An index mutual fund is a type of fund that invests all, or nearly all, of its total assets in securities comprising its underlying index. Index funds use passive investment strategies, and therefore tend to have low turnover and low expense ratios. Funds that implement indexing strategies require less portfolio management and active trading, which minimizes their operating fees. Index funds with low expense ratios are beneficial to long-term investors who seek to track indexes and gain exposure to select segments of the market over time. Expense ratios and management fees are part of an ongoing debate waging passive funds against active funds in the marketplace. A growing number of index funds continue to be developed in the market including the evolution of smart beta index funds that seek to replicate customized indexes. To date, the debate on the added value of active management versus the advantages of passively managed funds continues. Expense ratios are often one of the key factors that may sway investors to choose passive fund investments over active managers when seeking targeted investment options.

As of October 2018, the following three funds were among the lowest expense ratio mutual funds as reported by Morningstar. These funds were chosen based on expense ratio, retail investment availability and broad market exposure.

Fidelity Spartan 500 Index Fund - Investor Class (FUSEX)

This is an investor class fund marketed by Fidelity with a net expense ratio of 0.015%. The fund tracks the holdings and return of the S&P 500 Index. The fund invests at least 80% of its total assets in the S&P 500 Index. The fund requires no minimum investment. As of September 30, 2018, it has a one-year return of 17.81% versus 17.91% for the S&P 500 Index.

Vanguard Value Index Fund Investor Shares (VIVAX)

This fund is marketed by Vanguard. It tracks the holdings and performance of the CRSP U.S. Large Cap Value Index. The fund has a net expense ratio of 0.17%. It does require a minimum investment of $3,000. As of September 30, 2018, the fund has a one-year return of 13.43% compared to 13.59% for the Index.

Fidelity U.S. Bond Index Fund - Investor Class (FBIDX)

FBIDX falls in the Intermediate-Term Bond Morningstar category. The fund is focused on U.S. bond investments. It has an expense ratio of 0.025%. It requires no minimum investment. The fund invests at least 80% of its assets in bonds in the Bloomberg Barclays U.S. Aggregate Bond Index. As of September 30, 2018, the one-year return is -1.40% versus -1.22% for the benchmark. The three-year return is 1.11% versus 1.31% for the benchmark.

Index Funds

These funds must be traded with their affiliated platform which is a factor that helps to keep the expense ratios down. The limited but easy access through the Fidelity and Vanguard trading platforms helps to limit many of the distribution and 12b-1 fees, keeping the expenses lower for investors.