Your Guide to Low-Cost Index Funds

LOW-COST INDEX FUNDS have become the prom queens of investing. They're so popular, in fact, Jack Bogle of Vanguard, oft called the father of index funds, sounded a warning that index investing may become "too successful for its own good."Bogle's concern is that the index fund industry will become concentrated, with large institutional investors and a select few index fund providers dominating the space. Whether or not that comes to pass, one thing is clear: Low-cost index investing is one of the best DIY strategies to emerge from Wall Street. Even prominent investors like Warren Buffett have openly come out in favor of buy-and-hold index investing for the average investor. If the Oracle of Omaha says it, it must be true.The argument in favor of low-cost index funds is simple: Active funds cost more and are less likely to live up to their promises. According to research by the S&P Dow Jones Indices, 95 percent of active managers failed to outperform their benchmarks on a relative basis over the past 15 years. If you're shopping for diamond-in-the-rough active funds, you have a 5 percent chance of finding one that actually shines.Meanwhile, the S&P 500's average rate of return over the last 15 years was 8.4 percent, which the Vanguard 500 Index Fund (ticker: VFINX) has nearly matched at 8.27 percent. The difference equates to the fund's expense ratio of 0.14 percent, which is subtracted from its returns. Comparatively, the average actively managed fund costs 0.75 percent.