Published February 25, 2026 • 20 min read • By monkey.investments
An index fund is an investment that automatically buys and holds every stock in a specific market index. Instead of paying a fund manager to pick stocks (which rarely works), an index fund simply mirrors the market. The S&P 500 index, for example, tracks the 500 largest publicly traded companies in the United States. When you invest in an S&P 500 index fund, you own a tiny slice of Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, Berkshire Hathaway, JPMorgan Chase, and 492 other major companies all at once.
The case for index funds is backed by decades of academic research and real-world performance data. The SPIVA Scorecard, published annually by S&P Dow Jones Indices, consistently shows that over 15-year periods, approximately 88 to 92% of actively managed large-cap funds underperform the S&P 500 index. Over 20 years, the percentage climbs even higher. Warren Buffett, the most successful investor of all time, has repeatedly told everyday investors to put their money in a low-cost S&P 500 index fund rather than trying to pick stocks or hire fund managers.
For beginners, index funds solve the two biggest problems: deciding what to buy and keeping costs low. You do not need to research individual companies, read earnings reports, or time the market. You buy one fund, hold it for decades, and let the long-term growth of the economy do the work. Index fund expense ratios in 2026 are as low as 0.00% to 0.03%, meaning you keep virtually all of your returns.
Index funds come in two formats: Exchange-Traded Funds (ETFs) and mutual funds. Both track the same indexes and deliver nearly identical returns. The differences are structural.
ETFs trade on stock exchanges throughout the day, just like individual stocks. You can buy or sell them at any point during market hours (9:30 AM to 4:00 PM Eastern). ETFs are identified by ticker symbols like VOO, VTI, or SPY. Most major brokerages now offer fractional shares of ETFs, meaning you can invest any dollar amount rather than needing to buy a full share. ETFs tend to be slightly more tax-efficient than mutual funds due to their unique creation and redemption mechanism, which allows them to minimize capital gains distributions.
Mutual funds trade once per day at the market close price (4:00 PM Eastern). When you place an order during the day, it executes at the closing net asset value. Mutual funds are identified by five-letter tickers ending in X, like VFIAX, FXAIX, or SWTSX. They make automatic investing easy because you can set up recurring purchases of exact dollar amounts. Some mutual funds still have minimum investment requirements, though many brokerages have eliminated them.
S&P 500 index funds are the most popular index funds in the world, and for good reason. The S&P 500 has delivered an average annual return of approximately 10.2% since its inception in 1957, including dividends. It has survived every recession, financial crisis, pandemic, and geopolitical event for nearly 70 years and always recovered to reach new highs.
Expense Ratio: 0.03% ($0.30/year per $1,000 invested)
Assets Under Management: Over $1.1 trillion
Minimum Investment: $1 (fractional shares) or ~$530 (one full share)
10-Year Average Annual Return: Approximately 12.5% (as of early 2026)
VOO is the gold standard for S&P 500 investing. Vanguard pioneered index investing in 1976 when Jack Bogle created the first index fund available to individual investors. Today, VOO is one of the three largest ETFs in the world. The 0.03% expense ratio means you pay just 30 cents per year for every $1,000 invested. VOO is available at every major brokerage and can be purchased in fractional shares at Fidelity, Schwab, and most other platforms.
Expense Ratio: 0.015% ($0.15/year per $1,000 invested)
Assets Under Management: Over $530 billion
Minimum Investment: $0
10-Year Average Annual Return: Approximately 12.5%
FXAIX is a mutual fund that actually undercuts Vanguard's expense ratio. At 0.015%, it is one of the cheapest S&P 500 funds available anywhere. There is no minimum investment, making it accessible to investors with any amount of money. As a mutual fund, it is ideal for setting up automatic recurring investments. The only limitation is that it must be held through a Fidelity account, but opening a Fidelity account is completely free.
