The Best Index Funds and How to Start Investing

An index fund is a group of stocks (or other investments) that aims to mirror the performance of an existing market index, such as the S&P 500 index. An index is made up of companies or securities that represent a part of the financial market. Some large indexes offer a look into the health of the economy as a whole.

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Investing in index funds is easy. Here's a quick rundown of how to do it:

1. Set a goal for your investments

Before you start investing in index funds, it's important to know what you want your money to do for you. If you're looking for a short-term place to park your money and earn a bit of interest, you may be more interested in certificates of deposit, savings accounts or money market funds.

But if you're looking to let your money grow slowly over time, particularly if you're saving for retirement, index funds may be a great investment for your portfolio.

2. Do your research

Once you know what index you want to track, it's time to look at the actual index funds you'll be investing in. When you're investigating an index fund, it's important to consider several factors. Here are some things to keep in mind:

• Company size and capitalization. Index funds can track small, medium-sized or large companies. (These funds are also known as small-, mid- or large-cap indexes).

• Geography. There are funds that focus on stocks that trade on foreign exchanges or a combination of international exchanges.

• Business sector or industry. You can explore funds that focus on consumer goods, technology, health-related businesses.

• Asset type. There are funds that track bonds, commodities and cash.

• Market opportunities. These funds examine emerging markets or other growing sectors for investment.

3. Pick your funds

At this point, it's time to choose which corresponding index fund to buy. Oftentimes, this boils down to cost.

Low costs are one of the biggest selling points of index funds. They’re cheap to run because they’re automated to follow the shifts in value in an index.

However, don’t assume that all index mutual funds are cheap. They still carry administrative costs, which are subtracted from each fund shareholder’s returns as a percentage of their overall investment.

Two funds may have the same investment goal — like tracking the S&P 500 — yet have management costs that can vary wildly. Those fractions of a percentage point may seem like no big deal, but your long-term investment returns can take a hit from the smallest fee inflation. Typically, the bigger the fund, the lower the fees.

» View our list of low-cost index funds and lost-cost ETFs

4. Decide where to buy them and place your order

You can purchase an index fund directly from a mutual fund company or a brokerage. When you're choosing where to buy an index fund, consider:

• Fund selection. Do you want to purchase index funds from various fund families? The big mutual fund companies carry some of their competitors’ funds. However, the selection may be more limited than what’s available in a discount broker’s lineup.

• Convenience. Find a single provider who can accommodate all your needs. For example, if you’re just going to invest in mutual funds (or even a mix of funds and stocks), a mutual fund company may be able to serve as your investment hub. But if you require sophisticated stock research and screening tools, a discount broker that also sells the index funds you want may be better. (If you don't have a brokerage account, here's how to open one.)

• Trading costs. If the commission or transaction fee isn’t waived, consider how much a broker or fund company charges to buy or sell the index fund. Mutual fund commissions are higher than stock trading ones, about $20 or more. Compare that with less than $10 a trade for stocks and ETFs.

• Impact investing. Want your investment to make a difference outside your portfolio? Some funds target companies with a focus on environmental or social justice causes. Learn more about impact investing.

• Commission-free options. Do they offer no-transaction-fee funds? This is an important metric we use to rate discount brokers.

When you go to purchase the fund, you may be able to select a fixed dollar amount to spend or choose a number of shares. The share price of the index fund, and your investing budget, will likely determine how much you're willing to spend. For instance, if you have $1,000 you'd like to invest in an index fund, and the fund you're looking at is selling for $100 a share, you'd be able to purchase 10 shares.

