Index funds are one of the most powerful wealth-building tools ever created for ordinary investors. They offer instant diversification, rock-bottom costs, and returns that beat the majority of actively managed funds over the long term. In 2025, with hundreds of index funds available across every brokerage, the challenge is not whether to invest in index funds — it is knowing which ones to choose and how to get started.
What Is an Index Fund?
An index fund is a type of investment fund — either a mutual fund or ETF — that tracks the performance of a specific market index, such as the S&P 500 or the total US stock market. Instead of a fund manager picking individual stocks and trying to beat the market, an index fund simply buys and holds every security in the index in the same proportions. This passive approach eliminates research costs, reduces trading activity, and passes those savings directly to investors through lower fees.
The result is a fund that essentially equals the market's return, minus a very small fee. Over decades, this seemingly modest advantage compounds into dramatically better outcomes than most actively managed alternatives. S&P Global's SPIVA scorecard consistently shows that over any 15-year period, more than 85% of actively managed US funds underperform their benchmark index after fees.
Why Index Funds Are Ideal for Beginners
- No expertise required — you do not need to analyze individual companies or time the market
- Automatic diversification — a single S&P 500 fund gives you exposure to 500 large US companies instantly
- Ultra-low fees — expense ratios as low as 0.03% versus 0.5–1.5% for actively managed funds
- Tax efficiency — low turnover means fewer taxable capital gains distributions each year
- Consistent long-term returns — the S&P 500 has returned approximately 10% annually over the past 50 years
- Easy to start — available through any major brokerage with as little as $1
Best S&P 500 Index Funds in 2025
The S&P 500 is the most widely tracked index in the world, covering the 500 largest publicly traded US companies and representing approximately 80% of total US market capitalization. For most beginners, an S&P 500 index fund is the ideal starting point — it is simple, proven, and liquid.
- Vanguard S&P 500 ETF (VOO) — expense ratio 0.03%; minimum $1; considered the gold standard for S&P 500 index investing
- Fidelity 500 Index Fund (FXAIX) — expense ratio 0.015%; no minimum investment; one of the cheapest options available
- iShares Core S&P 500 ETF (IVV) — expense ratio 0.03%; highly liquid; excellent for brokerage accounts at any institution
- Schwab S&P 500 Index Fund (SWPPX) — expense ratio 0.02%; no minimum; great option for Schwab account holders
- SPDR S&P 500 ETF Trust (SPY) — expense ratio 0.09%; the oldest and most traded S&P 500 ETF, though slightly higher cost than alternatives
For most new investors, VOO, FXAIX, or IVV are the top choices. All three offer virtually identical performance — they track the same index — so the decision comes down to your brokerage platform and whether you prefer an ETF or mutual fund structure.
Best Total Stock Market Index Funds
Total market index funds go beyond the S&P 500 to include mid-cap and small-cap US stocks alongside large caps. This broader exposure adds roughly 3,000–4,000 smaller companies to your portfolio. Historically, small-cap stocks have outperformed large caps over very long time horizons — though with higher short-term volatility.
- Vanguard Total Stock Market ETF (VTI) — expense ratio 0.03%; covers approximately 3,800 US stocks; the most popular total market ETF
- Fidelity Total Market Index Fund (FSKAX) — expense ratio 0.015%; no minimum; tracks the Dow Jones US Total Stock Market Index
- Schwab Total Stock Market Index Fund (SWTSX) — expense ratio 0.03%; covers the entire investable US equity market
- iShares Core S&P Total US Stock Market ETF (ITOT) — expense ratio 0.03%; covers large, mid, and small cap US stocks
Best International Index Funds for Diversification
Concentrating entirely in US stocks means your portfolio rises and falls with one country's economy. International index funds provide exposure to developed markets in Europe, Japan, and Australia, as well as emerging markets in China, India, and Brazil. Most financial advisors recommend allocating 20–40% of an equity portfolio to international stocks for geographic diversification.
- Vanguard Total International Stock ETF (VXUS) — expense ratio 0.07%; covers 7,800+ stocks in 47 countries
- iShares Core MSCI Total International Stock ETF (IXUS) — expense ratio 0.07%; tracks MSCI ACWI ex USA
- Fidelity International Index Fund (FSPSX) — expense ratio 0.035%; developed market international exposure
- Vanguard FTSE Emerging Markets ETF (VWO) — expense ratio 0.08%; dedicated exposure to emerging market growth
Should Beginners Include Bond Index Funds?
Bond index funds add stability by reducing volatility at the cost of some long-term return. A common starting guideline is to hold a percentage of bonds equal to your age — so a 30-year-old might hold 30% bonds, 70% stocks. This approach becomes more relevant as you approach retirement and cannot afford a significant market decline.
- Vanguard Total Bond Market ETF (BND) — expense ratio 0.03%; tracks the entire US investment-grade bond market
- iShares Core US Aggregate Bond ETF (AGG) — expense ratio 0.03%; the most widely used bond index ETF
- Fidelity US Bond Index Fund (FXNAX) — expense ratio 0.025%; no minimum; mutual fund version
How Expense Ratios Silently Drain Your Wealth
A 1% annual expense ratio sounds trivial. Over 30 years, it is devastating. Consider $50,000 invested at 8% annual return. With a 0.03% expense ratio, that grows to approximately $493,000. With a 1% expense ratio typical of actively managed funds, it grows to only $374,000. The difference — $119,000 — is nearly 25% of your total wealth, lost purely to fees. This is why expense ratio is the single most important criterion when comparing index funds.
The rule is simple: never pay more than 0.10% expense ratio for a broad market index fund. Any fund charging more has to consistently outperform its index by that exact amount just to break even — and the data shows almost none do over the long term.
How to Buy Your First Index Fund in 3 Steps
- Open a brokerage account — choose from Fidelity, Vanguard, or Schwab for the widest index fund selection and lowest costs. If your employer offers a 401(k) with matching contributions, start there first — the employer match is an immediate guaranteed return on your money.
- Decide on your allocation — for simplicity, many beginners start with a three-fund portfolio: one US stock index fund, one international stock index fund, and one bond index fund. Alternatively, a single target-date fund automatically handles allocation adjustments for you.
- Set up automatic contributions — treat investing like a bill payment. Automate monthly transfers so you invest consistently regardless of market conditions. This dollar-cost averaging approach removes emotion from the equation and builds long-term wealth-building discipline.
Once your index funds are set up and automated, the best ongoing action is usually inaction. Resist the urge to check daily prices or react to market news. Investors who stay the course through market downturns consistently outperform those who attempt to time entries and exits.
See how compound growth transforms your index fund returns — try our Compound Interest Calculator →
