Best Index Funds With Lowest Expense Ratios for Long-Term Growth

Understanding Index Fund Expense Ratios and Their Impact on Long-Term Returns

When building a portfolio for long-term growth, selecting index funds with the lowest expense ratios should be a top priority for cost-conscious investors. The best index funds combine broad market exposure with minimal fees, allowing more of your money to compound over time. Even a seemingly small difference in expense ratios—0.03% versus 0.20%—can translate to thousands of dollars in savings over decades of investing.

Expense ratios represent the annual fee that funds charge investors, expressed as a percentage of assets. For example, a fund with a 0.10% expense ratio charges $10 annually for every $10,000 invested. While this might seem negligible in the short term, these fees compound just like your investments do—except they work against you. According to Morningstar research, funds with lower expense ratios consistently outperform their higher-cost counterparts in the same category over long time horizons.

Top 5 S&P 500 Index Funds With Rock-Bottom Expense Ratios

The S&P 500 index represents the cornerstone of many long-term investment portfolios, tracking the performance of 500 large U.S. companies. These funds offer instant diversification across America's most established businesses and have historically delivered average annual returns of approximately 10% over the long run. The best index funds in this category combine this robust performance potential with extraordinarily low costs.

When comparing the best S&P 500 index funds, the differences in expense ratios might appear minimal, but they remain significant for long-term investors. The following funds represent the most cost-efficient options available in today's market, all with expense ratios under 0.05%:

• Fidelity ZERO Large Cap Index (FNILX): 0.00% expense ratio, $0 minimum investment
• Vanguard S&P 500 ETF (VOO): 0.03% expense ratio, superior tracking precision
• iShares Core S&P 500 ETF (IVV): 0.03% expense ratio, high liquidity
• Schwab S&P 500 Index Fund (SWPPX): 0.02% expense ratio, $0 minimum investment
• SPDR S&P 500 ETF Trust (SPY): 0.0945% expense ratio, highest trading volume

Best Total Market Index Funds for Complete U.S. Equity Exposure

While S&P 500 funds focus on large-cap stocks, total market index funds offer even broader diversification by including mid-cap and small-cap companies. These funds provide exposure to essentially the entire U.S. equity market, which can potentially enhance long-term returns while maintaining a low-cost structure. The best index funds in this category track indices like the CRSP US Total Market Index or the Russell 3000.

Total market funds are ideal for investors seeking a one-fund solution for domestic equity exposure. They eliminate the need to balance multiple funds across different market capitalizations, simplifying portfolio management while maintaining comprehensive market coverage. Here are the top options with the lowest expense ratios:

• Fidelity ZERO Total Market Index Fund (FZROX): 0.00% expense ratio, no minimum investment requirement
• Vanguard Total Stock Market ETF (VTI): 0.03% expense ratio, tracks CRSP US Total Market Index
• Schwab US Broad Market ETF (SCHB): 0.03% expense ratio, tracks Dow Jones U.S. Broad Stock Market Index
• iShares Core S&P Total U.S. Stock Market ETF (ITOT): 0.03% expense ratio, over 3,500 holdings

Why Total Market Funds May Outperform S&P 500 Funds in Certain Market Cycles

Historically, small-cap stocks have outperformed large-cap stocks over very long time horizons, though with higher volatility. Total market index funds capture this potential outperformance while maintaining lower costs than actively managed small-cap funds. During periods when smaller companies outperform, total market funds may deliver superior returns compared to S&P 500 funds.

However, this outperformance isn't guaranteed in every market cycle. Between 2010 and 2020, for instance, large-cap stocks generally outperformed their smaller counterparts, giving S&P 500 funds an edge. The best approach for many long-term investors may be owning both types of funds or simply choosing a total market fund for simplicity.

International Index Funds With Competitive Expense Ratios

Geographic diversification represents another crucial element of a well-rounded long-term portfolio. International index funds provide exposure to developed and emerging markets outside the United States, potentially reducing overall portfolio volatility while capturing global growth opportunities. The best index funds in this category maintain competitive expense ratios despite the higher costs typically associated with international investing.

While international funds generally have slightly higher expense ratios than their domestic counterparts, several options still offer remarkably low costs. These funds track indices like the FTSE Global All Cap ex US Index or the MSCI EAFE Index, providing broad international exposure:

• Vanguard Total International Stock ETF (VXUS): 0.08% expense ratio, comprehensive global coverage excluding U.S.
• Fidelity International Index Fund (FSPSX): 0.035% expense ratio, focuses on developed markets
• Schwab International Index Fund (SWISX): 0.06% expense ratio, developed markets excluding U.S.
• iShares Core MSCI Total International Stock ETF (IXUS): 0.09% expense ratio, includes small-cap international stocks

Bond Index Funds: Fixed-Income Options With Minimal Fees

A balanced long-term portfolio typically includes bond allocation for stability and income. Bond index funds offer broad fixed-income exposure with the same cost advantages as their equity counterparts. The best index funds in this category maintain low expense ratios while providing diversification across different bond types, maturities, and credit qualities.

