What Is an Index Fund?
An index fund is a basket of stocks that automatically tracks a market index. Instead of a fund manager picking stocks (and usually underperforming), an index fund simply buys every stock in the index.
- S&P 500 index fund (VOO): Owns all 500 largest US companies
- Total market fund (VTI): Owns 3,000+ US companies of all sizes
- International fund (VXUS): Owns 8,000+ companies outside the US
When you buy one share of VTI, you instantly own a tiny piece of Apple, Microsoft, Amazon, Google, and 3,000+ other companies.
Why Index Funds Win
The data is overwhelming:
- 90% of actively managed funds fail to beat the S&P 500 over 15 years (S&P SPIVA Scorecard 2025)
- Fees compound against you: A 1% annual fee vs 0.03% costs you $590,000 over 40 years on $500/month invested
- No stock-picking required: You don’t need to research companies, read earnings reports, or time the market
- Instant diversification: One fund gives you thousands of stocks. If one company fails, it barely affects your portfolio.
Source: S&P Dow Jones SPIVA Scorecard 2025, Vanguard research papers
Best Index Funds (2026)
- VTI (Vanguard Total Stock Market): 0.03% fee. 3,000+ US stocks. The single best fund for most investors.
- VOO (Vanguard S&P 500): 0.03% fee. 500 largest US companies. Slightly less diversified than VTI but very similar returns.
- VXUS (Vanguard International): 0.07% fee. 8,000+ international stocks. Add 20–40% of this for global diversification.
- FSKAX (Fidelity Total Market): 0.015% fee. Fidelity’s equivalent of VTI. Slightly cheaper.
- FZROX (Fidelity ZERO Total Market): 0.00% fee. Literally free. Fidelity’s loss leader to attract customers.
How to Invest in Index Funds
- Open a brokerage account (Fidelity, Schwab, or Vanguard)
- Transfer money from your bank
- Search for the fund ticker (e.g., “VTI”)
- Buy shares (fractional shares available - invest any dollar amount)
- Set up automatic monthly purchases
- Don’t touch it for 20+ years
The Three-Fund Portfolio
The simplest complete portfolio for any investor:
- 60% VTI (US stocks)
- 30% VXUS (International stocks)
- 10% BND (US bonds - increase this % as you age)
This gives you global diversification across 11,000+ companies and bonds for stability. Rebalance once per year. That’s it.
Historical Returns
- S&P 500 (1928–2025): 9.92% average annual return
- $200/month at 9.92% for 30 years: $454,000 (you invested $72,000)
- Worst 20-year period: Still positive (6.4% annual, 1929–1948)
- Best 20-year period: 17.9% annual (1980–1999)
Source: S&P Global, NYU Stern historical returns database