S. Small-Cap ETF

Expenses: 0.04%

Small-cap stocks are beloved by growth investors because of their high upside potential. The thinking goes that it is much easier to double revenues from $1 million than $1 billion, and exhibiting that kind of growth should in turn result in outsize stock gains.

Tops among the cheapest index funds is the Schwab U.S. Small-Cap ETF (SCHA, $71.81), which is the least expensive way to delve into the broader small-cap space. This ETF holds 1,750 stocks with a weighted average market cap of less than $3 billion. It also delivers decent sector diversification with five sectors represented at double-digit weightings, led by financials (17.9%) and information technology (15.4%).

While most of the holdings fall under consumers’ radar, there are a few familiar names in the top holdings, including handmade/vintage e-commerce specialist Etsy Inc. (ETSY) and discount retailer Five Below (FIVE).

U.S. Small Growth

Cheapest fund: Vanguard Small-Cap Growth ETF

Expenses: 0.07%

Not all small caps are in growth mode, however. Some companies simply have too much of a specialty to expand beyond a certain point and have reached something of a plateau.

Those looking for a cheap way to concentrate on just the growthiest small caps can look to the Vanguard Small-Cap Growth ETF (VBK, $183.90). The index that VBK tracks classifies growth stocks based on several metrics, including “future long-term growth in earnings per share (EPS), future short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets.”

VBK’s portfolio is roughly 625 stocks that is heavily concentrated in industrials (19.6%), health care (19.5%), technology (19.0%) and financials (17.0%). Top holdings include Burlington Stores (BURL), biotech Sarepta Therapeutics (SRPT) and manufactured-home REIT Sun Communities (SUI).

U.S. Small Value

Cheapest fund: Vanguard Small-Cap Value ETF

Expenses: 0.07%

You can indeed find value in the small-cap space.

Vanguard Small-Cap Value ETF’s (VBR, $132.54) tracking index looks at the same qualities as its mid-cap selection – metrics such as P/E and P/S. And in fact, the universe of small-cap value stocks is bigger than the growth side, with 863 stocks in VBR’s portfolio.

This stock is heavily clustered in a few sectors: Financials (34.3%) and industrials (20.4%) account for more than half the fund’s assets. Meanwhile, top holdings include the likes of single-tenant REIT W. P. Carey (WPC), fluidics systems specialist Idex Corp. (IDEX) and natural gas distributor Atmos Energy (ATO).

U.S. Sectors – ex-Real Estate

Cheapest funds: Fidelity MSCI Sector Index ETFs

Expenses: 0.08%

Morningstar has categories for each of the 11 Global Industry Classification Standard (GICS) sectors, and Fidelity offers the cheapest index funds for 10 of them:

Fidelity MSCI Financials Index ETF (FNCL, $38.85)
Fidelity MSCI Consumer Discretionary Index ETF (FDIS, $45.31)
Fidelity MSCI Energy Index ETF (FENY, $18.43)
Fidelity MSCI Consumer Staples Index ETF (FSTA, $33.76)
Fidelity MSCI Health Care Index ETF (FHLC, $44.07)
Fidelity MSCI Industrials Index ETF (FIDU, $38.94)
Fidelity MSCI Information Technology Index ETF (FTEC, $61.17)
Fidelity MSCI Materials Index ETF (FMAT, $32.54)
Fidelity MSCI Communication Services Index ETF (FCOM, $33.19)
Fidelity MSCI Utilities Index ETF (FUTY, $38.13)

Each of these funds holds a basket of stocks that includes only companies from within each sector. So the Fidelity MSCI Financials Index ETF, for instance, holds banks such as JPMorgan Chase (JPM) and Bank of America (BAC), insurers such as Berkshire Hathaway (BRK.B) and Chubb (CB), and investment management companies such as Goldman Sachs (GS) – all industries within the financial sector.

U.S. Sectors – Real Estate

Cheapest fund: Schwab U.S. REIT ETF

Expenses: 0.07%

The Schwab U.S. REIT ETF (SCHH, $44.76) is the lone exception to Fidelity’s dominance of the sector space.

SCHH invests in real estate investment trusts (REITs) – a structure that was created in 1960 to allow people easier investing access to real estate. REITs own and often operate properties, and they enjoy special tax privileges on the condition that they pay out 90% or more of their taxable income back to shareholders as dividends. As a result, income investors are drawn to the sector.

The Schwab U.S. REIT ETF isn’t a particularly high yielder at 2.8% – the Vanguard REIT ETF, by contrast, yields 4.0% at the moment. But SCHH is the cheapest way to delve into the space, allowing investors to own the likes of mall operator Simon Property Group (SPG), logistics REIT Prologis (PLD) and self-storage leader Public Storage (PSA) for a relative song.

