Lucy Lambriex / Getty Images Here we share the best mutual fund companies and discount brokers to buy index funds, plus a few financial firms that charge too much for index funds (and should therefore be avoided).
Mutual Fund Companies That Offer the Best Index Funds
The best index funds are generally those with two primary qualities: low expense ratios and a system of tight index tracking. Index funds are passively managed investments. They are designed to replicate the performance of a target index. You should look for low operational costs and fund performance that is nearly identical to the index. Here are four of the best companies where investors can get the best index funds:
Best Fund Companies for Index Funds: Vanguard Investments
Vanguard Investments is among the best and favorite of mutual fund companies for the do-it-yourself crowd. John C. “Jack” Bogle formed Vanguard with the idea that low-cost index funds can provide superior returns for the long-term investor. The late Bogle effectively and consistently demonstrated to the investment community that it is foolish to attempt an actively managed approach when a simple, low-cost passively managed index fund strategy can provide superior returns. The firm also has options for several exchange-traded funds (ETFs), which are similar to mutual funds. Vanguard is the first mutual fund company to offer a publicly traded index fund, which is today called Vanguard 500 Index (VFINX). It also has the biggest stock mutual fund in the world, Vanguard Total Stock Market Index (VTSMX) and the biggest bond mutual fund in the world, Vanguard Total Bond Market Index (VBMFX). With the largest selection of low-cost, no-load index funds, Vanguard is the largest and best provider of index mutual funds in the world. Other Vanguard funds include:
An index fund that combines stocks and bonds—Vanguard Balanced Index (VBNIX) A sector index fund that focuses on energy—Vanguard Energy (VGENX) A healthcare sector fund—Vanguard Health Care (VGHCX)
VTSMX, VFINX, VBMFX, and VBINX are closed to new investors. However, you can invest in lower-cost Admiral Shares of these funds that carry a minimum investment of $3,000. Vanguard also suggests ETFs in lieu of the first three that follow the same investing strategy. Here are the alternatives to these funds suggested by Vanguard: As a mutual fund company and brokerage firm, Fidelity has risen on the backs of some of their widely held actively managed mutual funds, such as Fidelity Contrafund (FCNTX), managed by William Danoff and Fidelity Magellan (FMAGX), made famous in the 1980s by the legendary fund manager Peter Lynch. Although Fidelity specializes in actively managed mutual funds, they have several of the cheapest high quality index funds on the market. For example, Fidelity 500 Index (FXAIX) has an expense ratio of just 0.015%, which is lower than many other funds. Because of the lower expenses, over time, FXAIX would be expected to edge out funds with higher expense ratios in terms of return to the investor. In general, the lower the internal expenses to operate a mutual fund, the more return to the investor. Fidelity also has several other outstanding index funds, such as:
Fidelity U.S. Bond Index (FYNAX) Fidelity Mid Cap Enhanced Index (FMEIX) Fidelity Small Cap Index (FCPEX) Fidelity Total Market Index (FSKAK)
Fidelity’s index funds have no minimum to get started, making these funds a great option for younger investors.
Best Fund Companies for Index Funds: Charles Schwab
Also known simply as Schwab and named after its founder, Charles Schwab Corporation is a discount brokerage firm offering mutual funds and financial services to individual investors. Founded in 1971 under the name First Commander Corporation, Schwab began offering brokerage services to individuals at a discount in 1975. Before that time, investing in the stock market was considered primarily as a wealthy person’s privilege. Schwab is a discount brokerage firm that also has its line of mutual funds. Schwab index funds are some of the cheapest and best available on the market. Among their best index funds are Schwab S&P 500 Index (SWPPX) and Schwab Total Stock Market Index (SWTSX), both of which have rock bottom expense ratios of just 0.02% and 0.03%, respectively. Compare that to the industry average of 0.52% for equity index funds Both funds have no minimum initial investment.
Finding the Best Index Funds at Discount Brokerage Firms
Many online brokers that are accessible to everyday investors are often referred to as discount brokers. Most people don’t think of brokerage firms when they think of mutual funds. Instead, they think of some of the best no-load mutual fund companies, such as Vanguard, Fidelity, and T. Rowe Price—and rightly so. Discount online brokers that offer a wide selection of mutual funds—although not their own—are E*TRADE and TD Ameritrade. Charles Schwab is also a discount broker. Keep in mind that brokerage firms and mutual fund companies often charge transaction fees when buying or selling shares of funds from other companies. These fees are usually low, averaging around $10 per trade on the lower end. Discount brokers often offer thousands of mutual funds, but be sure to begin your search by looking through their respective choices of “no-transaction-fee” (NTF) funds.
Watch for Index Funds That Are Too Expensive
Index funds are passively managed. This means the management team simply buys the securities found in the index (and, therefore, doesn’t need to do any research). Very little trading is needed. This lack of trading naturally keeps the internal costs of operating the index funds very low. As a result, there is no good reason to charge expenses to investors more than the average for index funds, which is about 0.52%. Here are some of the most expensive S&P 500 Index funds:
Invesco S&P 500 Index Fund (SPICX) C Shares: 1.31% expense ratioWells Fargo Index (WFINX) C Shares: 1.20% expense ratio
Note that these funds may have other share classes that are less expensive than the ones listed here. The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
