Low Cost Index Funds — Finding the Lowest Cost S&P 500 Index Mutual Funds Posted By : The Skilled Investor
For a better mutual fund and ETF investment strategy, focus on very low cost, broad market, passive index mutual funds and ETFs. They cost less and get the broad market return — whatever that will be — before costs. They narrow the range of investment portfolio outcomes, and therefore they reduce the risk to your long-term personal financial plan. They take far less time to manage personally. Furthermore, extensive financial research has shown clearly and overwhelmingly that a passive, low cost index strategy for individual investors tends to be superior from a risk-adjusted, after-tax, and net returns standpoint.
Unfortunately, lately, the index fund investment space has become a minefield for individual investors. Given the growing popularity of index fund investing, many new supposed “index” mutual fund and ETF products have been introduced to the market that may not necessarily serve the interests of passive, buy-and-hold individual investors. Some of the index investment land mines out there are high index fund costs, active “index” management, and new indexing definitions and concepts that stray from the original asset-weighted concept that has served individual investors so well for several decades.
Measured by invested assets, the S&P 500 index is the most common index fund benchmark in the U.S. The S&P 500 tracks about 75% of publicly traded U.S. equity market asset value. You might think that you can pick any old S&P500 benchmarked index fund or ETF and thereby adopt a passive, low cost, broad market index strategy. Nope, sorry. Life just never seems to be that easy.
The dominant issue with S & P 500 index mutual funds and ETF funds is that fees charged by securities industry firms are all over the map from reasonably low to shockingly high. If you are not careful, there is even one S & P 500 index fund out there that will charge you 2.71% annually for management fees and 12b-1 investment sales fees combined.
You might ask, what is the value added for such high fees, when you can purchase S&P 500 index mutual funds directly from other fund families at just a .1% annual management fee with no sales charges? Well, there really is no value-added. None. Zip. Nada. If you are naive enough to pay higher investment costs for an index funds, then these ridiculously high fees are just a wealth transfer from you to the industry that repeatedly bleeds your personal investment portfolio year after year.
So, how can you find low cost S&P 500 index mutual funds? There are a couple ways. First, you could read fund screening articles by The Skilled Investor: “Selecting Investment Funds — Mutual Funds and ETFs.” The Skilled Investor also suggests using the IndexUniverse.com and the Morningstar.com automated on-line fund screeners to screen funds, because they are free to use, and they have relatively current and comprehensive mutual fund and ETF databases. I have written articles that tell you how to use these fund screeners.
Get educated and get smart about selecting mutual funds and ETFs. Picking them just because they have 4 star and 5 star ratings and a nice historical performance graph usually leads to lousy, sub-par results. Historical performance is just industry marketing bait for naive, performance chasing investors, who will most often arrive at the party too late.
Second, you can read this research article, “S&P 500 Index Mutual Funds,” by John A. Haslem, H. Kent Baker, and David M. Smith published in the March/April 2007 Journal of Indexes (pages 34-38). Haslem, Baker, and Smith analyzed the investment expenses of S&P500 index mutual funds and found a very wide dispersion of management fees and total expense ratios.
Without all their research details, which you can read yourself, Haslem, et.al. simply found that higher expenses just lowered investors’ net returns. They grouped S & P 500 index funds by expense groupings from low to high, i.e. standard deviations around the average expense ratio. They reported a list of twenty-five retail and institutional index mutual funds with lower costs.
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Larry Russell is the Editor and Publisher of The Skilled Investor website and The Skilled Investor’s Financial Planning Blog. With objective and scientific financial information, I help you to make better decisions.
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