Selecting a top low-cost index fund is challenging. There are thousands to choose from. Dozens for each index and asset class. And the big fund providers are constantly competing for your business by opening new funds and lowering fees.
That’s why we did the work for you! We analyzed the best, most popular funds in each asset class that we’re interested in at Pathway to FI. Then picked the top low-cost index funds for each category.
Since many of you are interested in tax loss harvesting, we made sure to include funds representing at least 2 different indexes when possible. You may be able to trade between these to harvest losses.
With these picks, you can confidently put together a diversified, high-performing portfolio without spending hours staring at data and becoming paralyzed by the endless options.
Read on for Pathway to FI’s top low-cost index funds for 2023!
The methodology and detailed data behind each selection are discussed at the end of the article.
Note: this information is not investment advice. See disclaimer at the bottom of the page.
Top Large-Cap Blend Funds
At the core of most portfolios is a large-cap blend fund representing the S&P 500 or US Total Stock Market index. Many of the largest and lowest cost funds are in this category as a result.
These indexes are heavily weighted toward the largest companies in America. They’re a blend of growth and value companies, though the largest companies in the world today are mostly growth companies.
The top 3 large-cap blend index funds for 2023 are:
- VOO – Vanguard 500 Index Fund ETF
- SPLG – SPDR Portfolio S&P 500 ETF
- FZROX – Fidelity Total Market Index Fund
Table 1 gives some of the facts and data behind each fund, and why you might use one over the other.
Top International Developed Markets Funds
Developed markets funds provide diversification across other currencies and political boundaries. They also add exposure to many more global companies that compete with US-based companies. The US isn’t the only country with great businesses!
The top 3 developed markets index funds for 2023 are:
- VEA – Vanguard Developed Markets Index Fund
- IDEV – iShares Core MSCI International Developed Markets ETF
- SPDW – SPDR Portfolio Developed World ex-US ETF
Table 2 gives some important details for each fund.
Notice that all 3 funds track different indexes. Yet they perform similarly and are highly correlated. In fact, according to Portfolio Visualizer, they have been 100% correlated since IDEV was founded in April 2017. This means that they’re always moving in the same direction. When one goes up or down, so does the other.
Top Emerging Markets Index Funds
Emerging markets funds invest in companies from countries like China, Taiwan, India, and Brazil. This gives them further diversification from developed markets like the UK, Germany, and Canada.
They’re less than 70% correlated with US market returns versus over 85% correlation between developed and US markets. So we’ve considered them as a separate asset class for the purpose of picking the best index funds for your portfolio.
The top 2 emerging markets index funds for 2023 are:
- IEMG – iShares Core MSCI Emerging Markets ETF
- VWO – Vanguard Emerging Markets Stock Index Fund
Table 3 gives some details on these funds.
The biggest difference between them is that VWO does not count South Korea as an emerging market. IEMG does. Yet the correlation between the two is 99%.
Top Small-Cap Value Funds
Small-cap value funds are concentrated on two factors: small in size and value-priced. They’re a great complement to large-cap blend (or growth) in a portfolio.
The top 2 small-cap value index funds are:
- VIOV – Vanguard S&P Small-Cap 600 Value Index Fund
- VBR – Vanguard Small-Cap Value Index Fund
Table 4 gives some details on these funds.
VIOV is the #1 pick for the category. VBR was chosen as #2 for the ability to tax loss harvest between the two.
There were two other funds competing with VIOV that track the same S&P Small-Cap 600 Value index. They may have beat VBR if not for the tax loss harvesting criterion. That’s because VBR’s benchmark index is not as small and not as value-oriented as the S&P Small-Cap 600 Value index.
It’s also interesting to note that a semi-active fund from Avantis, AVUV, was in the running. AVUV has outperformed the passive index funds during the 3 years it’s been around. And there’s some good theory behind its stock selection algorithm. It just hasn’t been around long enough for us to choose it.
In two more years, AVUV may be on our 2025 top picks list!
Top Real Estate Index Funds
Real Estate Investment Trusts (REITs) are a sector of mostly large and medium companies. Since large-cap index funds are highly concentrated in tech, healthcare, and consumer discretionary companies, adding more REITs is another way to diversify a portfolio.