Expense Ratio: 0.0945% ($0.95/year per $1,000 invested)
Assets Under Management: Over $560 billion
Minimum Investment: $1 (fractional shares) or ~$530 (one full share)
10-Year Average Annual Return: Approximately 12.4%
SPY was the first ETF ever created (launched in 1993) and remains the most heavily traded ETF in the world. Its higher expense ratio compared to VOO and IVV makes it slightly less ideal for long-term buy-and-hold investors. However, its massive trading volume means extremely tight bid-ask spreads, making it popular with active traders. For beginners focused on long-term investing, VOO or IVV is the better choice due to lower fees.
Total stock market funds hold not just the 500 largest companies but also mid-cap and small-cap stocks, typically covering 3,000 to 4,000 companies. This gives you exposure to the entire US equity market. Historically, small-cap stocks have delivered slightly higher returns than large-caps over very long periods, though with more volatility. The performance difference between a total market fund and an S&P 500 fund is typically small, usually within 0.1 to 0.3% per year, because the S&P 500 companies make up approximately 80% of the total market by value.
Expense Ratio: 0.03% ($0.30/year per $1,000 invested)
Number of Holdings: Approximately 3,700 stocks
Minimum Investment: $1 (fractional shares)
VTI is the most popular total market ETF and holds virtually every investable stock in the United States. You get large-cap, mid-cap, and small-cap exposure in a single fund. At 0.03%, the cost is identical to VOO. VTI is the cornerstone of the popular three-fund portfolio recommended by the Bogleheads community.
Expense Ratio: 0.00% (literally zero fees)
Number of Holdings: Approximately 2,600 stocks
Minimum Investment: $0
FZROX is a groundbreaking fund that charges absolutely nothing in management fees. Zero. Fidelity launched this fund in 2018 to attract new investors and has maintained the 0.00% expense ratio since. It tracks the Fidelity US Total Investable Market Index rather than a well-known index like the Russell 3000, but the practical performance difference is negligible. The only drawback is it can only be purchased through a Fidelity account. If you already use Fidelity or are willing to open an account, FZROX is the lowest-cost way to own the entire US stock market.
Expense Ratio: 0.03% ($0.30/year per $1,000 invested)
Number of Holdings: Approximately 3,400 stocks
Minimum Investment: $0
SWTSX offers Schwab's take on total market indexing with no minimum investment and an extremely low expense ratio. Schwab's platform is widely regarded as one of the most beginner-friendly, with excellent customer service, physical branch locations across the US, and strong educational content. If you value in-person support alongside low-cost index investing, Schwab is an excellent choice. A beginner guide to index investing pairs well with opening your first Schwab account.
Investing solely in US stocks means your portfolio depends entirely on the US economy. International index funds provide geographic diversification by giving you exposure to developed markets (Europe, Japan, Australia, Canada) and emerging markets (China, India, Brazil, Taiwan). Financial advisors commonly recommend allocating 20 to 40% of your stock portfolio to international funds.
Expense Ratio: 0.08%
Number of Holdings: Approximately 8,500 stocks across 49 countries
Minimum Investment: $1 (fractional shares)
VXUS covers the entire non-US equity market in a single fund. It includes developed market giants like Nestle, Toyota, Samsung, ASML, and Novo Nordisk alongside emerging market companies. The 0.08% expense ratio is remarkably low for international exposure, which typically costs more than domestic funds due to the complexity of trading in foreign markets.
Expense Ratio: 0.00%
Number of Holdings: Approximately 2,400 international stocks
Minimum Investment: $0
FZILX provides international stock exposure at zero cost. Like FZROX, it tracks a Fidelity proprietary index rather than a well-known benchmark, but delivers comparable performance to MSCI and FTSE international indexes. For Fidelity customers building a diversified portfolio, pairing FZROX and FZILX gives you global stock exposure for literally $0 in annual fees.
Bond index funds provide stability and income to your portfolio. When stocks drop 30% in a market crash, bonds typically hold steady or even increase in value. As you get closer to needing your money (for retirement, a home purchase, or other goals), increasing your bond allocation reduces portfolio volatility. A common rule of thumb is to hold your age in bonds as a percentage. A 30-year-old might hold 70% stocks and 30% bonds, while a 60-year-old might hold 40% stocks and 60% bonds.