Foreign Large Blend

Cheapest fund: SPDR Portfolio Developed World ex-US ETF

Expenses: 0.04%

Anyone seeking out international diversification has been blessed by the collapse of fees in the foreign-stock space. One of the most crowded areas is foreign large blend, where there are numerous cheap index funds.

But the SPDR Portfolio Developed World ex-US ETF (SPDW, $29.71) reigns as the current low-cost leader following an initiative two years ago to drastically slash expenses across several SPDR ETFs. SPWD previously was known as the SPDR S&P World ex-US ETF (GWL) and cost 0.34% annually; in October 2017, the fund was renamed and its costs were lowered to a bargain-basement 4 basis points.

Many of the funds in the foreign large-blend space are heavily invested in more economically developed countries like Japan, Australia and western European nations, though a few will hold emerging-market countries such as China and India. SPDW is predominantly exposed to developed markets, including large weights in Japan (23.0%), the United Kingdom (14.6%) and Canada (8.5%).

World Large Stock

Cheapest fund: Vanguard Total World Stock ETF

Expenses: 0.09%

Typically, if a fund’s name includes the words “world” or “global,” it means that it invests in both U.S. and foreign stocks, while “international” tends to mean exclusively ex-U.S.

The Vanguard Total World Stock ETF (VT, $74.68), then, is a play on the U.S. and much of the rest of the world – and it’s the cheapest index ETF in its category.

For just $9 for every $10,000 you invest, Vanguard Total World Stock ETF plugs you into a massive portfolio of 8,109 stocks spread across 42 countries. American companies make up a little more than half the portfolio at a 54.5% weight. And while larger developed countries such as Japan, the U.K. and Canada get a lot of attention, VT has a little exposure to a number of smaller emerging markets such as the Philippines, Mexico and Qatar.

Diversified Emerging Markets

Cheapest fund: SPDR Portfolio Emerging Markets ETF

Expenses: 0.11%

Developed-market funds typically offer more value-oriented blue chips from slower-growing economies. However, emerging markets – places such as China, India, Brazil and Thailand – typically boast much faster growth rates, and funds investing in EMs are more growth-oriented. The tradeoff? These economies and their stock markets can be much more volatile.

A way to spread out some of that risk is by investing in a diversified index ETF such as the SPDR Portfolio Emerging Markets ETF (SPEM, $36.48).

SPEM holds nearly 1,550 emerging markets stocks in roughly 30 nations. China typically is a massive portion of EM-fund portfolios, and that’s the case with this ETF, which dedicates nearly a third of its assets to Chinese stocks. Taiwan (13.5%) and India (12.9%) are hefty players here, too.

China Region

Cheapest fund: Franklin FTSE Hong Kong ETF

Expenses: 0.09%

China’s GDP growth rate of 6.6% in 2018 was its slowest pace since 1990. But while it’s clearly not expanding like it used to, developed countries still have every reason to be chartreuse with envy over numbers like that. Consider that even with $1.5 trillion in tax cuts and a bevy of government spending in 2018, America’s GDP only improved by 2.9%.

China ETFs have unsurprisingly roared to the foreground over the past few years. But despite its dirt-cheap expenses, the Franklin FTSE Hong Kong ETF (FLHK, $27.33) hasn’t quite caught on yet. The ETF made its public debut in November 2017, and has since amassed only $20.4 million in assets and trades just a few thousand shares daily.

That’s likely in large part because FLHK invests in Hong Kong companies. The 92-holding portfolio includes the likes of AIA Group (AAGIY), Link REIT (LKREF) and Hang Seng Bank (HSNGY). But that focus means it excludes high-profile growth plays such as Alibaba (BABA), JD.com (JD) and Ctrip.com International (CTRP), just to name a few.

U.S. Short Government Bond

Cheapest fund: Tie, Schwab Short-Term U.S. Treasury ETF, SPDR Portfolio Short Term Treasury ETF

Expenses: 0.06%

Bond investors also have benefited from the ETF fee wars.

The Schwab Short-Term U.S. Treasury ETF (SCHO, $50.05) and the SPDR Portfolio Short Term Treasury ETF (SPTS, $29.68) both attempt to track the Bloomberg Barclays U.S. 1-3 Year Treasury Bond Index.

When interest rates rise, the prices on existing bonds tend to fall as investors sell to buy into the better-rate bonds. But the shorter the length of the bond, the less such risk there is. Hence, short-term bonds are considered “safer.” Combine that factor with the fact that U.S. Treasuries are among the best-rated bonds as far as credit quality goes, and you have two dependable fixed-income funds.

The drawback is that the U.S. government doesn’t have to offer very high yields to attract investors into these uber-secure bonds. At the moment, both ETFs sport an SEC yield of 2.3%. (SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.)

