Best Index Funds and How to Invest in Them

If you want to put money to work in the stock market, you don't necessarily need to buy individual stocks or pay expensive fees to mutual fund managers.

Index funds can put your investment strategy on autopilot in a cost-effective manner. They can do this while still producing excellent appreciation over the long run.

An index fund is an investment that tracks a financial index, such as the S&P 500 or Nasdaq Composite. Index funds can be found for broad stock market indexes. There are also more narrowly focused stock indexes, indexes that invest in specific sectors or types of stocks, and indexes that focus on fixed-income investments like bonds, just to name a few. There are hundreds of great index funds available.

Index funds generally invest in all the components of the benchmark index they track.

Getting started

Four great index funds to get you started in 2025

If you're looking for some index fund ideas to help you invest better, these four are a good place to start. All of these are broad index funds that could help form a solid backbone for your investment portfolio.

• Vanguard S&P 500 ETF (VOO -0.31%): Tracks the benchmark S&P 500 index, which is widely regarded as the best overall representation of the stock market; $3 annual cost for a $10,000 investment (0.03% expense ratio).
• Vanguard Total Stock Market ETF (VTI -0.27%): Tracks an index of U.S. stocks of all sizes; $3 annual cost for a $10,000 investment (0.03% expense ratio).
• Vanguard Total International Stock ETF (VXUS 0.09%): Tracks an index of global stocks, excluding the U.S.; $5 annual cost for a $10,000 investment (0.05% expense ratio).
• Vanguard Total Bond Market ETF (BND 0.32%): Tracks an index of various bonds; $3 annual cost for a $10,000 investment (0.03% expense ratio).

It's worth noting that the annual costs mentioned here, which are technically known as expense ratios, aren't actual out-of-pocket costs you pay. They are the fund's various management fees and are reflected in the share price of the index fund over time.

Also, you might notice that this list includes four Vanguard ETFs, and there's a good reason for it. Vanguard funds have low expenses and are widely regarded as an easy entry point for new index fund investors, but you can find similar funds from other providers as well.

The bottom line is that by allowing you to form a stock and bond asset allocation that is appropriate for your risk tolerance and investment goals, index funds like these let you create a portfolio without the need to research individual stocks or pay an expensive investment advisor.

Once you've used index funds like these to establish a backbone to your portfolio, you can then explore some more focused and specialized index funds to add over time.

Steps to take

1. Pick an index

There are hundreds of indexes you can track using index funds.

The most popular index to invest in is the S&P 500 index. This includes the stocks of 500 of the largest U.S. companies and is widely considered the best gauge of how the overall U.S. stock market is doing. Here's a short list of some additional top indexes, broken down by the part of the market that they cover:

• Large U.S. stocks: S&P 500, Dow Jones Industrial Average, Nasdaq Composite.
• Small U.S. stocks: Russell 2000, S&P SmallCap 600.
• International stocks: MSCI EAFE, MSCI Emerging Markets.
• Bonds: Bloomberg Global Aggregate Bond.

In addition to these broad indexes, you can find sector indexes tied to specific industries. For example, you can buy an index fund that tracks the financial sector.

There are several other types of index funds. You can find country indexes that target stocks in specific international markets. You can also find style indexes emphasizing fast-growing companies or value-priced stocks, as well as other indexes that limit their investments based on their own filtering systems.

2. Choose the right fund for your index

Once you've chosen an index, you can generally find at least one index fund that tracks it. For popular indexes, like the S&P 500, you might have a dozen or more choices, all tracking the same index. If you have more than one fund option for your chosen index, you'll want to ask some basic questions.

First, out of the top index funds that meet your needs, which index fund has the lowest costs? Even a seemingly small difference can have a big impact over the long term.

You can determine which index fund is more cost-effective by comparing the expense ratios of two or more index funds.

Second, are there any limitations or restrictions on an index fund that prevent you from investing in it? For example, many mutual fund index funds have minimum investment requirements.

The answers to those questions should make it easier to pick the right index fund for you.

3. Buy index fund shares

You can open a brokerage account that allows you to buy and sell shares of the index fund that interests you. Index funds come in both exchange-traded fund (ETF) and mutual fund forms.

While you could open an account directly with a fund provider, most investors prefer to have all their investments held in a single brokerage account. Plus, many brokers allow customers to buy fractional shares of index funds in ETF form. This can allow you to start investing and create a diversified portfolio without needing thousands of dollars right away.

Pros and cons

Pros and cons

Why invest?

Why invest in index funds?

Investing in index funds is one of the easiest and most effective ways for investors to build wealth. By simply matching the impressive performance of the financial markets over time, index funds can turn your investment into a huge nest egg in the long run -- and best of all, you don't have to be a stock market expert to do it.

Investors find index funds especially useful for many reasons:

1. Minimal investment research: You can rely on the index fund's portfolio manager to simply match the underlying index's performance over time. If you buy an S&P 500 index fund and the S&P 500 rises by 10%, your investment should increase by the same amount.
2. Managed investment risk: Diversification leaves you less likely to suffer big losses if something bad happens to one or two companies in the index.
3. Lots of choices: You can buy broad index funds, such as those that track the S&P 500, or more focused index funds that invest in specific sectors or trends. For example, if you want to invest in artificial intelligence stocks, there are several great AI index funds that can help you do it.
4. Low fees: Index funds are usually far less costly than alternatives like actively managed funds. That's because an index fund manager simply has to passively buy the stocks or other investments in an index.
5. Tax efficiency: Index funds are quite tax-efficient compared to many other investments. Index funds generally don't do as much buying and selling of their holdings as actively managed funds, so they typically produce lower capital gains that can add to your tax bill.
6. Building your portfolio over time: When you use index funds, you are a passive investor. You can invest month after month and ignore short-term ups and downs, confident that you'll share in the market's long-term growth and build your nest egg.

Why not invest?

Why not invest in index funds?

As simple as index funds are, they're not for everyone. The downsides of investing in index funds include the following:

1. No chance of beating the benchmark: Index funds are designed solely to match the market's performance or the performance of a certain benchmark index. If you want to prove your mettle as a superior investor, index funds won't give you that chance.
2. Short-term downside risk: Index funds track their markets in good times and bad. They can be volatile places to put your money, especially when the economy or stock market isn't doing particularly well. Investors may have been reminded of this lesson during a stock market correction in early 2025, just to name a recent example. If your primary objective is capital preservation (not losing money), investments like bonds or high-yield certificates of deposit (CDs) could be the better choice for you.
3. Many different stocks: The diversification of an index fund works both ways. Depending on the index you choose, you could end up owning some stocks you'd rather not own while missing out on others you'd prefer.

Related investing topics

Should you invest?

Are index funds right for you?

If you have the time, knowledge, and desire to create a portfolio of individual stocks, by all means, go for it. But index funds can be a great wealth-building tool all by themselves.

Index funds offer investors of all skill levels a simple, time-tested way to invest. Plus, they can be a nice backbone to any stock portfolio, even for the most experienced and knowledgeable investors.

If you're interested in growing your money but would rather put some or all of your investments on autopilot, index funds can be a great solution to achieve your financial goals.

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