If you’ve spent any time reading about investing, you’ve encountered index funds. They come up constantly – and for good reason. For most people, most of the time, a simple index fund is the best investment they can make. Here’s why.
What an Index Fund Actually Is
An index fund is a type of investment fund that tracks a specific market index rather than trying to beat it. Instead of trying to pick winning stocks, you buy a tiny piece of every stock in the market.
The S&P 500 is the most well-known index – it tracks the 500 largest publicly traded companies in the United States. When you buy an S&P 500 index fund, you own a tiny slice of Apple, Microsoft, Amazon, Google, and 496 other companies in a single purchase.
The fund doesn’t require a manager making active decisions. It just mirrors the index automatically. That simplicity is the entire point.
Why Index Funds Beat Most Active Funds
This is the part that surprises most people. Over 15 years, 92% of actively managed funds underperformed the S&P 500 index. The “experts” picking stocks lose to simply owning the index almost every time over the long term.
The reason is largely fees. An actively managed fund charges 0.5-1.5% per year to pay analysts, fund managers, and research teams. An index fund charges almost nothing – the Schwab S&P 500 Index Fund has an expense ratio of 0.02%, meaning you pay just $0.20 per $1,000 invested annually.
That fee difference compounds dramatically over decades. The fee difference alone could cost you $42,000+ over your investing lifetime.
The Most Popular Index Funds for Beginners
| Fund | Index Tracked | Expense Ratio |
|---|---|---|
| VOO (Vanguard) | S&P 500 | 0.03% |
| VTI (Vanguard) | Total US Market | 0.03% |
| SWPPX (Schwab) | S&P 500 | 0.02% |
| FZROX (Fidelity) | Total US Market | 0.00% |
| IVV (iShares) | S&P 500 | 0.03% |
FZROX has a 0% expense ratio and no minimum investment, making it a strong choice for beginning investors.
For most beginners the choice between these funds matters less than the decision to start. They all track similar indexes at near-identical costs.
Index Funds vs ETFs – What’s the Difference?
You’ll notice the funds above include both ETFs (VOO, VTI) and traditional index funds (FZROX, SWPPX). The line between them is thin:
- ETFs trade on the stock exchange throughout the day like a stock
- Traditional index funds price once daily after market close
Both track the same indexes at similar costs. For long-term buy-and-hold investors the difference is minimal. See the full comparison: ETFs vs Mutual Funds
How to Actually Buy One
You need a brokerage account. The three most recommended for beginners:
- Fidelity – no minimums, FZROX available with 0% expense ratio
- Schwab – no minimums, excellent SWPPX fund
- Vanguard – the original index fund company, legendary low fees
Start small. Many brokers let you invest with $1 through fractional shares. Even $50-100 is a strong first step.
Once your account is open: search for your chosen fund ticker, decide how much to invest, and place the order. The whole process takes about 15 minutes.
The Most Important Step – Automate It
Set up automatic deposits – this is called dollar-cost averaging. It means you add money on a schedule no matter what the market is doing. It removes emotion and keeps you consistent.
You only need to check your index fund investments once or twice a year. Looking every day adds stress and makes it easier to panic – investors who react often to market moves tend to earn worse returns than those who stay the course.
Set a monthly automatic contribution. Match it to your payday. Then leave it alone.
The One Decision That Actually Matters
Broad market or S&P 500 – that’s genuinely the only decision most beginners need to make. VTI covers the entire US market including small and mid-cap companies. VOO covers only the 500 largest. Both have delivered similar long-term returns.
Pick one. Start. The difference between the two funds is far smaller than the difference between starting today and waiting six more months to decide.
Related: What Is Dollar-Cost Averaging