U.S. Short-Term Bond

Cheapest fund: JPMorgan BetaBuilders 1-5 Year U.S. Aggregate Bond ETF

Expenses: 0.05%

The JPMorgan BetaBuilders 1-5 Year U.S. Aggregate Bond ETF (BBSA, $25.12) launched in March, at the same time as the BBUS large-cap ETF, becoming the cheapest of all the index funds tackling the broader world of short-term bonds.

Funds such as BBSA can hold all kinds of debt. BBSA, for instance, does hold U.S. Treasuries – its top four holdings are all American debt, and make up more than half of the ETF’s weight. But it also holds corporate bonds, debt from other government agencies such as the Federal National Mortgage Association (Fannie Mae), even international bonds. The tie that binds all these fixed-income securities is a maturity of somewhere between one and five years.

BBSA currently has no listed SEC yield because of its relatively recent inception.

U.S. Intermediate Government Bond

Cheapest fund: Tie, Schwab Intermediate-Term U.S. Treasury ETF, SPDR Bloomberg Barclays Mortgage Backed Bond ETF

Expenses: 0.06%*

So far in this list, any time two or more index funds in the same category shared the same expense ratios, they were executing almost identical strategies. That’s not the case for the Schwab Intermediate-Term U.S. Treasury ETF (SCHR, $53.45) and SPDR Bloomberg Barclays Mortgage Backed Bond ETF (MBG, $25.73).

SCHR holds roughly 120 bonds, 99.9% of which are U.S. Treasuries, 99.9% of which have maturities of between three and 10 years. It’s still a very low-risk profile with an SEC yield of 2.4%.

MBG, on the other hand, invests in mortgage-backed securities (MBSes) – essentially, debt securities that are secured by bundles of mortgages. However, this index fund still qualifies as a U.S. Intermediate Government Bond fund because the debt is issued by government agencies – just not the U.S. Treasury. Instead, these MBSes are issued by the likes of Fannie Mae, the Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This basket of 520 holdings has an average maturity of 6.3 years, which is intermediate, but because the debt is more risky than Treasury notes, it has to compensate with considerably better yield. MBG offers an SEC yield of 3.1% at the moment.

U.S. Intermediate-Term Bond

Cheapest fund: Tie, Schwab U.S. Aggregate Bond ETF, SPDR Portfolio Aggregate Bond ETF

Expenses: 0.04%

Schwab and SPDR also are tied for expenses on another pair of very similar products: The Schwab U.S. Aggregate Bond ETF (SCHZ, $51.62) and the SPDR Portfolio Aggregate Bond ETF (SPAB, $28.39), both of which track the Bloomberg Barclays U.S. Aggregate Bond Index.

The Bloomberg Barclays U.S. Aggregate Bond Index (often referred to as just the “Agg”) is the most prominent benchmark for bond funds, and it covers a wide swath of types and maturities of fixed-income instruments. Maturities range anywhere from one year to more than 30 years. The bonds range from U.S. Treasuries and agency bonds to government and commercial MBSes to corporate bonds and even foreign government securities.

That said, SCHZ and SPAB are about to be No. 2 among low-fee providers in this category. In early March, several outlets including Bloomberg reported that Vanguard filed to lower fees across several ETFs, including Vanguard Total Bond Market ETF (BND), which will be priced at 0.035%.

U.S. Long Government Bond

Cheapest fund: SPDR Portfolio Long Term Treasury ETF

Expenses: 0.06%

SPDR stands alone in the longer-dated government debt category.

The SPDR Portfolio Long Term Treasury ETF (SPTL, $35.60) is a tight portfolio of 50 long-term U.S. Treasuries. The vast majority of these (93%) are 20 to 30 years in maturity, with another 4.5% in the 15-to-20-year range, and a mere 2.5% in the 10-to-15-year range.

This still is U.S. Treasury debt, so the risk is low from that perspective, but because much can change over the course of 10, 20 and 30 years, these bonds must provide a little more bang for a buyer’s buck. Hence, SPTL offers an SEC yield of 2.8%.

U.S. Corporate Bond

Cheapest fund: Tie, 5 iShares ETFs, SPDR Bloomberg Barclays Corporate Bond ETF

Expenses: 0.06%

U.S. corporate bonds tend to deliver more yield than Treasury debt because the risk is simply greater.

Treasuries enjoy the second-highest-possible debt scores from the major ratings agencies. Only two companies – Microsoft and Johnson & Johnson (JNJ) – have better-rated debt, at AAA. A few other companies are on par with Treasuries, but the vast majority are rated well below. That’s OK. There are plenty of investment-grade ratings below U.S. debt.