» Need help? Here's how to open a brokerage account

5. Keep an eye on your investments

Index funds have become one of the most popular ways for Americans to invest because of their ease of use. Their diversity — and returns that typically beat actively managed accounts — don't hurt, either. But passive management doesn't mean you should completely ignore your index fund. Here are some things to think about over time:

• Is the index fund doing its job? Your index fund should mirror the performance of the underlying index. To check, look at the index fund’s returns on the mutual fund quote page. It shows the index fund’s returns during several time periods, compared with the performance of the benchmark index. Don’t panic if the returns aren’t identical. Remember, those investment costs, even if minimal, affect results, as do taxes. However, red flags should wave if the fund’s performance lags the index by much more than the expense ratio.

• Is the index fund you want too expensive? If the fees start stacking up over time, you may want to reevaluate your index fund.

• Want to buy stocks instead? If you want to be hands-on with your investments, you may want to explore stocks. Learn how to buy stocks with these step-by-step instructions.

When it comes to index funds that track the S&P 500, the Nasdaq-100 and the U.S. bond market, three funds stand out in terms of expense ratio and investment minimum:

• The Fidelity Zero Large Cap Index (FNILX) is the cheapest major S&P 500 index fund we track.

• The Invesco Nasdaq 100 ETF (QQQM) is the cheapest major Nasdaq-100 index fund we track.

• The Fidelity U.S. Bond Index Fund (FXNAX) is the cheapest bond index fund we track.

Index funds work by tracking specific market indices. So you'll need to know which market index you want your index fund to track before you start investing.

Here are some of the best index funds pegged to the S&P 500, due to their low costs.

Vanguard 500 Index Fund Admiral Shares (VFIAX)

This fund is also known as the Vanguard S&P 500 Index fund. It was founded in 1976 and is the granddaddy of all index funds. Like the other S&P 500 funds on this list, this fund gives exposure to 500 of the largest U.S. companies, which make up about 75% of the U.S. stock market’s total value.

Schwab S&P 500 Index Fund (SWPPX)

As research firm Morningstar notes, this is one of the cheapest S&P 500-tracking funds out there. Launched in 1997, this Schwab fund charges a scant 0.02% expense ratio and requires no minimum investment. That makes it attractive for investors concerned about costs.

Fidelity 500 Index Fund (FXAIX)

Founded in 1988 (and formerly known as Institutional Premium Class fund), Fidelity removed this fund's investment minimum so investors with any budget size could get into the low-cost index fund action.

Fidelity Zero Large Cap Index (FNILX)

In the race for the lowest of the low-cost index funds, this Fidelity fund made news by being among the first to charge no annual expenses. That means investors can keep all their cash invested for the long run.

T. Rowe Price Equity Index 500 Fund (PREIX)

Founded in 1990, the fund’s expense ratio is competitive with other providers, though still on the high side. However, the $2,500 minimum may be steep for beginning investors.

Here are some of the best index funds pegged to the Nasdaq-100 index.

Invesco NASDAQ 100 ETF (QQQM)

QQQM includes 100 of the biggest nonfinancial companies listed on the Nasdaq. It also includes at least 90% of the assets on the NASDAQ-100 index and is rebalanced quarterly.

QQQM has an expense ratio of 0.15%. For every $1,000 invested, you'd pay a $1.50 fee annually.

Invesco QQQ (QQQ)

QQQ holds 101 companies, tracks the NASDAQ-100, and has over $323 billion in assets under management^[0]

Fidelity NASDAQ Composite Index Fund (FNCMX)

FNCMX aims to mirror the performance of the Nasdaq Composite index. The fund usually holds 80% of stocks included in the index. In addition to the typical sectors represented by a Nasdaq index fund (such as IT, consumer services and health care), FNCMX also includes the real estate and material sectors.

FNCMX has an expense ratio of 0.29%. For every $1,000 invested, you'd pay a $2.90 fee annually.

Here are some of the cheapest index funds that track the bond market. We compiled this list by screening for bond index funds with a Morningstar rating of at least 4 stars, and then selecting the three lowest-expense-ratio funds.

Fidelity U.S. Bond Index Fund (FXNAX)

The Fidelity U.S. Bond Index Fund tracks the Bloomberg U.S. Aggregate Bond Index, a broad index of corporate bonds and government bonds.

