Last Updated on February 1, 2022 by pf team
We picked 7 best index funds with a track record of healthy returns and low fees. As a bonus, they all pay a dividend as well.
Management costs can take a big bite out of earnings, especially when you’re investing for the long term. When you’re investing in mutual funds, it’s important to keep an eye on expense ratios but there’s more to consider.
Why you should consider investing in index funds
Buying individual stocks is risky business. Sure, we can all point to examples of stocks that went to the moon like Google or Amazon, but even with their beautiful long term charts, many moonshot stocks broke plenty of hearts over the years.
The trading floors are littered with trades made at the wrong time or at the wrong price, costing investors dearly. Index funds offer a way to enjoy the upward momentum while reducing the risk that comes from picking individual stocks.
You’re instantly diversified when you buy an index, but you can also focus on a sector if you choose. There’s no need to pick winners or losers and over time you’re more likely to keep more of your earnings because there’s less emotional investment.
An index fund that tracks the S&P 500, for example, gives you access to 500 stocks without having to research each investment.
You might also be surprised to learn that less than 25% of actively managed portfolios outperform the S&P over time. Chances are good that you’ll make more money with index funds.
What Warren Buffett thinks about index funds
When self-made billionaire investor Warren Buffett opines on an investment topic, it’s worth our while to listen and consider the advice.
Warren Buffett says that index funds make the most sense for investors. There are exceptions, of course, and Warren Buffett made his fortune looking for those exceptions.
However, most of us don’t have the time or the once-in-a-generation level of market insight that Warren Buffett has.
Warren Buffet has long been a champion of index funds, advocating broad index funds as the best long-term solution for most investors.
However, Warren Buffett also cautions against the costs of mutual funds, pointing to the cost advantages found with most index funds.
Index funds also offer an easy way to use dollar cost averaging to build or position. Because you aren’t buying individual stocks, there’s less temptation to time trades. Instead, just assume the long term direction is up and buy steadily.
How we created the list of best index funds
Many brokerage accounts offer a stock screener and several paid options are also available. But you can also use a free screener to choose a winning portfolio of index funds.
- Funds with 5-year and 10-year average returns higher than 10%. A track record of strong returns speaks to the strength of the fund’s holdings.
- Yield higher than 1.5%. Markets go up and down. A reasonable dividend helps patient investors to wait for long-term gains. As your investment grows, dividends can provide a healthy passive income stream.
- Maximum expense ratio of 0.05%. When you’re investing for the long term, expenses matter. When buying (and holding) an index fund, you’re already saving money on trading costs. A low expense ratio helps your investment dollars go even further. A 1% expense ratio on a $10,000 investment costs nearly $42,000 over 30 years. By comparison, a fund with a .05% expense ratio saves nearly $20,000 in fees.
- Morningstar ratings of 4 stars or higher. Think of Morningstar ratings as an unbiased way to measure a fund's risk-adjusted return when compared to similar funds. We wanted at least 4 stars out of 5.
7 Best Index Funds with expense ratios below 0.05%
Our fund screen found 7 funds that matched all our criteria. You’ll find options from 2 of the 3 largest mutual fund companies as well as some options from other well-respected providers, such as Fidelity.
If you’re looking for variety or want to invest in a specific sector, you may need to adjust your screening criteria by lowering the yield or raising the expense ratio.
Admittedly, our requirements for expense ratios are downright miserly. We wanted you to keep more of your money and to have more money to invest.
In our list, you’ll find funds targeting large indexes, like the S&P 500. You’ll also find total market funds, which offer exposure to the entire stock market.
SWPPX: Schwab’s S&P 500 Index Fund
Minimum investment: $1
Schwab funds have gone on a cost-cutting spree lately and Schwab’s S&P 500 Index Fund is no exception. The fund’s expense ratio comes in at an impressive 0.02%, making it one of the least expensive funds you can buy.
True to its name, Schwab’s S&P 500 Index Fund tracks the S&P 500 index, which gives you exposure to every major sector of business.
IT holdings make up the largest category at more than 22%. The fund manages nearly $42 billion in assets with 99% of its holdings in North America. European and Asian companies make up most of the remaining 1%.
In addition to tech companies, you’ll also own health care and financial stocks, as well as large consumer conglomerates. For example, J&J and Proctor & Gamble, each with dozens or hundreds of companies of their own, are among the fund’s top holdings.
SWTSX: Schwab’s Total Stock Market Index Fund
Minimum investment: $1
If you want even more diversification than the S&P 500 offers, a separate breed of index fund tracks the entire US stock market.
Schwab’s Total Stock Market Index Fund invests at least 80% of its assets to track the Dow Jones US Total Stock Market Index. However, you can expect more than 80% to be invested.
Options, primarily futures contracts, help the fund to mirror its benchmark index while also keeping management costs low. You’ll pay just 0.03% as an expense ratio.
Yields for SWTSX aren’t the highest you’ll find in our list, but at 1.61%, you’re paid handsomely when considering the diversity of investments. It’s like being paid for safety.
