This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Index fund investing is the simplest, most proven way to build wealth in the stock market. Instead of picking individual stocks, you buy a fund that holds hundreds or thousands of companies — instant diversification with a single purchase.
What is an index fund?
An index fund is a mutual fund or ETF that tracks a market index, like the S&P 500 or the total US stock market. When you buy a share of an S&P 500 index fund, you own a tiny piece of all 500 companies in the S&P 500.
Because index funds do not require a manager to pick stocks, their fees (expense ratios) are much lower than actively managed funds. The average active fund charges 0.50% to 1.00% per year. An S&P 500 index fund charges 0.03%.
ETFs vs mutual funds — what is the difference
| Feature | ETF | Mutual Fund |
|---|---|---|
| How it trades | Throughout the day, like a stock | Once per day at 4 PM NAV |
| Minimum investment | 1 share or $1 (fractional) | $1 to $3,000+ |
| Tax efficiency | More tax-efficient | Less (capital gains distributions) |
| Expense ratio | As low as 0.03% | As low as 0.00% (Fidelity Zero) |
| Best for | Taxable accounts, beginners | Tax-advantaged accounts (IRA) |
For most beginners, ETFs are the better choice: they have no minimum investment at brokers that support fractional shares, they trade whenever you want, and they are more tax-efficient in taxable accounts.
Popular index funds for beginners
| Fund | Ticker | Type | Expense Ratio |
|---|---|---|---|
| Vanguard Total Stock Market | VTI | Total US market | 0.03% |
| Vanguard S&P 500 | VOO | S&P 500 | 0.03% |
| iShares Core S&P 500 | IVV | S&P 500 | 0.03% |
| Fidelity ZERO Total Market | FZROX | Total US market | 0.00% |
| Vanguard Total International | VXUS | International stocks | 0.07% |
| Vanguard Total Bond Market | BND | US bonds | 0.03% |
How to build a simple index portfolio
A simple two-fund portfolio covers the world:
- 70% VTI (total US stock market)
- 30% VXUS (total international stock market)
Add a bond fund as you get closer to retirement:
- 50% VTI / 20% VXUS / 30% BND (moderate portfolio for near-retirees)
You can buy all of these commission-free at any major broker. Rebalance once per year to maintain your target percentages.
The power of low fees
A $10,000 investment earning 7% per year grows to $76,123 after 30 years with a 0.03% expense ratio. With a 1.00% expense ratio, it grows to $57,435. The difference — $18,688 — goes to the fund manager instead of staying in your account.
This is why the lowest-cost index funds (Vanguard, Fidelity Zero) are the best choice.
Common questions
Can I lose money in an index fund? Yes. Index funds track the market. When the market drops, your index fund drops. But over long periods (20+ years), the stock market has always gone up.
What is the best index fund for a beginner? VTI (total US stock market) or VOO (S&P 500). Both are low-cost, diversified, and available commission-free at every major broker.
How many index funds do I need? Two to four: a total US market fund, a total international fund, and optionally a bond fund.
Where to start
Open an account at Fidelity (0.00% Zero funds) or buy Vanguard ETFs at any commission-free broker. Buy VTI with your first deposit. Read the ETF investing guide for broker-specific details.