Index funds are popular with investors because they promise ownership of a wide variety of stocks, greater diversification, and lower risk – usually all at a low cost. That’s why many investors, especially beginners, find index funds to be superior investments compared to individual stocks.
Some of the most watched indexes fill up the financial news every night, whether it’s the Standard & Poor’s 500 (S&P 500), the Nasdaq Composite, or the Dow Jones Industrial Average. These indexes are often shorthand for the performance of the market, and investors track them to get a read on how stocks as a whole are faring.
Here’s everything you need to know about index funds, including ten of the top index funds to consider adding to your portfolio this year.
Suggested read: Best Mutual Funds in 2024: Top Picks and Performance
Best index funds for 2024
The list below includes index funds from a variety of companies tracking broadly diversified indexes and includes some of the lowest-cost funds trading on public markets. When it comes to index funds like these, one of the most important factors in your total return is cost. Included are three mutual funds and seven ETFs:
- Fidelity ZERO Large Cap Index
- Shelton NASDAQ-100 Index Direct
- Invesco QQQ Trust ETF
- Vanguard S&P 500 ETF
- SPDR S&P 500 ETF Trust
- Vanguard Russell 2000 ETF
- iShares Core S&P 500 ETF
- Schwab S&P 500 Index Fund
- Vanguard Total Stock Market ETF
- SPDR Dow Jones Industrial Average ETF Trust
1. Fidelity ZERO Large Cap Index (FNILX)
The Fidelity ZERO Large Cap Index mutual fund is part of the investment company’s foray into mutual funds with no expense ratio, hence its ZERO moniker. The fund doesn’t officially track the S&P 500 – technically it follows the Fidelity U.S. Large Cap Index – but the difference is academic. The real advantage is that investor-friendly Fidelity avoids licensing fees to use the S&P name, keeping costs lower for investors.
Expense ratio: 0 percent. That means every $10,000 invested costs $0 annually.
2. Shelton NASDAQ-100 Index Direct (NASDX)
The Shelton Nasdaq-100 Index Direct ETF tracks the performance of the largest non-financial companies in the Nasdaq-100 Index, which primarily includes tech companies. This mutual fund began trading in 2000 and has a strong record over the last five and ten years.
Suggested read: Best ETFs for 2024: Top Exchange-Traded Funds
Expense ratio: 0.5 percent. That means every $10,000 invested costs $50 annually.
3. Invesco QQQ Trust ETF (QQQ)
The Invesco QQQ Trust ETF also tracks the performance of the largest non-financial companies in the Nasdaq-100 Index. This ETF started trading in 1999 and is managed by Invesco, a fund giant. It is the top-performing large-cap fund in terms of total return over the 15 years to Sept. 2021, according to Lipper.
Expense ratio: 0.2 percent. That means every $10,000 invested costs $20 annually.
4. Vanguard S&P 500 ETF (VOO)
As its name suggests, the Vanguard S&P 500 tracks the S&P 500 index and is one of the largest funds on the market with hundreds of billions in assets. This ETF began trading in 2010 and is backed by Vanguard, one of the powerhouses of the fund industry.
Suggested read: How to Buy an S&P 500 Index Fund: Step-by-Step Guide
Expense ratio: 0.03 percent. That means every $10,000 invested costs $3 annually.
5. SPDR S&P 500 ETF Trust (SPY)
The SPDR S&P 500 ETF is the granddaddy of ETFs, founded back in 1993. It helped kick off the wave of ETF investing that has become so popular today. With hundreds of billions in assets, it’s among the most popular ETFs. The fund is sponsored by State Street Global Advisors — another heavyweight in the industry — and it tracks the S&P 500.
Expense ratio: 0.09 percent. That means every $10,000 invested costs $9 annually.
6. Vanguard Russell 2000 ETF (VTWO)
The Vanguard Russell 2000 ETF tracks the Russell 2000 Index, a collection of about 2,000 of the smallest publicly traded companies in the U.S. This ETF began trading in 2010, and as a Vanguard fund, it focuses on keeping costs low for investors.
Suggested read: Mutual Fund vs. ETF: Are ETFs a Better Investment?
Expense ratio: 0.10 percent. That means every $10,000 invested costs $10 annually.
