Top 7 Low-Overhead ETFs for Your 401(k)
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Top 7 Low-Overhead ETFs for Your 401(k)

Investing
4 Min.

If you're unsatisfied with the fees charged by mutual fund managers in your retirement account, you might want to consider switching to ETFs. ETF stands for Exchange Traded Fund, which works similarly to an index mutual fund but comes with lower costs, greater liquidity, and flexibility. Below is a list of seven of the best ETFs for your retirement account based on asset class and with low expense ratios. All figures are current as of December 2023.

Basics

Investors often find their 401(k) retirement accounts heavily laden with mutual funds due to default choices in investment selections. Unbeknownst to many, superior alternatives may exist. Exchange-traded funds (ETFs) present a more transparent fee structure, offer granular trading options, and exhibit significantly reduced overhead. This results in diminished annual fees that can erode your portfolio's returns. For those keen on maximizing 401(k) investments, exploring ETFs with low expense ratios is advisable. The following seven ETFs merit consideration, with all data reflecting Q3 2021 figures.

SPDR S&P 500 ETF (SPY)

  • Issuer: State Street SPDR
  • Dividend: $6.63
  • Expense ratio: 0.09%

Renowned as the quintessential barometer for the US stock market, the Standard and Poor's 500 Index (S&P 500) has maintained its status as a preferred retirement asset. SPY ingeniously restructures this enduring favorite, minimizing expenses and simplifying documentation compared to conventional index funds. Widely endorsed by institutional investors, integrating S&P 500 index funds, including SPY, is considered a prudent strategy for most retirement portfolios.

The Vanguard Total Stock Market ETF (VTI)

  • Issuer: Vanguard
  • Dividend: $3.41
  • Expense ratio: 0.04%

Positioned as an alternative to conventional market index funds, VTI provides investors with broad exposure spanning the Nasdaq and NYSE, encompassing diverse sectors and segments. This ETF, characterized by a rock-bottom expense ratio, substantial assets under management, and a commendable track record of robust returns, stands as a compelling choice for discerning investors.

The iShares Core U.S. Aggregate Bond ETF (AGG)

  • Issuer: BlackRock iShares​
  • Dividend: $3.11
  • Expense ratio: 0.03%

Tailored for young investors seeking enduring assets in their 401(k), AGG provides exposure to the bond market without the constraints of fixed maturation periods. This ETF, characterized by flexibility and consistent performance, emerges as a prudent choice for 401(k) portfolios, notwithstanding its modest returns.

The iShares MSCI Emerging Markets ETF (EEM)

  • Issuer: BlackRock iShares​
  • Dividend: $1.06
  • Expense ratio: 0.70%

While the inherent volatility of emerging markets may not align with typical retirement investment strategies, EEM offers a nuanced approach, introducing a measured level of volatility to your retirement fund. The crucial aspect lies in prudent decision-making, avoiding excessive exposure to emerging markets without the stabilizing presence of bonds and index funds in your 401(k).

The Vanguard Value ETF (VTV)

  • Issuer: Vanguard
  • Dividend: $3.67
  • Expense ratio: 0.05%

VTV offers investors access to a diverse array of large-cap securities, including JP Morgan Chase, Procter & Gamble, Johnson & Johnson, and Berkshire Hathaway. Integrating Vanguard Value into your 401(k) presents an effective strategy for diversification beyond traditional index funds, maintaining a comparatively low level of risk.

The iShares Russell 2000 ETF (IWM)

  • Issuer: iShares​
  • Dividend: $2.7
  • Expense ratio: 0.19%

Serving as a counterpart to the S&P 500, the Russell 2000 Index focuses on 2,000 small-cap securities rather than 500 blue chips. If you anticipate significant growth in the American economy from smaller businesses in the next two decades, consider integrating IWM into your 401(k). This ETF provides investors with exposure to the Russell index at a comparatively low expense ratio, making it an ideal fit for long-term investment strategies.

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

  • Issuer: iShares
  • Dividend: $4.45
  • Expense ratio: 0.49%

Corporate bonds, offering elevated returns on secured debt compared to Treasury notes, present a viable alternative for investors. Focused on BB-rated corporations, HYG includes a mix of AAA, B, and lower-rated bonds. Incorporating HYG into your 401(k) introduces a strategic blend of corporate notes alongside government bonds, enhancing portfolio diversity.

Conclusion

For investors dissatisfied with mutual fund fees in their retirement accounts, transitioning to exchange-traded funds is a prudent consideration. ETFs, such as the seven highlighted here with low expense ratios, provide a cost-effective and flexible alternative to traditional mutual funds. The transparency, liquidity, and reduced overhead of ETFs contribute to minimizing annual fees, safeguarding portfolio returns. Whether diversifying with Vanguard's Total Stock Market ETF or exploring strategic volatility with iShares MSCI Emerging Markets ETF, these options offer tailored solutions for maximizing 401(k) investments. 

Exchange-Traded Funds (ETFs)