Expense Ratio: 0.03%
Number of Holdings: Approximately 11,000 bonds
Yield: Approximately 4.3% (as of early 2026)
BND holds US Treasury bonds, government agency bonds, and investment-grade corporate bonds. It provides broad exposure to the entire US investment-grade bond market. The current yield of approximately 4.3% reflects the elevated interest rate environment. BND is the bond component in most three-fund portfolios.
Expense Ratio: 0.025%
Number of Holdings: Approximately 9,000 bonds
Yield: Approximately 4.3%
FXNAX is Fidelity's equivalent to BND, offering broad US bond market exposure at an even lower expense ratio. Like other Fidelity index funds, it has no minimum investment and can be purchased in any dollar amount through a Fidelity account.
| Fund | Ticker | Type | Expense Ratio | Minimum | Holdings |
|---|---|---|---|---|---|
| Vanguard S&P 500 ETF | VOO | ETF | 0.03% | $1 | ~500 |
| Fidelity 500 Index | FXAIX | Mutual | 0.015% | $0 | ~500 |
| iShares Core S&P 500 | IVV | ETF | 0.03% | $1 | ~500 |
| SPDR S&P 500 | SPY | ETF | 0.0945% | $1 | ~500 |
| Vanguard Total Market | VTI | ETF | 0.03% | $1 | ~3,700 |
| Fidelity ZERO Total | FZROX | Mutual | 0.00% | $0 | ~2,600 |
| Schwab Total Market | SWTSX | Mutual | 0.03% | $0 | ~3,400 |
| Vanguard Total Intl | VXUS | ETF | 0.08% | $1 | ~8,500 |
| Fidelity ZERO Intl | FZILX | Mutual | 0.00% | $0 | ~2,400 |
| Vanguard Total Bond | BND | ETF | 0.03% | $1 | ~11,000 |
| Fidelity US Bond Index | FXNAX | Mutual | 0.025% | $0 | ~9,000 |
With so many options, choosing your first fund can feel overwhelming. Here is a simple decision framework that works for the vast majority of beginners.
Open a free account at Fidelity, Schwab, or Vanguard. All three offer $0 commissions on stock and ETF trades, excellent index fund options, and strong educational resources. If you have no preference, Fidelity is a strong default because it offers the ZERO fee fund series and has no account minimums for any fund.
Choose either an S&P 500 fund or a total stock market fund at your brokerage. If you are at Fidelity, FZROX (total market, 0.00% fee) or FXAIX (S&P 500, 0.015% fee) are both excellent. At Schwab, SWTSX (total market, 0.03%) is the go-to. At any brokerage, VOO (S&P 500 ETF, 0.03%) or VTI (total market ETF, 0.03%) are universally available.
Deposit your money and buy the fund. Then set up automatic recurring contributions, even if it is just $25 or $50 per month. Automation removes the temptation to time the market or skip contributions. Dollar-cost averaging, which means investing a fixed amount on a regular schedule regardless of market conditions, has been shown to produce better outcomes for most investors than trying to time their purchases.
As your portfolio grows past $5,000 to $10,000, consider adding an international stock fund (20 to 30% of your portfolio) and a bond fund (based on your age and risk tolerance). This creates the three-fund portfolio that has been endorsed by countless financial advisors, personal finance books, and investing communities as the optimal simple portfolio for individual investors.
The three-fund portfolio, popularized by the Bogleheads community (named after Vanguard founder Jack Bogle), consists of just three index funds that together cover the entire global stock and bond markets. Despite its simplicity, this portfolio has historically outperformed the vast majority of professional fund managers and financial advisors.
| Component | Vanguard ETF | Fidelity Mutual | Purpose |
|---|---|---|---|
| US Stocks (50-70%) | VTI (0.03%) | FZROX (0.00%) | Core growth engine |
| International Stocks (15-30%) | VXUS (0.08%) | FZILX (0.00%) | Geographic diversification |
| US Bonds (10-30%) | BND (0.03%) | FXNAX (0.025%) | Stability and income |
A 25-year-old aggressive investor might allocate 70% US stocks, 20% international stocks, and 10% bonds. A 50-year-old moderate investor might choose 50% US stocks, 20% international stocks, and 30% bonds. The exact percentages matter less than maintaining a consistent strategy and rebalancing once or twice per year.
