Commission-free exchange-traded funds (ETFs) offered by online discount brokers enable investors to invest in a diversified portfolio of stocks and bonds at a very low cost. With just a few funds, Fidelity's brokerage clients can get exposure to thousands of stocks and bonds and pay less than $0.11 in annual fees for every $100 they invest.

I looked through Fidelity's list of commission-free ETFs and found five funds that together offer exposure to stock and bond investments in the United States and abroad. Here are five of my favorite commission-free ETFs offered by Fidelity, with the case for each ETF explained below.

Commission-free ETF

Ticker

Expense Ratio

iShares Core S&P 500 ETF

(NYSEMKT:IVV)

0.04%

iShares Core S&P Mid-Cap ETF

(NYSEMKT:IJH)

0.07%

iShares Core S&P Small-Cap ETF

(NYSEMKT:IJR)

0.07%

iShares Core MSCI Total International Stock ETF

(NASDAQ:IXUS)

0.11%

iShares Core U.S. Aggregate Bond ETF

(NYSEMKT:AGG)

0.05%

Source: Fidelity, iShares.

iShares Core S&P 500 ETF

This fund is a simple large-cap stock fund that tracks the performance of the S&P 500 index. Companies in the S&P 500 make up approximately 82% of all stock market value, thus making it one of the most important indexes on the stock market today.

The case for this fund is simple: It offers diversified exposure to the most important companies in American exchanges, and does it at a very low cost. The fund's expense ratio of 0.04% per year ranks among the best for large-cap stock ETFs, resulting in after-fee returns that nearly mirror the S&P 500's return in any given year.

Letter blocks that spell out "ETF"

Fidelity's commission-free ETF list has a lot to offer the long-term investor. Image source: Getty Images.

iShares Core S&P Mid-Cap ETF

This fund is a good way to increase your exposure to companies that are too small to make it into the S&P 500 index. It tracks the S&P MidCap 400 Index, which includes roughly 400 companies that together make up about 7% of total stock market value. Thus, when combined with an S&P 500 fund, these two funds include stocks that together make up about 90% of all stock market value in the United States.

Mid-cap stocks have historically trumped the returns of large-cap stocks because they are more likely to be acquisition targets, and because they typically offer more growth potential than large-cap stocks. Over the most recent 15-year period, the S&P MidCap 400 Index has returned about 12% annually, far more than the 9.9% return of the S&P 500 index. Of course, they can be more volatile than large caps, rising higher in bull markets and falling deeper in bear markets.

iShares Core S&P Small-Cap ETF

Investors who want exposure to smaller companies should look no further than this ETF, which tracks the S&P SmallCap 600 index and thus holds roughly 600 stocks that together comprise about 3% of the stock market's total value. The index's components have a market capitalization of $450 million to $2.1 billion, relatively small potatoes as far as publicly traded companies go.

Importantly, the S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes do not overlap, as each fund contains distinct stocks that are not included in another index. Together, they include roughly 1,500 companies that make up 92% to 93% of all stock market value in the United States. With just three commission-free iShares ETFs, investors can create a very diverse portfolio of U.S. stocks at a very low cost.

Index

Annualized 15-year Returns

S&P 500

9.9%

S&P MidCap 400

12%

S&P SmallCap 600

12.3%

Source: Morningstar. Return data is based on the underlying index. ETF returns may differ slightly due to fees and tracking error.

iShares Core MSCI Total International Stock ETF

This fund is a great pick for investors who want broad exposure to stocks listed in developed and emerging markets alike. It tracks the MSCI ACWI ex-USA IMI index, which includes nearly 6,200 stocks in markets all around the world.

What I like most about this fund is it rolls up investments in developed markets and emerging markets into one fund, thus pairing up stocks in faster-growing emerging economies with stocks in slower-growing developed ones. At the time of writing, stocks in Japan, the United Kingdom, and China made up the largest percentage of the fund, at 17%, 10%, and 8% of the fund's assets, respectively. One could keep things simple and use this fund for all of his or her international stock exposure.

An annual expense ratio of 0.11% makes this a very inexpensive way to invest in international stocks. While international stock funds are pricier than domestic stock funds, the premium price for this fund amounts to a mere rounding error, just a few pennies per $100 invested.

iShares Core U.S. Aggregate Bond ETF

No portfolio is complete without a mix of stocks and bonds. This fund offers investors a "one-stop shop" for bonds, as it tracks the Bloomberg Barclays US Aggregate Bond Index. It holds nearly 6,500 bonds that represent the overwhelming majority of the bond market's total value.

Think of this ETF as a "total bond market" fund for high-quality bond issues. It invests roughly 72% of its assets in AAA-rated bonds, which makes it less correlated to stocks as other bond funds that invest more of their assets in lower-rated bonds and junk bond issues. That's ideal, since the whole reason people invest in bonds is to earn a return that isn't correlated with the ups and downs of their stock portfolio.

With an average effective duration of less than six years, this bond fund doesn't have a lot of interest rate exposure. In theory, a one-percentage-point increase or decrease in interest rates would result in a six-percentage-point decrease or increase in the fund's value, calculated by multiplying its effective duration by the theoretical change in interest rates.

Why commission-free ETFs?

One of the disadvantages of using ETFs is that they trade like stocks, so investors have to pay a commission to buy or sell them. Thanks to Fidelity's commission-free ETFs, investors can get all the advantages of ETFs (better tax efficiency, more liquidity, and lower fees) without paying a commission on every transaction.

These five ETFs are my favorite picks for the simple reason that they make the building blocks of a diversified portfolio, and when used together, allow you to create a portfolio that costs less than 0.10% per year. Combined with online brokers' special offers, commission-free ETFs are one of the best perks of using an online discount brokerage to manage your investments.

 

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.