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Lower expense ratios can make a meaningful difference over long periods.
Passive ETFs generally offer cost advantages through index tracking.
Five ETFs offer ultra-low fees across different market segments.
Exchange-traded funds (ETFs) have grown rapidly into one of investors’ favorite ways to access the market. Their appeal comes from a combination of low costs, transparency, diversification, tax efficiency and innovative investment strategies. But when it comes to keeping more of your returns, one factor stands out — the expense ratio.
Of course, investors face other ETF-related costs, including trading commissions, bid/ask spreads, premiums or discounts to net asset value and tracking differences. Still, expense ratios are particularly important because they directly reduce an investor’s returns year after year. When two funds offer similar exposure and performance, the lower-cost option generally has an advantage.
Here’s a simple example. Suppose you invest $10,000 in two ETFs, one charging 0.10% and the other 0.50% annually. If both generate a 10% annual return, the lower-cost fund would grow to about $25,703 after 10 years compared with roughly $24,782 for the higher-cost fund.
The gap becomes even more striking over longer periods. After 30 years, the investment would grow to about $169,797 in the 0.10% ETF versus $152,203 in the 0.50% ETF. In other words, even a seemingly small difference in fees can compound into a meaningful amount over time.
Why & How Investors Should Pay Attention
The key point is that investors don't pay an expense ratio just once. The fee is charged every year, meaning its effect can compound over time. The longer the investment horizon, the greater the potential impact of even a modest fee difference.
That doesn't mean investors should automatically choose the ETF with the lowest expense ratio. A slightly more expensive ETF may offer a more effective strategy, better diversification, stronger liquidity or access to a specialized market that is difficult to replicate. The right approach is to compare costs alongside performance, holdings, liquidity, tracking quality and the fund's investment objective.
Still, when two ETFs provide similar exposure and have comparable performance, a lower expense ratio can give investors an important long-term advantage.
Passive ETFs Keep Costs Low
Passive ETFs generally come with lower expense ratios because they simply track an index rather than relying on active portfolio management. With less research, trading and management involved, these funds can keep operating costs low, allowing investors to retain more of their returns over the long term. This cost advantage is one of the key reasons passive ETFs have become so popular.
ETF Picks
Below we highlight five lowest-cost ETFs from five investing zones and charge pretty little in the current market environment.
S&P 500 – State Street SPDR Portfolio S&P 500 ETF (SPYM - Free Report) – Expense Ratio: 0.02%
The underlying S&P 500 Index is designed to measure the performance of the large-capitalization segment of the U.S. equity market. The fund charges 2 bps in fees and yields 1.01% annually. The fund’s top three holdings are NVIDIA (8.39%), Apple (7.07%) and Microsoft (5.58%).
Total Stock Market – Vanguard Morningstar Total Stock Market ETF (VTI - Free Report) – Expense Ratio: 0.03%
The underlying CRSP US Total Market Index represents nearly 100% of the U.S. investable equity market, covering nearly 4,000 constituents across mega, large, small and micro capitalizations. The fund charges 3 bps in fees and yields 1.04% annually. The fund’s top three holdings are NVIDIA (6.87%), Apple (6.30%) and Microsoft (5.10%).
Developed Markets – Vanguard FTSE Developed Markets Index Fund ETF Shares (VEA - Free Report) – Expense Ratio: 0.03%
The underlying FTSE Developed All Cap ex US Index is a market-capitalization-weighted index representing the performance of large, mid and small-cap companies in developed markets, excluding the United States. The fund charges 3 bps in fees and yields 2.40% annually. The fund’s top three holdings are Samsung (2.60%), SK Hynix (2.0%) and ASML Holding (1.95%).
Ex-United States – State Street SPDR Portfolio Developed World ex-US ETF (SPDW - Free Report) – Expense Ratio: 0.03%
The underlying S&P Developed Ex-U.S. BMI Index is a market-capitalization weighted index that defines and measures the investable universe of publicly traded companies domiciled in developed countries outside the United States. The fund charges 3 bps in fees and yields 3.0% annually. Japan, the United Kingdom and Canada take the top three spots in the fund.
Diversified U.S. Bonds – Schwab U.S. Aggregate Bond ETF (SCHZ - Free Report) – Expense Ratio: 0.03%
The underlying Bloomberg US Aggregate Bond Index measures the performance of the U.S. investment-grade, taxable bond market, including U.S. Treasuries, government-related and corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities, and asset-backed securities that are publicly available for sale in the United States. The fund charges 3 bps in fees and yields 4.37% annually.
