Index funds are the foundation of most successful long-term investment portfolios — including those of many billionaires and professional investors. Warren Buffett has repeatedly recommended them for the average investor. The reason is simple: they're cheap, diversified, and they consistently outperform most actively managed alternatives over time.
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Here's everything you need to know to start investing in index funds today.
What Is an Index Fund?
An index fund is a type of investment fund that tracks a market index — a predefined list of stocks or bonds. The most common is the S&P 500, which tracks the 500 largest publicly traded U.S. companies.
When you buy an S&P 500 index fund, you own a tiny slice of all 500 companies — Apple, Microsoft, Amazon, and 497 others — in proportion to their market size. If the S&P 500 goes up 10%, your investment goes up roughly 10%.
Index funds come in two forms: mutual funds (priced once per day, often with minimum investments) and ETFs (exchange-traded funds, traded like stocks throughout the day, usually with no minimum). For most investors, either works fine.
Why Index Funds Beat Most Alternatives
- Lower costs: The average actively managed mutual fund charges 0.5–1.5% annually. A total market index fund charges as little as 0.015%. On a $100,000 portfolio over 30 years, that difference compounds to over $100,000.
- Better performance: Over 15-year periods, roughly 90% of actively managed funds underperform their benchmark index. The fund managers who beat the market one year rarely repeat it the next.
- Instant diversification: One fund gives you exposure to hundreds or thousands of companies. A single stock can go to zero; an entire index cannot.
- Tax efficiency: Index funds have low turnover (they rarely buy and sell), which means fewer taxable events in a brokerage account.
- Simplicity: No research required. No earnings calls to follow. No stock-picking decisions to second-guess.
Types of Index Funds
| Index Type | What It Tracks | Example Funds |
|---|---|---|
| U.S. Total Market | All U.S. publicly traded stocks (~3,500+) | FSKAX, VTSAX, VTI |
| S&P 500 | 500 largest U.S. companies | FXAIX, VOO, SPY |
| International | Stocks outside the U.S. | FZILX, VXUS, IXUS |
| Emerging Markets | Developing economies (China, India, Brazil, etc.) | FPADX, VWO, EEM |
| U.S. Bonds | U.S. government and corporate bonds | FXNAX, BND, AGG |
| Real Estate (REIT) | Real estate investment trusts | FSRNX, VNQ |
How to Choose an Index Fund
Three numbers matter most when evaluating an index fund:
- Expense ratio: The annual fee as a percentage of your investment. Look for funds under 0.10%. The best are under 0.05%. Avoid anything above 0.20% for a basic index fund.
- Tracking error: How closely the fund follows its index. Lower is better. Most major index funds track their index very closely.
- Fund size (AUM): Larger funds are more liquid and less likely to be closed. Look for funds with at least $1 billion in assets.
For most investors, the expense ratio is the only number that matters — and the lowest-cost funds from Fidelity, Vanguard, and Schwab are all excellent choices.
Best Index Funds for Beginners in 2026
| Fund | Type | Expense Ratio | Minimum |
|---|---|---|---|
| FZROX (Fidelity) | U.S. Total Market | 0.00% | $0 |
| FSKAX (Fidelity) | U.S. Total Market | 0.015% | $0 |
| FXAIX (Fidelity) | S&P 500 | 0.015% | $0 |
| VTSAX (Vanguard) | U.S. Total Market | 0.04% | $3,000 |
| VTI (Vanguard ETF) | U.S. Total Market | 0.03% | $1 (1 share) |
| VOO (Vanguard ETF) | S&P 500 | 0.03% | $1 (1 share) |
| SWTSX (Schwab) | U.S. Total Market | 0.03% | $0 |
If you're just starting out with limited capital, Fidelity's zero-fee funds (FZROX, FZILX) are hard to beat — $0 minimum, $0 expense ratio.
Building a Complete Portfolio
You don't need more than 2–3 index funds to build a complete, globally diversified portfolio. The classic "three-fund portfolio":
- U.S. Total Market fund — core holding, 50–70% of portfolio
- International fund — global diversification, 20–30% of portfolio
- Bond fund — stability and ballast, 0–20% depending on age and risk tolerance
A simple rule of thumb for bond allocation: your age minus 10. So at 30, hold roughly 20% bonds; at 50, roughly 40%. More aggressive investors hold fewer bonds; more conservative investors hold more.
As you approach retirement, gradually shift more into bonds to reduce volatility. This is the core of "target-date fund" logic — which automates this rebalancing for you.
How to Buy Index Funds Step-by-Step
- Open a brokerage account — Fidelity, Vanguard, or Schwab. For tax-advantaged investing, open a Roth IRA or contribute to your 401(k) first. See our Roth vs. Traditional IRA guide.
- Fund the account — link your bank account and transfer money. Most transfers take 1–3 business days.
- Search for the fund by ticker symbol — e.g., FZROX, VTI, VOO
- Place a buy order — for mutual funds, enter a dollar amount. For ETFs, enter a number of shares (or a dollar amount if your broker supports fractional shares).
- Set up automatic investments — schedule monthly contributions to invest consistently without thinking about it. This is dollar-cost averaging in practice. See our dollar-cost averaging guide.
FAQ
What's the difference between an index fund and an ETF?
An ETF (exchange-traded fund) is a type of index fund that trades on a stock exchange throughout the day like a stock. Traditional index mutual funds are priced once per day. For long-term investors, the difference is minimal — both can track the same index at similar costs.
Can I lose all my money in an index fund?
An index fund can only go to zero if every company in the index goes bankrupt simultaneously — which has never happened and is essentially impossible for a broad market index. You can lose a significant percentage during market downturns, but diversified index funds have always recovered over long time horizons.
How often should I rebalance my index fund portfolio?
Once or twice a year is sufficient for most investors. Rebalancing means selling some of what has grown and buying more of what has lagged to return to your target allocation. Many investors rebalance annually on a set date.
Should I invest a lump sum or spread it out?
Research shows lump-sum investing outperforms dollar-cost averaging about two-thirds of the time — because markets tend to go up over time, and money invested earlier has more time to grow. But if a lump sum would cause you to panic-sell during a downturn, spreading it out is psychologically safer. See our dollar-cost averaging guide.