7. iShares Core S&P 500 ETF (IVV)
The iShares Core S&P 500 ETF is sponsored by BlackRock, one of the largest fund companies. This iShares fund is one of the largest ETFs and tracks the S&P 500. With an inception date in 2000, this fund is a long-tenured player that has closely tracked the index over time.
Expense ratio: 0.03 percent. That means every $10,000 invested costs $3 annually.
8. Schwab S&P 500 Index Fund (SWPPX)
With tens of billions in assets, the Schwab S&P 500 Index Fund is on the smaller side of the heavyweights on this list, but that’s not a concern for investors. This mutual fund has a strong record dating back to 1997 and is sponsored by Charles Schwab, a respected name in the industry. Schwab is especially noted for its focus on making investor-friendly products, as evidenced by this fund’s razor-thin expense ratio.
Suggested read: ETF vs. Index Fund: Here’s How They Compare
Expense ratio: 0.02 percent. That means every $10,000 invested costs $2 annually.
9. Vanguard Total Stock Market ETF (VTI)
Vanguard also offers a fund that covers effectively the entire universe of publicly traded stocks in the U.S., known as the Vanguard Total Stock Market ETF. It consists of small, medium, and large companies across all sectors. The fund has been around since 2001 and, with Vanguard as the sponsor, the costs are low.
Expense ratio: 0.03 percent. That means every $10,000 invested costs $3 annually.
Suggested read: Stocks vs. Mutual Funds: Which Should You Invest In?
10. SPDR Dow Jones Industrial Average ETF Trust (DIA)
There aren’t many ETFs tracking the Dow Jones Industrial Average, but State Street Global Advisors offers this fund that tracks the 30-stock index of large-cap stocks. The fund debuted in 1998 and has tens of billions under management.
Expense ratio: 0.16 percent. That means every $10,000 invested costs $16 annually.
Why are index funds so popular?
Index funds based on major indexes are popular for many reasons. These funds offer good returns over time, are diversified, and provide a relatively low-risk way to invest in stocks.
Suggested read: Index Funds vs. Mutual Funds: What’s the Difference?
- Attractive returns – Like all stocks, major indexes fluctuate. But over time, indexes have made solid returns, such as the S&P 500’s long-term record of about 10 percent annually. That doesn’t mean index funds make money every year, but over long periods, that’s been the average return.
- Diversification – Investors like index funds because they offer immediate diversification. One purchase gives ownership in a wide range of companies. One share of an index fund based on the S&P 500 provides ownership in hundreds of companies, while a Nasdaq-100 fund offers exposure to about 100 companies.
- Lower risk – Because they’re diversified, investing in an index fund is lower risk than owning a few individual stocks. That doesn’t mean you can’t lose money or that they’re as safe as a CD, but indexes usually fluctuate less than individual stocks.
- Low cost – Index funds charge little for these benefits, with low expense ratios. For larger funds, you may pay $3 to $10 per year for every $10,000 invested. In fact, one fund listed above charges no expense ratio at all. In index funds, cost is one of the most important factors in your total return.
While some funds such as S&P 500 or Nasdaq-100 index funds allow you to own companies across industries, other funds focus on specific industries, countries, or investing styles (e.g., dividend stocks).
How to invest in an index fund in 3 easy steps
It’s surprisingly easy to invest in an index fund, but you’ll want to know what you’re investing in, rather than buying random funds you know little about.
1. Research and analyze index funds
Your first step is finding what you want to invest in. While an S&P 500 index fund is the most popular, there are index funds for different industries, countries, and investment styles. Consider what you want to invest in and why it might hold opportunity:
Suggested read: What are Mutual Funds? Benefits & Types Explained
- Location: Consider the geographic location. Broad indexes such as the S&P 500 or Nasdaq-100 own American companies, while others focus on narrower locations (France) or broader ones (Asia-Pacific).
- Business: Which industries does the index fund invest in? Pharma, tech, or others? Some funds specialize in certain industries and avoid others.
- Market opportunity: What opportunity does the index fund present? Is it buying pharma companies for blockbuster drugs or stable dividends? Some funds invest in high-growth stocks, others in high-yield stocks.
Carefully examine what the fund is investing in so you know what you own. Sometimes labels can be misleading, but you can check the index’s holdings to see exactly what’s included.