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A Guide to Low-Cost ETFs
Key Takeaways
Exchange-traded funds (ETFs) have grown rapidly into one of investors’ favorite ways to access the market. Their appeal comes from a combination of low costs, transparency, diversification, tax efficiency and innovative investment strategies. But when it comes to keeping more of your returns, one factor stands out — the expense ratio.
Of course, investors face other ETF-related costs, including trading commissions, bid/ask spreads, premiums or discounts to net asset value and tracking differences. Still, expense ratios are particularly important because they directly reduce an investor’s returns year after year. When two funds offer similar exposure and performance, the lower-cost option generally has an advantage.
Here’s a simple example. Suppose you invest $10,000 in two ETFs, one charging 0.10% and the other 0.50% annually. If both generate a 10% annual return, the lower-cost fund would grow to about $25,703 after 10 years compared with roughly $24,782 for the higher-cost fund.
The gap becomes even more striking over longer periods. After 30 years, the investment would grow to about $169,797 in the 0.10% ETF versus $152,203 in the 0.50% ETF. In other words, even a seemingly small difference in fees can compound into a meaningful amount over time.
Why & How Investors Should Pay Attention
The key point is that investors don't pay an expense ratio just once. The fee is charged every year, meaning its effect can compound over time. The longer the investment horizon, the greater the potential impact of even a modest fee difference.
That doesn't mean investors should automatically choose the ETF with the lowest expense ratio. A slightly more expensive ETF may offer a more effective strategy, better diversification, stronger liquidity or access to a specialized market that is difficult to replicate. The right approach is to compare costs alongside performance, holdings, liquidity, tracking quality and the fund's investment objective.
Still, when two ETFs provide similar exposure and have comparable performance, a lower expense ratio can give investors an important long-term advantage.
Passive ETFs Keep Costs Low
Passive ETFs generally come with lower expense ratios because they simply track an index rather than relying on active portfolio management. With less research, trading and management involved, these funds can keep operating costs low, allowing investors to retain more of their returns over the long term. This cost advantage is one of the key reasons passive ETFs have become so popular.
ETF Picks
Below we highlight five lowest-cost ETFs from five investing zones and charge pretty little in the current market environment.
S&P 500 – State Street SPDR Portfolio S&P 500 ETF (SPYM - Free Report) – Expense Ratio: 0.02%
The underlying S&P 500 Index is designed to measure the performance of the large-capitalization segment of the U.S. equity market. The fund charges 2 bps in fees and yields 1.01% annually. The fund’s top three holdings are NVIDIA (8.39%), Apple (7.07%) and Microsoft (5.58%).
Total Stock Market – Vanguard Morningstar Total Stock Market ETF (VTI - Free Report) – Expense Ratio: 0.03%
The underlying CRSP US Total Market Index represents nearly 100% of the U.S. investable equity market, covering nearly 4,000 constituents across mega, large, small and micro capitalizations. The fund charges 3 bps in fees and yields 1.04% annually. The fund’s top three holdings are NVIDIA (6.87%), Apple (6.30%) and Microsoft (5.10%).
Developed Markets – Vanguard FTSE Developed Markets Index Fund ETF Shares (VEA - Free Report) – Expense Ratio: 0.03%
The underlying FTSE Developed All Cap ex US Index is a market-capitalization-weighted index representing the performance of large, mid and small-cap companies in developed markets, excluding the United States. The fund charges 3 bps in fees and yields 2.40% annually. The fund’s top three holdings are Samsung (2.60%), SK Hynix (2.0%) and ASML Holding (1.95%).
Ex-United States – State Street SPDR Portfolio Developed World ex-US ETF (SPDW - Free Report) – Expense Ratio: 0.03%
The underlying S&P Developed Ex-U.S. BMI Index is a market-capitalization weighted index that defines and measures the investable universe of publicly traded companies domiciled in developed countries outside the United States. The fund charges 3 bps in fees and yields 3.0% annually. Japan, the United Kingdom and Canada take the top three spots in the fund.
Diversified U.S. Bonds – Schwab U.S. Aggregate Bond ETF (SCHZ - Free Report) – Expense Ratio: 0.03%
The underlying Bloomberg US Aggregate Bond Index measures the performance of the U.S. investment-grade, taxable bond market, including U.S. Treasuries, government-related and corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities, and asset-backed securities that are publicly available for sale in the United States. The fund charges 3 bps in fees and yields 4.37% annually.