What are the best low-cost index funds to save for retirement?

Q. What are the best low-cost index funds for retirement?

Great question. Index funds, also known as tracker funds, offer an easy and low-cost way to be diversified across lots of different companies and many markets. 

For retirement savers, keeping costs low can be especially important because even small charges can add up over many years and eat into long-term returns.

That said, there's no single 'best' index fund for retirement. A younger investor saving into their pension may be comfortable with more equity exposure, while someone closer to retirement may want to think more carefully about diversification, bonds, volatility and how they might eventually take an income. 

There are 15 index-tracking funds on our Select 50 and they cover a wide variety of regions and asset classes. I’ve ordered them in terms of their ongoing charges - so lowest cost first. They shouldn't be viewed as 'ready-made retirement portfolios', but they may be useful building blocks if you’re thinking about long-term retirement saving.

How to think about index funds for retirement

When you are decades away from retirement, equity index funds (ones that invest in company shares) can help provide long-term growth potential.

As retirement gets closer, some investors choose to introduce more defensive assets into the mix - such as bond funds - to help reduce reliance on stock markets alone. This doesn’t remove risk, but it can help spread it by investing in different asset classes.

For investors already in retirement or planning to take drawdown, market movements particularly matter because withdrawals made during market falls can have a lasting impact on a portfolio. This is why holding a mix of assets, rather than simply choosing the cheapest fund, can be important.

Let’s take a closer look at four of the lowest cost index funds on the Select 50 - our favourite funds, selected by experts:

1. iShares Core FTSE 100

This fund is the first of the two cheapest index funds on Select 50. It tracks the returns of the FTSE 100 Index, with an ongoing charge of 0.07%. It offers you exposure to the UK and a variety of large value companies.

Its top 10 holdings include pharma giant AstraZeneca, Shell, HSBC, Unilever, and BP.

Our experts like this fund because BlackRock, the manager of the fund, is a seasoned investor in passive funds, plus the fund’s costs are low.

From a retirement perspective, this kind of fund could offer UK equity exposure within a wider portfolio. However, it shouldn’t be seen as a retirement solution on its own, as it is focuses on large UK-listed companies and has exposure to specific sectors.

2. Vanguard S&P 500

This fund is the other cheapest index fund on Select 50, with an ongoing charge of 0.07%. It tracks the widely recognised benchmark of the US stock market, which is comprised of large US companies. The index is a capitalisation weighted index of 500 US stocks.

Its top 10 holdings include some familiar mega corporations, such as Microsoft, Apple, NVIDIA, Amazon, and Google-owner Alphabet.

Our experts like this fund because it invests in large companies listed in the US, therefore the fund provides US dollar exposure. They also highlight that the fund is well priced.

For long-term retirement savers, US equity exposure can provide access to some of the world’s largest companies. However, investors should remember that overseas investments are affected by currency movements, and a US tracker won’t provide global diversification by itself.

3. Vanguard FTSE 250

This fund tracks the FTSE 250, with an ongoing charge of 0.10%. Most of its stocks include small to medium sized companies, with a focus on value and core styles.

The fund’s top 10 holdings include a diverse mix from international infrastructure Balfour Beatty PLC,  to advertising giant WPP PLC and platinum group metal company Johnson Matthey PLC. 

Our experts like this firm because it is focused on medium-sized companies in the UK, which has been an area of good long-term investment returns.

From a retirement perspective, this type of fund may appeal to investors with a long-time horizon who want exposure to medium-sized UK companies, which can offer growth potential over time. However, it has the potential to be more volatile than a fund focused on larger, more established companies, so it may be better suited as a smaller part of a wider retirement portfolio rather than a core retirement option on its own. 

4. Vanguard FTSE Developed Europe ex UK

This fund tracks the FTSE Developed Europe, excluding the UK, with an ongoing charge of 0.10%. It’s made up of stocks of large and mid-capitalisation companies in the region.

The fund’s top 10 holdings include exposure to Denmark, Netherlands, Switzerland, France and Germany, from companies like pharma firm Novo Nordisk, food and drink corporation, Nestlé, luxury goods company, Lvmh Moet Hennessy Louis Vuitton and industry software firm SAP SE.

Our experts like this fund because it provides broad-based European exposure. They highlight that Vanguard is an expert in index tracking and that the fund is well priced.

For retirement investors, this fund could help broaden exposure beyond the UK and US by adding developed European companies to the mix. That can support diversification, but it also brings overseas market and currency risk. As with other regional equity funds, it’s unlikely to be enough on its own and may work best as one part of a diversified retirement portfolio.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Before investing into a fund, please read the relevant key information document which contains important information about the fund. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.