Low-cost exchange-traded funds (ETF) offer investors a cost-effective way to get diversified exposure across various asset classes and investment themes. That’s a significant plus because, as we will see in a moment, it’s not always easy for the average investor to get direct exposure to these asset classes and themes. In addition, ETFs offer a level of diversification that would be challenging for retail investors to replicate themselves.
Best low-cost ETFs to buy now
This list is intended to give investors some new ideas they might need to be more familiar with. In addition, I’ve included a range of ETFs to suit the needs of different investors and what they might be looking for to fill a gap in their portfolio.
All the low-cost ETFs listed are from credible investment companies and have a good amount of assets under management (AUM). Of course, plenty of ETFs have a small amount of AUM and/or a low market price, but that’s not what makes an ETF cheap. Instead, investors should focus on something called the expense ratio.
ETFs can be actively or passively managed, but usually, the latter have far smaller expense ratios or ER (management fees divided by the ETF’s assets). Don’t underestimate the importance of a low expense ratio because, over time, it can have a huge impact on returns. In case you are wondering, the difference between return and total return is that the latter assumes reinvestment of dividends – an important distinction I will get into later.
| ETF | Expense Ratio | Net Assets | 10 Year Return | 10 Year Total Return | Characteristic |
|---|---|---|---|---|---|
| Vanguard S & P 500 ETF (NYSEMKT:VOO) | 0.03% | $804 billion | 165% | 220% | Very closely tracks the S & P 500 index |
| Vanguard Dividend Appreciaton ETF (NYSEMKT:VIG) | 0.06% | $77.7 billion | 139% | 191% | Designed to track the S & P 500 Dividend Growers Index |
| Vanguard Intermediate-Term Corporate Bond Index Fund (NYSEMKT:VCIT) | 0.04% | $41.1 billion | (9.80%) | 26% | Designed to track the Bloomberg U.S. 5–10 Year Corporate Bond Index. |
| Invesco DB Commodity Index Tracking Fund (NYSEMKT:DBC) | 0.87% | $2.17 billion | (7.80%) | (4.50%) | Gives exposure to a broad range of commodities |
| VanEck Gold Miners ETF (NYSEMKT:GDX) | 0.51% | $14.1 billion | 16% | 27% | Designed to track the NYSE Arca Gold Miners Index |
1. Vanguard S&P 500 ETF
This ETF tracks and correlates closely to the benchmark S&P 500 index. As such, it’s an excellent low-cost way to park money if you are bullish on the market overall and aren't inclined to pick individual stocks or sector ETFs. It’s a highly liquid instrument, so investors can dive in and out and put money to work as they see fit in their portfolio.
2. Vanguard Dividend Appreciation, a cheap dividend ETF
Investors who subscribe to the theory that companies that are growing their dividends tend to produce better returns will like this ETF. It aims to track the S&P 500 Dividend Growers Index. The index includes U.S. stocks that have increased their dividends for at least 10 years but excludes the top 25% of companies with the highest dividend yield. The idea is to avoid low-growth (and low dividend growth) cash cow-type companies in favor of companies that are growing earnings and dividends over time.
As you can see in the table above, reinvesting dividends (total return figure) makes a significant difference. While the strategy did not outperform simply buying the S&P 500 (using the ETF above), there’s no reason why it won’t work in the coming decade.
3. Vanguard Intermediate-Term Corporate Bond Index Fund
It’s difficult for retail investors to get diversified exposure to investment-grade corporate bonds. Still, this low-cost Vanguard offering lets them do that. The ETF tracks the performance of the Bloomberg U.S. 5–10 Year Corporate Bond Index. It’s an index of U.S. investment-grade corporate bonds with debt maturities between five and 10 years.
Although the performance outlined in the table above is distinctly underwhelming, it’s essential to recognize that different asset classes will generate varied returns over changing market conditions. For example, as market interest rates rise, corporate bond prices tend to fall because investors demand higher yields from bonds.
However, the reverse tends to be true: If market interest rates fall, bond prices rise. So, if you think the rate-hiking cycle is coming to a close and rates are headed lower, then this relatively safe corporate bond ETF is worth picking up.
4. Invesco DB Commodity Index Tracking Fund
Commodities are another asset class that’s not always easy to get diversified exposure to. That’s why looking at Invesco’s ETF tracking the DBIQ Opt Yield Diversified Comm Index makes sense. In plain English, the ETF invests in a basket of commodity futures.
Energy looms large in this ETF (more than 45% of holdings are in gasoline, crude, and heating oil), but gold, sugar, soybeans, corn, copper, and zinc contribute more than 5% each, respectively, closely followed by zinc and aluminum.
The ETF’s performance over the last decade is unimpressive, but that comes down to coming up against a difficult comparison with energy prices a decade ago. That said, the ETF’s 120% return over the last three years (commodities have soared) has trumped the S&P 500 total return of 55% over the same period. Moreover, if you want exposure to commodities to hedge some risk elsewhere in your portfolio, then this ETF is a smart buy.
5. VanEck Gold Miners ETF
Finally, for investors worried about the direction of the global economy or who just want to diversify with a noncorrelated asset class, it’s worth looking at a gold ETF. In this case, the VanEck gold miners ETF. It invests in a portfolio of the largest gold mining companies. Given that they tend to be priced in line with their assets (gold reserves), the ETF offers upside exposure to the price of gold.
While the ETF may seem a bit expensive (in terms of expense ratio) compared to other gold ETFs, it invests in the miners themselves and so is backed by a physical asset. As such, buying into it eliminates the worry over whether the ETF holds physical gold, merely a derivative in gold, or a combination of the two.