The Fidelity version of this portfolio costs literally $0 in annual fees. On a $100,000 portfolio, that is $0 per year versus $1,000 or more per year for a typical financial advisor. Over 30 years of investing, the fee savings from index funds versus actively managed funds can amount to hundreds of thousands of dollars.
All major brokerages now offer commission-free trading on ETFs and their own mutual funds. Here is a comparison of the top platforms for index fund investors.
| Brokerage | Commission | Fractional Shares | Best Index Fund | Account Minimum |
|---|---|---|---|---|
| Fidelity | $0 | Yes ($1 min) | FZROX (0.00%) | $0 |
| Charles Schwab | $0 | Yes ($5 min) | SWTSX (0.03%) | $0 |
| Vanguard | $0 | Limited | VTI (0.03%) | $0 |
| Robinhood | $0 | Yes ($1 min) | VOO (0.03%) | $0 |
| E*TRADE (Morgan Stanley) | $0 | No | VOO (0.03%) | $0 |
For pure index fund investing, Fidelity and Schwab offer the best combination of fund selection, platform quality, fractional share support, and customer service. Robinhood has a more streamlined mobile experience but fewer research tools. Vanguard's platform has improved significantly but still lags behind Fidelity and Schwab in user experience.
Paying too much in fees. The difference between a 0.03% index fund and a 1.00% actively managed fund seems small, but it compounds dramatically. On a $500 monthly investment over 30 years at 10% growth, the 0.03% fund would be worth approximately $987,000. The 1.00% fund would be worth approximately $849,000. That is a $138,000 difference just in fees. Always check the expense ratio before investing.
Buying too many overlapping funds. Owning VOO (S&P 500), VTI (total market), and QQQ (Nasdaq 100) gives you massive overlap. Apple alone would appear in all three funds. You do not get more diversification by holding multiple funds that contain the same stocks. One broad US stock fund is sufficient for your US equity exposure.
Trying to time your purchases. Waiting for a market dip to invest sounds smart but almost never works in practice. Research from Charles Schwab analyzed every possible entry point from 1926 to 2024 and found that investing immediately almost always outperformed waiting for a dip. Time in the market beats timing the market.
Selling during downturns. The biggest destroyer of investor returns is panic selling. When the market drops 20%, your instinct screams to sell and stop the bleeding. But selling locks in your losses and means you miss the recovery. The S&P 500 has recovered from every single downturn in history. If you had invested $10,000 in the S&P 500 on the worst possible day in 2008 (right before the crash), held through the entire 50% decline, and never sold, your investment would be worth over $55,000 today.
Neglecting tax-advantaged accounts. If you are investing for retirement and have access to a Roth IRA, use it. Index fund gains in a Roth IRA grow completely tax-free. In a taxable account, you owe capital gains taxes when you sell and income taxes on dividends each year. The tax savings from using a Roth IRA or traditional 401(k) can add up to tens of thousands of dollars over a career.
Where you hold your index funds matters almost as much as which funds you choose. Different account types have dramatically different tax implications.
Best for: Young investors in lower tax brackets. You contribute after-tax dollars, but all growth and withdrawals in retirement are completely tax-free. The 2026 contribution limit is $7,000 per year ($8,000 if over 50). Index funds in a Roth IRA are the most powerful wealth-building tool available to most Americans. If you invest $7,000 per year in a Roth IRA starting at age 25, earning 10% average annual returns, you would have approximately $2.8 million at age 65, all completely tax-free.
Best for: Higher earners who want a tax deduction now. Contributions reduce your taxable income today, but you pay income taxes on withdrawals in retirement. If your employer offers a 401(k) match, always contribute enough to get the full match before investing elsewhere. That match is free money with an immediate 50 to 100% return.
