One of the things that has caused the ETF industry to explode at the expense of the mutual fund industry over the past several years has been cost. While overall costs have come down, many mutual funds are still plagued with expense ratios that exceed 1% of assets annually. As study after study continues to show most actively-managed funds struggling to outperform their benchmarks over time, investors have found great appeal in simply matching an index for a minimal fee.
According to ETF Action, there are more than 230 ETFs that charge 0.1% of less annually. That means you can get a fully diversified portfolio for next to nothing. On top of that, several financial services platforms, including Vanguard, allow you trade most ETFs commission-free.
If you're looking to build a long-term buy-and-hold portfolio (or even if you're just looking for cheap exposure to specific segment of the market), these funds are ideal.
Once you get down to single digit expense ratios, the differences are almost immaterial, but why not get every basis point you can get? If you're looking for a list of the cheapest of the cheap, you've come to the right place.
For the purposes of this exercise, I'll look at the top low-cost picks in the following categories:
- Total U.S. Stock Market
- Developed Markets
- Emerging Markets
- U.S. Government Bonds
- U.S. Corporate Bonds
- Total U.S. Bond Market
- Real Estate
It would be easy to come up with a couple dozen more categories covering regions, sectors and themes, but most broadly diversified portfolios target these groups for the core of their investments, so we'll just stick with these.
In each of the categories, I'll highlight the two lease expensive offerings. In some cases, there will be ties, of course, so I'll just mention one of the larger ETFs within the group.
The bottom line is that any of the ETFs mentioned here would be great choices for building the core of your ETF portfolio. They're large, they're liquid, they're cheap and they're well diversified.
- SoFi Select 500 ETF (SFY) - 0.00%
- iShares Core S&P 500 ETF (IVV) - 0.03%
SFY is ostensibly and S&P 500 index fund, although it officially targets the 500 largest publicly-traded U.S. companies. Its expense ratio is listed at 0.19%, but will be waiving that fee through at least June 30, 2021. The complete fee waiver hasn't necessarily been a huge attraction as the fund still has less than $300 million in assets, but I expect the fee waiver will be extended.
IVV is just one of a handful of large-cap focused ETFs that charge under 5 basis points annually.
- SoFi Next 500 ETF (SFYX) - 0.00%
- Vanguard Mid-Cap ETF (VO) - 0.04%
SFYX essentially does the exact same thing as SFY except it targets companies #501-1000 in the list of largest U.S. names. The same fee waiver also applies here.
According to ETF Action, VO is one of four mid-cap funds with an expense ratio of 0.04%, although it's easily the largest with more than $46 billion in total assets.
- Schwab U.S. Small-Cap ETF (SCHA) - 0.04%
- BNY Mellon U.S. Small-Cap Core Equity ETF (BKSE) - 0.04%
BNY Mellon isn't a household name within the ETF industry, but it's tried to make a splash here competing on ultra-low fees with its fund that just turned one year old. With about $130 million in assets, it hasn't gone completely unnoticed, but it's struggling to take market share away from the big three issuers - Vanguard, BlackRock and State Street.
Schwab can compete on cost within just about any of these categories and it's broad small-cap focused fund is tied for the cheapest in this space.
Total U.S. Stock Market
- JPMorgan BetaBuilders U.S. Equity ETF (BBUS) - 0.02%
- Vanguard Total Stock Market ETF (VTI) - 0.03%
The fact that Vanguard shows up here shouldn't be a surprise. Seeing JPMorgan's name on the cheapest total market ETF might be though for those who don't closely follow the ETF industry. The company has become a top 10 ETF issuer and has done it largely on the back of cost and transferring existing client assets over to their funds.
In total, there are a dozen funds in this category with expense ratios of 0.05% or lower.
- SPDR Portfolio Developed World ex. U.S. ETF (SPDW) - 0.04%
- Vanguard FTSE Developed Markets ETF (VEA) - 0.05%
Investing internationally has generally been synonymous with higher fees, but the biggest issuers have managed to offer investors foreign market exposure with the same razor-thin fees.
