They're Practically Giving This Investment Away

Now that the biggest part of the stock market's post-recession rebound is behind us, the low-hanging fruit is off the tree, so to speak. History has shown us that after recessions, the heaviest part of the market's rebound tends to come in the year or so directly following the market trough. While I think there is still plenty of upside left in the market right now, stocks aren't as cheap as they were a few years ago. That means investors are going to have to work harder to find high-return opportunities for their portfolios. Fortunately, there is one corner of the market that is helping investors to do just that.

Caution: falling prices
Exchange-traded funds have been undisputed winners in the investing market in recent years. Assets in ETFs reached the $1 trillion mark late last year and are on track to reach new highs in 2011. One of the primary benefits of ETFs is their lower cost structure, compared with actively managed mutual funds with similar mandates. And as competition in the ETF space heats up, providers are cutting fees to the bone to try to secure business.

Last year, Vanguard announced that it would offer commission-free ETF trades for Vanguard brokerage clients. In an attempt to stay competitive on price, Schwab (NYSE: SCHW) recently cut fees on a handful of its ETFs, some to a mere 0.06%. BlackRock (NYSE: BLK) has also slashed fees on some of its iShares ETFs, most notably its iShares Gold Trust ETF (NYSE: IAU), which is now available for 0.25%, down from 0.40%. It's a race to the bottom as firms compete for your ETF dollars, and that's a very good thing for investors!

Discount investing
So which exchange-traded funds are winning in the race to be the cheapest on the block? According to Morningstar data, there are seven ETFs that sell for less than 0.10% now.

The nice thing you'll notice about these ETFs is that, of the six stock funds, all are well-diversified funds that invest in broad sections of the domestic market, rather than one specific industry or sector. Fortunately for investors, you'll find that the cheapest funds also tend to be those that are most appropriate for the widest group of investors. If you're looking for the best ETFs around, price tends to be a pretty good indicator of how suitable the fund will be -- the cheaper, the better. Investors would do well with any of the six equity ETFs listed above, no matter what their time horizon or risk tolerance. Likewise, the PIMCO fund would be a decent choice for folks who are looking for a place to stash some cash they may need in a few years but want to squeeze out a bit more yield than they would get in a money market account.

On the cheap
Of course, there are scores of completely appropriate ETFs out there that fall above the 0.10% price range. But investors should remember to not overpay for their funds. If you're buying a domestic equity ETF in any market capitalization range or a broad market bond ETF, you probably want to stick to funds that don't charge more than 0.25%. You can go outside that price point for more exotic funds like emerging markets offerings or foreign small-cap ETFs. But even in those cases, I'd recommend not buying funds that cost more than 0.40% or 0.45%. There are some specialty ETFs that approach and even exceed 1.00% in fees, but these tend to be leveraged and inverse funds that the vast majority of investors don't need. And at those prices, you pretty much lose all of the cost advantage of choosing an ETF over an actively managed fund. After all, if you're just tracking the market, you want to do it as cheaply as possible.

All indications point to exchange-traded funds continuing to fall in price as higher-cost providers are forced to cut fees to be competitive or are driven out of business. That means that ETFs should be even more accessible to a greater number of investors in the coming years. These funds can be a solid alternative to actively managed mutual funds if you are limited in the number of no-transaction-fee funds you can buy from your particular brokerage. If you haven't yet discovered all the benefits exchange-traded funds can bring to your portfolio, take a few minutes and start by looking at what some of the cheapest ETFs around have to offer.

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