When selecting bond index funds, investors should consider not only expense ratios but also factors like duration (interest rate sensitivity), credit quality, and tax implications. Here are the top low-cost options:

• Vanguard Total Bond Market ETF (BND): 0.035% expense ratio, tracks the Bloomberg U.S. Aggregate Bond Index
• Schwab U.S. Aggregate Bond ETF (SCHZ): 0.04% expense ratio, comprehensive U.S. bond market exposure
• Fidelity U.S. Bond Index Fund (FXNAX): 0.025% expense ratio, $0 minimum investment
• iShares Core U.S. Aggregate Bond ETF (AGG): 0.04% expense ratio, high liquidity

Tax-Efficient Bond Index Funds for Taxable Accounts

For investments held in taxable accounts, municipal bond index funds offer tax advantages that can enhance after-tax returns. These funds hold bonds issued by state and local governments, with interest typically exempt from federal income tax. While their pre-tax yields may appear lower than comparable taxable bonds, their tax-equivalent yield can be significantly higher for investors in higher tax brackets.

The following municipal bond index funds maintain competitive expense ratios while providing tax-efficient income:

• Vanguard Tax-Exempt Bond ETF (VTEB): 0.05% expense ratio, federal tax-exempt income
• iShares National Muni Bond ETF (MUB): 0.07% expense ratio, broad municipal bond exposure
• Schwab Municipal Bond ETF (SCMB): 0.05% expense ratio, investment-grade municipal securities

Building a Complete Portfolio With Low-Cost Index Funds

Creating a diversified portfolio using the best index funds with the lowest expense ratios involves strategic allocation across asset classes. A typical long-term portfolio might include U.S. stocks, international stocks, and bonds in proportions appropriate to your investment timeline and risk tolerance. The "three-fund portfolio" approach popularized by Bogleheads (followers of Vanguard founder John Bogle's investment philosophy) exemplifies this strategy.

For example, a moderately aggressive investor might allocate 60% to a total U.S. market fund, 20% to an international index fund, and 20% to a total bond market fund. This simple yet effective approach provides broad diversification while minimizing costs. As you approach your investment goal, gradually increasing the bond allocation can reduce volatility and preserve capital.

Common Questions About Low-Cost Index Funds

Are the absolute lowest expense ratios always the best choice?

While expense ratios significantly impact long-term returns, they shouldn't be the only consideration. Tracking error (how closely the fund follows its index), liquidity, and tax efficiency also matter. Sometimes paying a slightly higher expense ratio (e.g., 0.04% vs. 0.03%) makes sense if the fund offers better execution, tighter bid-ask spreads, or superior tax management. However, the differences should be minimal—there's rarely justification for paying substantially higher fees for basic index exposure.

How do mutual fund expense ratios compare to ETF expense ratios?

Historically, ETFs (exchange-traded funds) have offered lower expense ratios than their mutual fund counterparts due to their more efficient structure. However, major fund providers now offer mutual funds with expense ratios matching or even beating their ETF equivalents. Fidelity's ZERO index funds, with absolutely no expense ratios, represent the pinnacle of this trend. For long-term investors who don't need intraday trading capability, these ultra-low-cost mutual funds can be excellent choices.

Do index fund expense ratios change over time?

Yes, expense ratios typically trend downward over time as funds grow in assets and competition intensifies. What was considered a low-cost fund a decade ago (0.15-0.20%) would now be relatively expensive compared to today's options (0.03-0.05%). This competitive pressure benefits investors, as fund companies continually reduce fees to attract and retain assets. When building a long-term portfolio, selecting fund providers with a consistent history of fee reductions can provide additional savings over time.

Conclusion: Maximizing Returns Through Fee Minimization

The best index funds with the lowest expense ratios provide the foundation for successful long-term investing. By minimizing costs, investors can capture more of the market's returns and significantly enhance their wealth accumulation over decades. The difference between a 0.03% and a 0.30% expense ratio might seem trivial in the short term, but it can translate to tens of thousands of dollars over a typical investment lifetime.

Major fund providers like Vanguard, Fidelity, Schwab, and BlackRock (iShares) continue to drive expense ratios lower through fierce competition, creating exceptional value for investors. By focusing on these low-cost leaders and maintaining a disciplined, diversified approach, investors can build wealth efficiently while avoiding the performance drag of excessive fees. Remember that while you cannot control market returns, you can control costs—making expense ratio optimization one of the most reliable ways to improve investment outcomes.