3 Tips to Find Index Funds With Low Fees From a Wall Street Expert

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Keeping investing fees to a minimum helps you maximize returns. Save money on fees with three simple tips that will help you find low-cost index funds. 

Some people think that investing is all about making savvy stock picks. In reality, many successful investors aren’t picking stocks at all. They’re just buying all the stocks — or, if not all of them, at least a large basket of them. They do that by investing in index funds, which are funds that invest in an entire market index.

Case in point, financial influencer Vivian Tu used to be a trader for JPMorgan. Even with her professional investing experience, she says that she doesn’t invest in individual stocks. She puts her money in index funds.

The only small disadvantage of index funds is that they charge a fee, whereas you can trade stocks for free. However, index fund fees tend to be very cheap, especially if you pick the right ones. Tu recently shared a short on her channel, YourRichBFF, with advice on finding index funds with low fees. Here’s how to do it.

1. Decide where you want to invest

As mentioned earlier, an index fund invests your money in a specific market index. So, it makes sense to start by deciding which index, or indexes, you want for your portfolio.

For example, many people like to keep it simple by investing in the U.S. stock market as a whole. In that case, you could invest in what’s called a total stock market index fund.

Another similar option is an S&P 500 index fund. The S&P 500 is an index with 500 of the largest publicly traded companies in the United States. A total stock market fund is a bit more diversified, but the 500 largest companies make up a sizable portion of the stock market. That means total stock market funds and S&P 500 funds perform very similarly.

Those are just a few examples, and there are plenty of quality index funds available. Other options include real estate index funds, growth index funds more heavily weighted toward tech stocks, and dividend index funds with stocks that pay high dividends.

2. Pick out index funds from different investment companies

Once you know which index you want to invest in, start searching for index funds. In most cases, there will be several index funds available from various investment companies. For example, Fidelity might have one. Merrill Lynch may have another, and so on.

Make a list of the index funds that are of interest. If you already have a brokerage account, you may want to put any index funds it offers at the top of your list. Be open to others, though, in case the broker you use doesn’t have the best option.

3. Compare their expense ratios

To see how much each index fund charges, look for the expense ratio. That’s the percentage of your investment that the fund charges per year. Let’s say you have $10,000 invested in an index fund with a 0.1% expense ratio. That would cost you $10 per year.

Expense ratios vary depending on the index. For example, S&P 500 index funds usually have the lowest fees. That’s why it’s best to decide on an index first, and then pick out index funds and compare fees. It wouldn’t make sense to compare expense ratios on, say, S&P 500 index funds and NASDAQ-100 index funds. They cover different indexes and have different costs.

A lower expense ratio is generally better for the investor, so all things being equal, choose whichever will cost you the least. That being said, it really only matters if it’s a sizable difference. A 0.02% difference will amount to very little — $20 for every $100,000 invested, to put it in perspective. What’s most important is making sure that the index fund you choose is reasonably priced compared to the competition.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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