VEA is easily the largest developed markets equity ETF here even though it's a scant one basis point more expensive with SPDW coming in at a distant #2.
- Vanguard FTSE Emerging Markets ETF (VWO) - 0.10%
- iShares Core MSCI Emerging Markets ETF (IEMG) - 0.11%
VWO and the iShares Core MSCI Emerging Markets ETF (IEMG) are nearly identical in size with $78 billion in assets a piece as well as fees.
IEMG has (nearly) a twin ETF in the iShares MSCI Emerging Markets ETF (EEM). It, however, comes with an expense ratio of 0.70% and is not worth considering in my opinion.
U.S. Government Bonds
- Schwab Intermediate-Term U.S. Treasury ETF (SCHR) - 0.05%
- iShares 0-3 Month Treasury Bond ETF (SGOV) - 0.03%
There are quite a few ultra-low cost ETFs focused on Treasuries. SGOV is one of the newest government bond ETF on the scene and its net 0.03% expense ratio (after a modest fee waiver that will continue through at least 2022) earns it the title of cheapest in this category.
I highlighted SCHR here as sort of a middle of the road Treasury ETF option in terms of maturities, but there are roughly a half dozen funds focused on long-, mid- and short-term Treasuries that come with 0.05% expense ratios, so your choice really depends on which risk exposure you're looking for.
U.S. Corporate Bonds
- Vanguard Total Corporate Bond ETF (VTC) - 0.05%
- Schwab 5-10 Year Corporate Bond ETF (SCHI) - 0.05%
Again, I'll point out a broad total bond market ETF and one focused on a specific maturity range. As with the government bond category, there are a number of different maturity choices at the same fee level depending on your preference.
It's worth noting that all of the cheapest corporate bond ETFs focus on investment-grade notes. The cheapest high yield bond ETF is the SPDR Portfolio High Yield Bond ETF (SPHY) with an expense ratio of 0.10%.
Total U.S. Bond Market
- BNY Mellon Core Bond ETF (BKAG) - 0.00%
- Vanguard Total Bond Market ETF (BND) - 0.04%
BNY Mellon can claim the only bond ETF in the marketplace with an expense ratio of 0.00%. The one unique aspect of this ETF is that the prospectus actually lists the expense ratio at 0.00%. There's no fee waiver involved, so this could essentially be a free investment option forever. Being a broad bond market ETF, it invests about 2/3 of assets in government & agency bonds and the remaining 1/3 in corporates.
BND is the easy choice for ultra-cheap bond exposure, but the Invesco PureBeta U.S. Aggregate Bond ETF (PBND) is a way-under-the-radar option at 0.05% annually.
- Schwab U.S. REIT ETF (SCHH) - 0.07%
- iShares Core U.S. REIT ETF (USRT) - 0.08%
The Vanguard Real Estate ETF (VNQ) owns about half of the total assets currently invested in real estate ETFs and is usually the fund quoted as a proxy for REITs, but it's not the cheapest. In fact, it doesn't even make the top 5.
SCHH and USRT own the top 2 spots. SCHH is just one of the ETFs that leads on fees and also has a nice broad composition, which makes it an ideal choice for real estate exposure.
- Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (BCI) - 0.25%
- GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) - 0.25%
The cheapest fund is this category really depends on whether you think straight gold funds belong in this category. For the purposes of this exercise, I'm only going to look at more broadly diversified products.
That puts BCI and COMB at the top of the list even though they're among the smaller offerings in this space. COMB is about 40% metals, 26% agriculture, 24% energy and 10% other, while BCI is about 31% metals, 30% agriculture, 32% energy and 7% other. The fact that neither generates a K-1 makes things easier at tax time.
- Schwab U.S. Tips ETF (SCHP) - 0.05%
- Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) - 0.05%
The TIPS ETF market overall has swollen to more than $70 billion. Along with SCHP and VTIP, the iShares 0-5 Year TIPS Bond ETF (STIP) also charges just 0.05%.