An index mutual fund is a type of fund that invests all, or nearly all, of its total assets in securities comprising its underlying index. Index funds use passive investment strategies and thus tend to have low turnover and low expense ratios.
Funds that implement indexing strategies require less portfolio management and active trading, which minimizes their operating fees. Index funds with low expense ratios are beneficial to long-term investors who seek to track indexes and gain exposure to select segments of the market over time.
Expense Ratios and Management Fees
Expense ratios and management fees are part of an ongoing debate waging passive funds against active funds in the marketplace. A growing number of index funds continue to be developed in the market including the evolution of smart beta index funds that seek to replicate customized indexes.
To date, the debate on the added value of active management versus the advantages of passively managed funds continues. Expense ratios are often one of the key factors that may sway investors to choose passive fund investments over active managers when seeking targeted investment options.
As of October 2020, the following three funds were among the lowest expense ratio mutual funds as reported by Morningstar. These funds were chosen based on expense ratio, retail investment availability, and broad market exposure.
1. The Fidelity 500 Index Fund (FXAIX)
The Fidelity 500 Index Fund (FXAIX) is an investor class fund marketed by Fidelity with a net expense ratio of 0.015%. The fund tracks the holdings and return of the S&P 500 Index. The fund invests at least 80% of its total assets in the S&P 500 Index. The fund requires no minimum investment. As of Oct. 19, 2020, it has a one-year return of 15.14% versus 16.53% for the S&P 500 Index.
2. The Vanguard Value Index Fund Investor Shares (VIVAX)
The Vanguard Value Index Fund Investor Shares fund is marketed by Vanguard. It tracks the holdings and performance of the CRSP U.S. Large Cap Value Index. The fund has a net expense ratio of 0.17%. It does require a minimum investment of $3,000. As of Oct. 19, 2020, the fund has a one-year return of -3.43%, as does the Index.
3. The Fidelity U.S. Bond Index Fund (FXNAX)
The Fidelity U.S. Bond Index Fund falls in Morningstar’s “Intermediate-Term Bond” category. The fund is focused on U.S. bond investments. It has an expense ratio of 0.025% and requires no minimum investment.
The fund invests at least 80% of its assets in bonds in the Bloomberg Barclays U.S. Aggregate Bond Index. As of Oct. 20, 2020, the one-year return is 7.06% versus 6.98% for the benchmark. The three-year return is 5.23% versus 5.24% for the benchmark.
The Bottom Line
These funds must be traded with their affiliated platform which is a factor that helps to keep the expense ratios down. The limited but easy access through the Fidelity and Vanguard trading platforms helps to limit many of the distribution and 12b-1 fees, keeping the expenses lower for investors.