If you’re hunting for inexpensive mutual funds, you might prefer index funds, which track a particular index, such as the S&P 500. Not only do these funds provide broad market exposure, the managers don’t try to pick winning stocks. Thus, index funds usually have below-average expenses.
Among index funds, Vanguard’s are known for very low expense ratios. For example, Vanguard’s largest fund, Vanguard 500 Index, which tracks the S&P 500, charges investors a scant 0.18 percent per year while the average domestic stock fund charges 1.49 percent per year. Vanguard 500 Index has been so popular that rival Fidelity cut the fee on its Spartan 500 Index Fund to 0.10 percent last year, enhancing its competitive position.
In addition, index funds tend to have low turnover because the managers simply hold onto the companies in a given index. Low turnover means that these funds seldom realize taxable gains that must be passed through to shareholders. As a result, index funds may be very tax-efficient.