If you've spent five minutes researching investing, someone has already told you to "just buy index funds." That advice is everywhere — and for good reason. But what actually is an index fund, why do they outperform most professional investors, and how do you pick the right one?
This guide covers everything you need to know to start investing in index funds with confidence. No jargon, no fluff — just the information that actually matters.
For a broader introduction to investing concepts, check out our Complete Guide to Investing for Beginners.
What Is an Index Fund?
An index fund is an investment fund designed to replicate the performance of a specific market index. An index is simply a list of companies selected according to certain rules. The S&P 500, for example, tracks the 500 largest publicly traded US companies. The total stock market index tracks nearly every publicly traded US company — about 3,700 of them.
When you buy one share of an S&P 500 index fund, you instantly own a tiny slice of all 500 companies on that list. Apple, Microsoft, Amazon, Google, Tesla — all of them, in proportion to their size. If those 500 companies collectively grow in value, your investment grows with them.
The "index" part means the fund follows a preset rulebook instead of relying on a manager to choose stocks. There's no team of analysts deciding what to buy and sell. The fund just holds whatever the index holds, rebalancing when the index changes. This is called passive investing.
Active vs. Passive Investing: Why Passive Usually Wins
Here's the uncomfortable truth about professional stock pickers: most of them lose to the index over time.
The S&P 500 returned roughly 10.5% annually on average over the past 30 years. Over that same period, S&P Global's SPIVA report consistently shows that about 80–90% of actively managed large-cap US funds underperform the S&P 500 over 15-year periods. It's not because fund managers are bad at their jobs — it's because fees and trading costs eat into returns every year, and beating the market consistently is genuinely one of the hardest things to do in finance.
A typical actively managed mutual fund charges 0.5% to 1.5% in annual fees (called the expense ratio). An S&P 500 index fund from Vanguard or Fidelity charges as little as 0.03%. On a $50,000 portfolio, that difference is $235 to $735 per year — money that stays in your pocket with an index fund.
Over 30 years, that fee gap compounds into a massive difference in wealth.
The Major Index Fund Providers
Three providers dominate the low-cost index fund space:
Vanguard — The pioneer of index investing, founded by John Bogle in 1975. Vanguard is unique in that it's owned by its fund shareholders, creating structural incentives to keep costs low. Their expense ratios are consistently among the lowest in the industry.
Fidelity — Launched four "ZERO" funds in 2018 with a 0.00% expense ratio — literally free. Fidelity is an excellent choice for new investors, especially those starting with small amounts since there are no account minimums on most funds.
Charles Schwab — Offers a full lineup of index funds and ETFs with expense ratios comparable to Vanguard, typically 0.03–0.06%. Their brokerage platform is well-regarded and beginner-friendly.
All three offer comparable products. Where you open your account often matters more than which provider's funds you choose, since all three offer low-cost options for the same underlying indexes.
Specific Fund Recommendations with Expense Ratios
Here are the most widely recommended index funds for beginners:
Total US Stock Market
- Fidelity ZERO Total Market Index (FZROX): 0.00%
- Vanguard Total Stock Market ETF (VTI): 0.03%
- Schwab Total Stock Market Index (SWTSX): 0.03%
S&P 500
- Fidelity 500 Index Fund (FXAIX): 0.015%
- Vanguard S&P 500 ETF (VOO): 0.03%
- iShares Core S&P 500 ETF (IVV): 0.03%
International Stocks
- Fidelity ZERO International Index (FZILX): 0.00%
- Vanguard Total International Stock ETF (VXUS): 0.07%
Bonds (for stability)
- Vanguard Total Bond Market ETF (BND): 0.03%
- Fidelity US Bond Index (FXNAX): 0.025%
All-in-One Option (Target-Date Funds) If you want zero decisions, a target-date fund like Vanguard Target Retirement 2060 (VTTSX, 0.08%) automatically holds a mix of stocks and bonds and gradually becomes more conservative as you approach retirement. Put money in, never touch it again.
For a detailed comparison between ETF and mutual fund versions of these funds, see our ETF vs mutual fund comparison.
How to Buy an Index Fund
The process is simpler than most people expect:
Step 1: Open a brokerage account. For retirement money, open a Roth IRA or contribute to your 401(k). For money you might need before retirement, open a taxable brokerage account. Fidelity, Vanguard, and Schwab are all excellent choices with no account minimums.
Step 2: Fund your account. Link your bank account and transfer money. This typically takes 1–3 business days. Most brokerages allow you to start investing with as little as $1.
Step 3: Search for your fund. Use the ticker symbol (like VTI or FXAIX) to find the exact fund you want.
Step 4: Place a buy order. For ETFs, you'll enter how many shares to buy or a dollar amount (fractional shares are available at most major brokerages). For mutual funds, you enter a dollar amount directly.
Step 5: Set up automatic contributions. The single best thing you can do is automate regular contributions — weekly, bi-weekly, or monthly. This practice, called dollar-cost averaging, removes the temptation to time the market and keeps you consistently building wealth.
The Compounding Advantage
Here's where index fund investing gets genuinely exciting.
Suppose you invest $500 per month starting at age 25 into a total market index fund. Assuming the historical average return of about 10% per year, by age 65 you'd have approximately $3.2 million — despite only contributing $240,000 of your own money out of pocket. The other $2.96 million is compounding: your returns earning returns, which earn more returns, for decades.
Start at 35 instead of 25, contributing the same $500/month? You'd end up with about $1.1 million. That single decade of delay costs you more than $2 million.
This is why the most powerful investing strategy for most people is simple: start as early as possible, keep costs low, buy diversified index funds, and don't sell when markets drop.
Common Index Fund Mistakes to Avoid
Checking your balance every day. Markets fluctuate constantly. Watching daily swings triggers emotional decisions. Set your contributions to automatic, check quarterly at most.
Selling during downturns. Every market crash in history has eventually recovered. The 2008 financial crisis wiped out nearly 57% of the S&P 500's value — and then went on to deliver one of the longest bull markets ever. Selling during a crash locks in losses permanently.
Chasing last year's winners. A sector fund that returned 40% last year is now at the top of every "best funds" list — and often about to underperform. Broad index funds remove this temptation entirely.
Owning too many funds. You don't need 12 different index funds. A two-fund portfolio (total US market + total international) or even a single target-date fund is genuinely enough for most investors.
The Bottom Line
Index funds work because of three things: diversification across hundreds or thousands of companies, extremely low costs, and the compounding power of leaving money invested for decades. Most professional fund managers can't beat them consistently, and there's no reason to pay high fees for the attempt.
Pick a low-cost total market fund from Fidelity, Vanguard, or Schwab. Automate your contributions. Leave it alone. That's genuinely the whole strategy — and it's more powerful than almost anything else you could do with your money.
Ready to take the next step? Explore our Complete Guide to Investing for Beginners for everything from opening your first account to building a full portfolio.