2. Decide which index fund to buy
Once you find a fund you like, consider other factors that may make it a good fit:
- Expenses: Compare expenses. Funds based on similar indexes can charge very different fees.
- Taxes: Mutual funds tend to be less tax-efficient than ETFs; mutual funds may pay taxable capital gains distributions, while ETFs generally do not.
- Investment minimums: Many mutual funds have minimum initial investments, often several thousand dollars. ETFs often have no minimums, and some brokers allow purchasing fractional shares.
3. Purchase your index fund
After deciding which fund fits your portfolio, buy the fund. You can purchase directly from the mutual fund company or through a broker, but it’s usually easier via a broker. ETFs always require buying through a broker.
Suggested read: 10 Best Long-Term Investments in 2024 for Wealth Building
Things to consider when investing in index funds
Consider the following factors:
- Long-run performance: Track at least five to ten years of performance to gauge potential returns. Different funds track different indexes, and some indexes outperform others.
- Expense ratio: Shows annual fees. For funds tracking the same index, paying more makes little sense.
- Trading costs: Some brokers offer low-cost or commission-free trading for ETFs. Beware of sales loads or commissions on mutual funds, which can reduce returns.
- Fund options: Not all brokers offer every mutual fund. ETFs are typically available at all brokers.
- Convenience: Mutual funds your broker offers may be easier to buy than opening new accounts. ETFs may sidestep this issue.
Can an index fund investor lose everything?
Market-based investments like stocks or bonds can lose value, but index funds are highly diversified, often owning dozens or hundreds of securities. For a stock index fund, every stock would have to go to zero for the investor to lose everything, which is very unlikely.
However, index funds can underperform and lose money for years, depending on their holdings. The chance of losing everything in a standard index fund is very low.
What is considered a good expense ratio?
Mutual funds and ETFs typically have low average expense ratios, varying with asset class. In 2020, the average stock index mutual fund charged 0.06 percent ($6 per $10,000 invested), while the average stock index ETF charged 0.18 percent ($18 per $10,000).
Suggested read: How to Buy Stocks: A Step-by-Step Guide for Beginners
Index funds tend to be cheaper than average funds. Compare this with the average stock mutual fund charging 0.54 percent. Many mutual funds are actively managed and charge higher fees.
Anything below the average is considered a good expense ratio. However, differences between 0.10 percent and 0.05 percent expense ratios represent just $5 per year per $10,000 invested. Still, there’s no reason to pay more for an index fund tracking the same index.
Is now a good time to buy index funds?
If you’re buying a broadly diversified stock index fund like the S&P 500 or Nasdaq-100, it can be a good time if you’re prepared to hold long term. Markets tend to rise over time as economies grow and corporate profits increase. Time is your best friend, allowing compounding.
Suggested read: Stock Market Basics: 8 Essential Tips for Beginners
Narrowly diversified index funds (focused on one industry) may do poorly for years.
Experts recommend regular investing to benefit from dollar-cost averaging and to avoid market timing, which can reduce long-term gains.
Index fund FAQ:
If you’re new to index funds, here are answers to common questions.
Suggested read: What is the S&P 500? | S&P 500 Index Explained
How do index funds work?
An index fund is a mutual fund or ETF based on a preset basket of stocks, or index. The index may be created by the fund manager or an external company.
Fund managers replicate the index passively, adjusting holdings as the index changes. This approach keeps expense ratios low.
Popular indexes include the S&P 500, Dow Jones Industrial Average, and Nasdaq-100. Most ETFs are index-based.
Suggested read: 5 Popular Investment Strategies for Beginners to Start Investing
What sort of fees are associated with index funds?
Mutual funds
Mutual fund index funds may charge:
- Sales load: A commission to buy or sell the fund, avoidable by choosing investor-friendly companies like Vanguard, Schwab, or Fidelity.
- Expense ratio: An ongoing fee based on assets, deducted daily.
ETFs
ETFs charge only an expense ratio, deducted daily. ETFs often have lower fees and offer advantages over mutual funds.
The bottom line
These are some of the best index funds on the market, offering investors broad stock ownership at low cost with diversification and lower risk. It’s no surprise these are among the largest funds available.
Suggested read: 7 Smart Investment Strategies for College Students
