In the realm of index investing, a revolution has been quietly unfolding over the past few years. This sector, once considered the preserve of seasoned investors, has now opened its doors to novices and those with limited resources, thanks to the advent of index funds, especially through exchange-traded funds (ETFs). These funds have democratized investing, making it easier for individuals without extensive financial knowledge or substantial resources to diversify their portfolios. Despite this democratization, a financial hurdle remains: The share prices of some of the most popular index ETFs can be prohibitively high for new or small-scale investors.

However, the story doesn’t end there. The ETF industry, keen to make the markets more accessible and affordable, has responded with a range of low-cost index funds. These funds offer broad index exposure at low share prices, paired with low expense ratios, opening the door to investment opportunities without requiring a large financial commitment upfront. For instance, the SPDR S&P 500 ETF (ticker: SPLG) and the iShares Core Dividend Growth ETF (DGRO) are among the six index funds that can be purchased for $55 or less per share. This development is a significant boon for investors who are just starting out or those who operate with smaller account sizes, as it lowers the barrier to entry and encourages more individuals to take the leap into building a diversified portfolio.

Affordable Index Funds: An Accessible Path to Wealth Creation

The field of index investing has gained remarkable traction over the recent years, offering investors an affordable and straightforward strategy for diversifying their portfolios. Index funds, especially through exchange-traded funds (ETFs), have democratized investing, making it accessible to individuals who may not have substantial financial resources or vast financial knowledge.

The Era of Index Investing

Robert Johnson, a professor of finance at Creighton University’s Heider College of Business, suggests that the most successful strategy for most investors is to invest in a broad index fund that monitors the overall performance of the market. However, a significant financial obstacle remains. The share prices of some of the most popular index ETFs, such as the SPDR S&P 500 ETF (SPY) and the Invesco QQQ Trust (QQQ), can be prohibitively high for new or small-scale investors.

Bridging the Gap with Low-Cost Index Funds

The ETF industry isn’t exclusive to affluent investors. There are options that provide broad index exposure at low share prices, combined with low expense ratios. These low-cost index funds make the markets accessible and affordable, providing investment opportunities without requiring a substantial financial commitment upfront.

A Look at Six Affordable Index Funds

The six index funds that can be purchased for $55 or less per share are SPDR Portfolio S&P 500 ETF (SPLG), iShares Core Dividend Growth ETF (DGRO), SPDR Portfolio S&P 500 Value ETF (SPYV), Schwab U.S. Broad Market ETF (SCHB), Pacer U.S. Cash Cows ETF (COWZ), and Invesco S&P 500 Top 50 ETF (XLG).

Brian Walsh, senior manager of financial planning at SoFi, emphasizes that a majority of actively managed funds underperformed their benchmarks over the past one, three, and five years. His observations are supported by the S&P Indices Versus Active’s SPIVA scorecard, which shows that about 51% of all U.S. large-cap funds underperformed the S&P 500 over a trailing one-year period, a figure that rises to 93.4% over 15 years.

The Verdict

Index investing not only allows investors to track well-known benchmarks like the S&P 500 or Nasdaq-100, but also offers an avenue to explore various underlying assets or strategies. With a growing number of index providers such as Morningstar, MSCI, S&P, and Solactive, investors now have access to customized indexes that cater to their specific needs and risk profiles.

The democratization of investing through low-cost index funds is a significant breakthrough in the financial world. It allows even those with limited resources to start building wealth in a cost-effective and straightforward manner. However, it’s crucial for investors to understand that while these funds offer a more accessible entry point, they also come with their own set of risks that should be thoroughly understood before investing.