Much like Schwab’s S&P 500 index fund, Schwab’s Total Stock Market Index Fund tears down the barriers to entry. With a $1 minimum investment, everyone can afford to invest and begin building a secure future.
VFIAX: Vanguard’s 500 Index Fund Admiral Shares index fund
Minimum investment: $3,000
It has a long name, but Vanguard’s 500 Index Fund Admiral Shares index fund is also long on value. The fund tracks the S&P 500 and tips the balance toward long-term gains.
A $10,000 investment made in 2009 would be worth more than $35,000 as 2019 draws to a close.
Vanguard’s VFIAX holds more than $500 billion in assets with over 23% of its holdings focused on 10 companies. By buying VFIAX, you’re investing in Microsoft, Apple, and Alphabet, the parent company of Google.
Facebook rounds out the fund’s top holdings of tech companies, but you’ll also find plenty of variety. Berkshire Hathaway, JPMorgan Chase, and Johnson & Johnson are also among the fund’s leading investments.
With VFIAX, you’ll not only enjoy an instantly diversified portfolio of some of the world’s largest companies, you’ll also save money. Expenses come in at only 0.04% compared to nearly 1% as an average for competing funds.
VTSAX: Vanguard’s Total Stock Market Index Fund
Minimum investment: $3,000
Similar to Schwab’s Total Stock Market Index Fund, Vanguard’s Total Stock Market Index Fund gives you exposure to the entire US stock market without picking sectors or favorites.
You’ll own it all from smallcap to midcap to large-cap stocks. Top holdings include giants like Microsoft, Amazon, and Visa but the fund also owns shares in the next rising stars of the market.
Having a healthy and diverse portfolio doesn't mean you have to sacrifice profits. $10,000 invested in 2009 would be worth more than $35,000 2019, which is impressive by any measure.
Combined with a sturdy 1.7% dividend yield, you have an investment that provides a diversified portfolio as well as cash flow, which you can either invest or take as income.
The fund’s total net assets of more than $845 billion make it a powerhouse, holding over 3600 stocks.
VLCAX: Vanguard’s Large-Cap Index Fund Admiral Shares index fund
Minimum investment: $3,000
The ticker symbol for a fund can provide clues to what the fund does. For example, an X at the end of a ticker symbol can indicate an index fund.
In the case of VLCAX, the LC indicate that the fund focuses on large cap stocks. However, you may find some differences when compared to an S&P 500 index fund.
Vanguard’s Large-Cap Index Fund Admiral Shares index fund uses the Spliced Large Cap Index as its benchmark, which includes 589 stocks.
This helps diversify your portfolio even more than with a S&P 500 index fund, while staying focused on large companies. Almost all the fund’s holdings are in US stocks and the fund’s median market cap is over $115 billion.
Vanguard’s Large-Cap Index Fund compares favorably with other funds in our list when measuring long terms performance.
$10,000 invested in 2009 would be worth over $35,000 10 years later, in 2019. Since its inception in 2004, the fund has returned nearly 9%, which includes the now infamous crash of 2008 to 2009.
SNXFX: Schwab 1000 Index Fund
Minimum investment: $3,000
Imagine a fund that lets you diversify your investment with 1000 different stocks. The Schwab 1000 Index Fund allows you to do that — and best of all, a low expense ratio keeps safety affordable.
You'll pay only 0.05% for the convenience of diversifying your portfolio with 1000 companies, a group that has rewarded investors with a year-to-date return of more than 27%.
Markets don't always go straight up, so you'll also earn a 1.7% yield while the market takes a rest.
Historic performance for the the Schwab 1000 Index Fund lags slightly behind the S&P 500 index but ahead of the large blend category.
In exchange, you'll get more diversification than you'll find with an S&P index fund because you own twice as many companies.
Expect tech stocks, healthcare stocks, and financials to make up the largest sectors in the fund, although you'll gain exposure to nearly every other sector as well.
FSKAX: Fidelity Total Market Index Fund
Minimum investment: No minimum
Schwab and Vanguard aren’t the only options if you want a high performance and low cost index fund. Fidelity offers one of the best options on our list with the Fidelity Total Market Index Fund.
As the fund’s name suggests, you'll be investing in the entire US market, much like with SWTSX from Schwab or VTSAX from Vanguard. However, Fidelity brings an advantage in the form of lower management costs.
You'll pay only 0.015% while owning a diversified portfolio of stocks that represent the whole US market, and arguably much of the US economy.
Fidelity’s Total Market Index Fund tracks the Dow Jones US Total Stock Market Index and has been rewarding investors since 1997.
Viewing 10-year performance, the fund’s returns parallel those of other total market index fund, although Fidelity does it with a lower expense ratio.
Expect the fund's holdings to include the brand names we all know and use, like Microsoft, Apple, and Amazon, which recently became the world's largest retailer, surpassing Walmart, which you’ll also own.