Best for: Money beyond retirement account limits, or savings with non-retirement goals. You pay taxes on dividends and capital gains. ETF index funds are more tax-efficient than mutual funds in taxable accounts due to their in-kind creation/redemption mechanism. Hold tax-inefficient funds (bonds, REITs) in tax-advantaged accounts and tax-efficient funds (broad stock index ETFs) in taxable accounts.
Compare index funds, calculate compound growth, and build your optimal portfolio with free tools from the Spunkeroo network.
Browse Free Tools →For most beginners, the Vanguard S&P 500 ETF (VOO) or Fidelity ZERO Total Market Index Fund (FZROX) are the best starting points. VOO charges just 0.03% per year and tracks the 500 largest US companies with a long proven track record. FZROX charges literally 0% in fees and covers the entire US stock market. Both require no minimum investment. Choose FZROX if you use Fidelity and want zero fees. Choose VOO if you want the most widely recognized fund available at any brokerage.
ETFs trade throughout the day like stocks and can be bought at any brokerage. Mutual funds trade once per day at the closing price and are sometimes restricted to their sponsoring brokerage. For index funds tracking the same benchmark, performance is virtually identical. ETFs have a slight tax efficiency advantage. Mutual funds make automatic dollar-amount investing slightly easier. For beginners, either format works perfectly. Choose whichever is more convenient at your brokerage.
As little as $1 at most major brokerages in 2026. Fidelity, Schwab, and Robinhood all offer fractional shares of ETFs. Fidelity's ZERO fund series has no minimum investment at all. The idea that you need thousands of dollars to start investing is completely outdated. Start with whatever you can afford and add more regularly. Consistency matters far more than the starting amount.
Both are excellent and the difference is small. The S&P 500 holds the 500 largest US companies, representing about 80% of the US market by value. A total stock market fund adds approximately 2,500 to 3,500 mid-cap and small-cap stocks. Their returns have been historically very similar. A total stock market fund gives you slightly more diversification. Either choice is a great foundation. Do not overthink this decision; both dramatically outperform not investing.
For a broad market US index fund, pay no more than 0.10% per year. The best options charge 0.03% or less, with Fidelity's ZERO funds charging 0.00%. On a $10,000 investment, the difference between a 0.03% fund and a 1.00% fund is approximately $97 per year. Over 30 years with compounding, that fee difference can cost tens of thousands of dollars in lost returns. Always check the expense ratio before buying any fund.
Index funds carry market risk. The S&P 500 dropped approximately 50% in 2008 and 34% in early 2020. However, it recovered from both and reached new all-time highs. Over any 20-year rolling period in US history, the S&P 500 has always delivered positive returns. Index funds eliminate single-company risk through diversification. You cannot lose everything in a broad market index fund because it would require every company in the index to fail simultaneously. For long-term investors (10+ year horizon), broad market index funds are among the most reliable wealth-building tools available.
Start with one. A single US total stock market or S&P 500 fund is all you need to begin. As your portfolio grows past $5,000 to $10,000, consider adding an international stock fund and a bond fund for the classic three-fund portfolio. Three funds covering US stocks, international stocks, and US bonds give you exposure to the entire global investment universe. Adding more funds beyond that rarely improves outcomes and increases complexity.
Index fund investing is the closest thing to a proven wealth-building strategy that exists for ordinary people. The data spanning decades and trillions of dollars is unambiguous: low-cost, diversified index funds outperform the vast majority of professional stock pickers, hedge funds, and financial advisors. They charge nearly nothing in fees, require no expertise, and demand almost no time or attention.
Your action plan is simple. Open a brokerage account at Fidelity, Schwab, or Vanguard today. Buy a single S&P 500 or total stock market index fund with whatever amount you can afford. Set up automatic monthly contributions. Do not sell when the market drops. Check your portfolio quarterly at most. Add international and bond funds as your balance grows. That is the entire strategy. It is not glamorous, but it is the approach that actually builds wealth over time.
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