The low-cost title for the corporate bond category is shared by six index funds – a broad SPDR ETF, as well as five iShares corporate bond ETFs focusing on various maturity ranges. They are:

SPDR Bloomberg Barclays Corporate Bond ETF (CBND, $31.95)
iShares Broad USD Investment Grade Corporate Bond ETF (USIG, $55.11)
iShares 5-10 Year Investment Grade Corporate Bond ETF (MLQD, $49.45)
iShares 10+ Year Investment Grade Corporate Bond ETF (LLQD, $48.86)
iShares Intermediate-Term Corporate Bond ETF (IGIB, $55.09)
iShares Long-Term Corporate Bond ETF (IGLB, $60.16)

U.S. High-Yield Bond

Cheapest fund: Xtrackers USD High Yield Corporate Bond ETF

Expenses: 0.15%*

The last bond category we’ll cover here is high-yield bonds.

“High-yield bonds,” of course, is language to be used in polite company. But this kind of corporate debt is known by another name: “junk.”

Junk debt will feature a score somewhere below the “investment-grade” line. For Standard & Poor’s, for instance, that starts at BB, then goes down to B, CCC and so forth until D. That’s important to note: Not all junk debt carries the same amount of risk.

DWS makes its lone appearance on this list with the Xtrackers USD High Yield Corporate Bond ETF (HYLB, $49.96) – a bargain-basement index fund that invests in junk bonds.

The ETF does defray risk somewhat by carrying a deep basket of more than 1,000 securities. There’s also some international exposure; about 15% of the debt is in overseas junk. The top holdings – which include bonds from European telecom Altice’s France and Luxembourg subsidiaries, as well as U.S. telecom Sprint (S) – illustrate a little of this diversity.

• Includes 5-basis-point fee waiver through at least March 30, 2020.

U.S. Preferred Stock

Cheapest fund: Global X U.S. Preferred ETF

Expenses: 0.23%

Preferred stocks aren’t among the most well-known corners of the market, but they’re well-trafficked by income hunters.

Preferred stocks are often referred to as stock-bond “hybrids” because they feature characteristics of both common shares and corporate debt. For instance, they trade on an exchange like a stock, but they pay out a fixed dividend similar to a bond coupon. They also tend to trade around a “par value” like a bond. Because of the lack of price potential, as well as the fact that they typically don’t come with voting rights, companies must offer large yields on preferreds, often between 5% and 7%.

The Global X U.S. Preferred ETF (PFFD, $24.20) was launched in September 2017 as the cheapest preferred-stock ETF at the time, and so far, it has maintained that distinction. This fund holds more than 220 preferred stocks from companies such as mega-bank Wells Fargo (WFC), med-tech company Becton Dickinson (BDX) and communications infrastructure REIT Crown Castle (CCI).

And like many preferred-stock index funds, PFFD delivers a generous yield. Presently, its SEC yield is 5.7%.

Commodities – Precious Metals

Cheapest fund: Aberdeen Standard Physical Swiss Gold Shares ETF

Expenses: 0.17%

Traditional gold ETFs technically aren’t index funds because they don’t track an index. However, they’re still “passive” investments (like index funds) that are designed to simply reflect price changes in gold.

While ETF providers have been undercutting each other for many years now, gold ETFs have been mostly immune until relatively recently. However, in 2017, Will Rhind’s GraniteShares disrupted the industry with a low-cost gold ETF, the GraniteShares Gold Trust (BAR).

BAR’s low fees appeared to force the hands of several other fund companies. For instance, SPDR, provider of the ubiquitous SPDR Gold Shares (GLD), eventually responded with a low-cost product called the SPDR Gold MiniShares (GLDM).

The GraniteShares Gold Trust lowered its fees yet again, to 0.1749%, in October 2018. However, the Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL, $124.48), which has been around since 2009, dropped its expenses to 0.17% in December 2018 to claim the title of lowest-fee gold ETF.

Aberdeen’s fund is like many other physical gold ETFs in that it aims to track the price of gold bullion. SGOL holds its physical metal in a secured vault in Zurich, Switzerland – hence the name.

Conclusion

Take index funds for what they are: a potentially wonderful tool that can save you a lot of money and help you get a good foundation. Once you are wealthy enough to have some real money behind you, consider bypassing the pooled structure entirely and owning the underlying components. Beyond that, index funds are neither friend nor foe, virtuous nor evil. They are a tool. Nothing more, nothing less. Use them when it suits you and is to your advantage; avoid them when they don’t and aren’t.

If you do invest through index funds, consider dollar cost averaging into a handful of core index funds, including an all-cap domestic and a developed market international, reinvest your dividends, ignore market fluctuations, and stay the course. Let time do the heavy lifting for you and, if you have a long enough run and good enough luck, retirement should be more comfortable than it otherwise would have been. There are a lot worse things you can do.