Biggest players in the index funds industry
When it comes to assets under management, 3 big players dominate the market, each with trillions of dollars invested through a wide array of funds.
Based in NY, BlackRock may not be as well known to some investors as its popular brand of ETFs: iShares. In addition to the company’s 350+ ETFs, BlackRock also offers more than 550 mutual funds. This includes nearly 90 index funds.
The largest of these index funds, BlackRock’s iShares S&P 500 Index Fund, boasts a 10-year total average return of more than 13% with a 0.10% expense ratio.
If you’re willing to pay a bit more in expenses, BlackRock offers a number of attractive index fund options. To be fair, a 0.10% expense ratio isn't necessarily high, but it’s higher than some competitors.
Funds with an expense ratio higher than 0.05% didn't make our list.
Many investors would probably guess that Vanguard is the largest mutual fund company. Second to BlackRock’s $7 trillion in assets under management, Vanguard manages $5.6 trillion for investors.
Founded in 1975, Vanguard built its name on low cost mutual funds. Vanguard’s structure is unique among investment companies.
The company itself is owned by the fund shareholders, a structure that puts the needs of the clients at the forefront. This structure also helps ensure that the Vanguard we all love today will still be focused on its client-owners well into the future.
In an industry where mergers and acquisitions are common, it's hard to put a price on stability.
Back in the mid-70s, Vanguard’s assets under management were just $1.7 billion. The company’s introduction of the first index fund helped fuel its staggering growth to $5.6 trillion managed for investors in 2019.
Known for efficiency and fund selection, Vanguard offers nearly 200 US mutual funds with an average expense ratio of just 0.10%.
As another brand known in most households, Charles Schwab offers mutual funds and investment management with a personalized touch.
The company boasts more than 300 branches throughout the US for those who prefer to work with a broker in person. Of course, you can also invest online.
Competition often benefits consumers (or investors in this case) and Schwab has turned up the heat recently, reducing fees on many of their funds.
While Vanguard has long held the title for the cheapest index funds overall, Schwab may be a more efficient option in many cases.
Schwab offers more than index funds, however. You'll find funds to match nearly any investment interest, including an expensive list of socially conscious funds.
Recent acquisitions make Schwab the 3rd largest mutual fund company with $3.7 trillion under management.
Index funds FAQs
Why do people invest in index funds?
Index funds offer a simple way to diversify your investment within a sector or across a broad part of the market. When compared with managed funds, index funds often perform better while also enjoying a lower fee structure.
How much do I need to start investing in index funds?
Minimum investments vary by fund. The minimum investment for our list range from no minimum or $1 up to $3,000.
Do index funds have fees?
Index funds have fees which are expressed as an expense ratio. Trading and management costs combined for index funds are often well below 1.0%, which make index funds an affordable option for long-term investing.
Do you get dividends with index funds?
Many index funds pay dividends but not all. Generally, if the assets held by the index fund pay a dividend, then the fund may also pay a dividend. However, it’s important to note that dividends aren’t always the main focus of an index fund and dividends aren’t guaranteed.
How often do index funds rebalance?
Because index funds track an index, less rebalancing is needed. Often, rebalancing frequency depends on when the index itself rebalances. For example, the S&P 500 index rebalances quarterly, so index funds that track that index follow a similar pattern.
How long should you hold index funds?
How long you hold any investment depends on your investment goals. Most investors enjoy better performance through buying and holding for an extended period, which could be several years or even decades.
Are index funds safe?
Nearly all investments can lose value. However, index funds offer built-in safety because your investment isn’t in one stock. Instead, you’ll often invest in hundreds of companies or assets through the fund. This reduces your risk sharply when compared to making individual investments.
Can you lose money in an index fund?
Yes, the value of your investment can go down in an index fund. However, if you hold your shares or add to your position during market downswings, you’ll often recoup your losses and continue building over time.
If you’re close to retirement, consider moving some of your assets into investments that can preserve your portfolio earnings.
Are index funds taxable?
When investing in index funds, you’ll pay taxes on dividends and capital gains. Some bond-focused funds can minimize your tax liability.
If you’re investing in a traditional IRA or 401k, you’re only taxed on the money you withdraw. In this case, you won’t pay taxes on dividends. Instead of paying capital gains, you’ll pay taxes on distributions.
Investing can bring big risks, especially if you're investing in individual stocks or sectors. One bit of news can rock an entire sector, causing additional volatility in focused portfolios.
Investing in individual stocks also requires knowing when to get in and went to get out. But that isn't always the biggest challenge. Often, investing can become emotional, causing investors to buy or sell at the wrong time.
Index investing answers these concerns by spreading investment risk across hundreds or even thousands of stocks. It also removes much of the emotion from the equation because you’re investing in a blended cross section of the broad economy.
Rather than stock-picking and timing trades, investing becomes a binary decision. You're in or you're out. Past performance shows that staying in is the safest bet for most investors and index funds offer an affordable way to build wealth with an eye toward safety.