No one likes fees. Whether it's baggage fees, cleaning fees, or hidden fees, they're all annoying. The same goes for investing fees. After all, you're already putting your hard-earned money on the line -- who wants to pay a fee on top of it?
Unfortunately, investment fees are a reality. So, how do investors ensure they're paying as little as possible? The answer is to find and invest in products with the lowest possible fees.
Here's my pick for a low-cost exchange-traded fund (ETF) with both low costs and an impressive performance record.
Image source: Getty Images.
What are low-cost ETFs?
Every ETF charges annual fees. The size of these fees varies based on many factors, including the fund's investment strategy, cost structure, and size. Generally speaking, passive ETFs (i.e., funds that track an underlying index) are cheaper than actively managed ETFs (i.e., funds that buy and sell stocks based on a proprietary methodology). Investors can compare ETF fees by looking for a fund's expense ratio, which will tell them how much they'll pay in fees.
For example, an ETF with an expense ratio of 1% will charge $100 in annual fees for every $10,000 invested in the fund. Similarly, a fund with an expense ratio of 0.1% will charge $10 in annual fees for every $10,000 investment.
Why low-cost ETFs are effective
As a general rule of thumb, investors should look for low expense ratios. Many, if not most, equity-focused ETFs will have expense ratios below 1%. Those with expense ratios below 0.2% (meaning investors pay only $20 per $10,000 investment) are generally considered low-cost ETFs.
Obviously, paying $20 in annual fees instead of $100 saves money. Over the long term, this difference can add up. For example, let's consider the difference between a 1% expense ratio and a 0.1% expense ratio on a $50,000 initial investment tracked for 30 years (with monthly compounding).
| Average Gain of 10% (Compounded) |
Cumulative Annual Fees With 0.1% Expense Ratio |
Cumulative Annual Fees With 1% Expense Ratio |
|
|---|---|---|---|
| Initial investment | $50,000 | $50 | $500 |
| After 1 year | $55,236 | $105 | $1,052 |
| After 3 years | $67,409 | $234 | $2,337 |
| After 5 years | $82,265 | $390 | $3,904 |
| After 10 years | $135,352 | $950 | $9,507 |
| After 15 years | $222,696 | $1,872 | $12,654 |
| After 20 years | $366,404 | $3,388 | $23,899 |
| After 25 years | $602,847 | $5,883 | $58,827 |
| After 30 years | $991,870 | $9,987 | $99,868 |
Source: Author's calculations. *Total fees are rounded to the nearest whole dollar. The fees would be slightly higher without rounding factored in.
As the table above demonstrates, over a 30-year investment horizon, the 1% expense ratio could result in an additional $89,881 in fees on an initial investment of $50,000. In other words, that seemingly small difference adds up to nearly twice the initial investment.
Why the SPDR Portfolio S&P 500 ETF is a smart choice
So, it's clear: Low expense ratios can pay off for investors. But which low-fee ETF is a good option for investors looking to invest $1,000? My choice is simple: The SPDR Portfolio S&P 500 ETF (SPLG -0.78%).
Here's what I like about this ETF. First, it has a tough-to-beat expense ratio of only 0.02%. That means you pay only $0.20 annually for every $1,000 invested in this ETF.
Second, the fund tracks the S&P 500 index, perhaps the most followed index in the world. The S&P is loaded with corporate titans like Microsoft, Apple, Nvidia, and Meta Platforms. Over the last 30 years, the S&P 500 has generated an annual return of 10.6%.
While it's true that investing in this fund won't help you beat the market, it will help you match the market. And for many investors, that -- coupled with the fund's ultra-low fees -- is good enough.