The top 2 REIT index funds for 2023 are:
- FREL – Fidelity MSCI Real Estate Index ETF
- VNQ – Vanguard Real Estate Index Fund
Table 5 gives some details.
Note that dividends from REITs are taxed as ordinary income. So REITs are best held in tax-advantaged accounts and tax-loss harvesting isn’t much of a consideration.
Top Utilities Index Funds
Utilities, like REITs, are an under-represented sector within large-cap index funds. They also have low correlation and trend toward medium-cap value. This makes them another good addition to a portfolio.
Utilities complement Real Estate index funds since they pay qualified dividends and are more tax efficient.
The top 3 utilities index funds are:
- FUTY – Fidelity MSCI Utilities ETF
- XLU – Utilities Select Sector SPDR Fund
- VPU – Vanguard Utilities Index Fund
Table 6 gives some details.
Each of these funds has its own advantage. So which one you use might have to do with which factor is most important to you. FUTY has the lowest expense ratio. XLU is the most liquid. And VPU is the most tax efficient.
So if you’re in the highest tax bracket, you might pick VPU. And you might reserve XLU for tax-loss harvesting since its benchmark index is different from the other two.
Top Long-Term Treasury Bonds Funds
We chose long-term treasury bonds for our Model Portfolios over short-term, intermediate-term, and total bond market funds for several reasons. Primarily, they have the highest negative correlation to stocks and they move the most with interest rate changes.
The higher interest rate sensitivity acts like leverage in a bond portfolio. So you don’t need to hold as many long-term bonds to get the same result as you would if you had shorter-term bonds. And that makes room for other assets in your portfolio that have a higher expected return.
The top 3 long-term treasury bond index funds for 2023 are:
- EDV – Vanguard Extended Duration Treasury Index Fund
- TLT – iShares 20+ Year Treasury Bond ETF
- VGLT – Vanguard Long-Term Treasury Index Fund
Table 7 gives some facts and data behind each fund.
EDV stands out because it has by far the longest duration. This gives it the highest interest rate sensitivity. Either of the other two funds could be tax-loss harvested from EDV.
You might use TLT if liquidity is important to you. You would use VGLT if you want the lowest expenses.
Note: Long-term treasury interest is taxed as ordinary income, but it’s free from state taxes.
Top Gold Funds
Funds that hold physical gold as collateral are not index funds. But they were included in this analysis for completeness since they’re a key asset class in two of our Model Portfolios.
Gold has some unique characteristics that make it useful in a low volatility, high safe withdrawal rate portfolio, as described in this article.
The top 2 gold funds for 2023 are:
- GLDM – SPDR Gold MiniShares
- IAUM – iShares Gold Trust Micro
Table 8 gives some details behind each fund.
These two funds are less costly than their big brothers, GLD, and IAU. And neither has been around long. But SPDR and iShares are the big players in Gold ETFs. There’s no reason to believe they’ll perform much differently since all Gold ETFs have the same holdings. Nor is there any reason to believe that the physical gold is less secure.
You won’t be able to tax-loss harvest between these funds. But they’re very tax efficient because they don’t pay dividends or interest.
Some people tax loss harvest into gold mining companies or gold futures. Neither one is a great solution, though.
How the top funds were selected
The methodology we used to pick the top low-cost index funds is discussed in detail in How to Pick a Good Index Fund.
We looked at the 7 criteria described there and selected the funds with the best balance and ability to meet the needs of most investors. Funds that made our list had to be low cost, relatively tax efficient, and accurately track an index that represents its asset class well.
As previously mentioned, when possible, we selected dissimilar funds within an asset class that could be used for tax loss harvesting.
Many more funds were considered than the top funds in this article. Some were immediately ruled out based on unreasonably high expense ratios. You can get the full spreadsheet analysis from this link, including the other funds that were considered in detail but not selected.
Summary
This article listed the top low-cost index funds in each asset class used by the Pathway to FI model portfolios. These funds can be used to create a low volatility portfolio with high expected returns, high safe withdrawal rate, and high tax efficiency.
Now that you have a list of great index funds, you should read one of these articles:
- How to Invest in a Volatile Stock Market
- How to Invest during Inflation
- What Should My Asset Allocation Be?
And don’t forget to sign up for FREE at the bottom of the page to get much more value from PathwayToFI.
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