It's the cheapest bond index fund we track, with no investment minimum and an expense ratio of just 0.025%.

Fidelity Inflation-Protected Bond Index Fund (FIPDX)

The Fidelity Inflation-Protected Bond Index Fund tracks the return of Treasury inflation-protected securities (TIPS), a subset of the government bond market.

Like FXNAX, it has no minimum. Its expense ratio is just 0.05%.

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

Like FXNAX, the Vanguard Total Bond Market Index Fund tracks a broad range of government and corporate bonds. Like FIPDX, it has a low expense ratio of 0.04%.

But unlike the previous two index funds, VBTLX comes with a steep investment minimum of $3,000 (like many other Vanguard funds with the Admiral Shares label).

Despite the fact that fund managers do a lot of work to "beat the market" (namely, a market index), they very rarely do. And if they do, it's highly unlikely that they will continue to beat the market over the long term.

In 2024, of the 3,900 actively managed U.S. stock funds and ETFs monitored by Morningstar, only 13.2% beat the S&P 500, with an average gain of 13.5%. This is compared with the S&P 500's gain of around 25%^[0]

Actively managed funds often underperform the market, while index funds match it. As a result, passively managed index funds typically bring their investors better returns over the long term. Plus, they cost less, as fees for actively managed investments tend to be higher.

A well-diversified investment portfolio generally includes investments in a variety of stocks and bonds. Index funds can make this easier, as they contain a variety of stocks or bonds themselves. In fact, it's possible to build a diversified portfolio with just two index funds.

A common portfolio allocation for beginner investors is 85% stocks and 15% bonds. If you're starting out with just $200, you can set up this portfolio simply by buying $170 worth of FNILX and $30 worth of FXNAX (the cheapest S&P 500 index fund and bond index fund we track, respectively).

If you stay invested in these index funds, and add more money to them periodically, you'll be well on your way to achieving your investment goals. The stock index fund can grow your money during bull markets, while the bond index fund can reduce your losses in the event of a stock market correction.

Some common benchmarks for index funds include:

• The S&P 500: As noted above, S&P 500 is an index of about 500 largest U.S. public companies.

• The Dow Jones Industrial Average: This well-known index (also known as the DJIA) tracks the 30 largest U.S. firms.

• Nasdaq: The Nasdaq Composite tracks more than 3,000 tech stocks.

• Russell 2000 Index: The Russell 2000 tracks 2000 smaller companies. (They're also known as "small caps," referring to companies with market capitalization of less than $2 billion).

• The Wilshire 5000 Total Market Index: The Wilshire 5000 tracks the nearly 7,000 publicly traded U.S. companies. It's weighted by capitalization.

• The MSCI EAFE Index: Tracks performance of large- and mid-cap stocks of firms based in 21 developed nations outside the U.S. and Canada. It includes nations in Europe, Australasia and the Far East.

» Learn more: What is the S&P 500?

Index funds may be less expensive than other funds, but they can still incur some costs. Here are the important ones:

• Investment minimum. The minimum required to invest in a mutual fund can run as low as nothing or as high as a few thousand dollars. Once you’ve crossed that threshold, most funds allow investors to add money in smaller amounts.

• Account minimum. This is different than the investment minimum. Although a brokerage's account minimum may be $0 (common for customers who open a traditional or Roth IRA), that doesn’t remove the investment minimum for a particular index fund.

• Expense ratio. This is one of the main costs of an index fund. Expense ratios are fees that are subtracted from each fund shareholder’s returns as a percentage of their overall investment. Find the expense ratio in the mutual fund’s prospectus or when you look up a quote for a mutual fund on a financial site.

• Tax-cost ratio. In addition to paying fees, owning the fund may trigger capital gains taxes if held outside tax-advantaged accounts, such as a 401(k) or an IRA. Like the expense ratio, these taxes can take a bite out of investment returns.