An index fund is a fund that simply buys every company (or nearly every company) in a market index — like the S&P 500 — instead of trying to pick winners. Buy one, and you instantly own a small slice of hundreds of companies at once, for a fraction of the cost of a traditional actively managed fund.
Educational only — not financial advice.
What Is an Index Fund?
An index fund is a type of mutual fund or ETF built to track a specific market index as closely as possible, rather than having a manager actively choose which stocks to buy and sell. The most common example is a fund that tracks the S&P 500, an index of roughly 500 of the largest publicly traded companies in the United States. Own one share of an S&P 500 index fund and you effectively own a tiny piece of every company in it — from large tech firms to banks, healthcare companies and retailers — in proportion to their size.
Index funds exist for other markets too: total US stock market funds, international funds, bond funds, and small-cap or sector-specific indexes. But the S&P 500 index fund remains the classic starting point for most beginners because it offers instant exposure to the backbone of the US economy.
How Index Funds Work
An index fund’s manager does not try to guess which stocks will outperform. Instead, the fund simply buys (and periodically rebalances) the same companies, in the same proportions, as the index it tracks. This passive approach means far less research, trading and staffing than an actively managed fund — which is exactly why index funds can charge such low fees. When the index goes up, your fund goes up by roughly the same amount, minus a very small fee. When it goes down, so does your fund. You are not betting on any single company; you are betting on the market as a whole continuing to grow over time.
Why Index Funds Are Popular With Beginners
- Instant diversification — hundreds (or thousands) of companies in a single purchase, instead of trying to pick individual winners.
- Very low fees — many of the largest S&P 500 index funds charge a fraction of a percent per year, since there is no expensive research team to pay for.
- Hands-off — there is nothing to actively manage or monitor day to day.
- Strong long-term track record — data from S&P’s own SPIVA scorecards has repeatedly shown that most actively managed U.S. large-cap funds underperform the S&P 500 over 10- and 15-year periods, largely because their higher fees and trading costs eat into returns.
- Simplicity — a single index fund can be an entire beginner portfolio, with no need to research individual stocks.
Popular Low-Cost Index Funds Compared
Here are some of the most widely held S&P 500 and total-market index funds beginners commonly consider. Expense ratios below are approximate and change occasionally — always confirm the current figure on the provider’s own website before investing.
| Fund | Provider | Tracks | Type | Approx. Expense Ratio |
|---|---|---|---|---|
| VOO | Vanguard | S&P 500 | ETF | ~0.03% |
| IVV | iShares (BlackRock) | S&P 500 | ETF | ~0.03% |
| SWPPX | Charles Schwab | S&P 500 | Mutual fund | ~0.02% |
| FXAIX | Fidelity | S&P 500 | Mutual fund | ~0.015% |
| SPY | State Street | S&P 500 | ETF | ~0.09% |
| VTI | Vanguard | Total US stock market | ETF | ~0.03% |
Index Fund vs ETF
These terms overlap more than they conflict. “Index fund” describes the strategy — passively tracking an index. An ETF (exchange-traded fund) describes the structure — a fund that trades on an exchange like a stock, with a live price throughout the day. Most index funds today are available as ETFs, and most beginners simply buy a low-cost index ETF like VOO or VTI to get the benefits of both: index-fund pricing and stock-like ease of trading.
Index Fund vs Mutual Fund
A traditional index mutual fund (like FXAIX or SWPPX above) only trades once per day, after the market closes, and can sometimes require an account directly with the fund provider. An index ETF trades throughout the day like a stock and can be bought through any standard brokerage account. For most beginners, the ETF version is simpler to access — see our guide on choosing a brokerage account to get started.
How to Start Investing in an Index Fund
- Open a brokerage account. Any beginner-friendly broker will let you buy index ETFs; see our comparison of the best brokerage accounts for beginners.
- Decide taxable vs retirement account. You can hold index funds in a standard taxable account or inside a tax-advantaged retirement account.
- Search for a broad, low-cost index fund or ETF — an S&P 500 or total-market fund is the classic starting point.
- Invest a little, regularly. Consistent monthly contributions (dollar-cost averaging) matter more than trying to time the market.
- Leave it alone. Index funds are built to be held for years, not traded daily.
Common Mistakes to Avoid
Beginners sometimes undo the benefits of index investing by chasing narrower, higher-fee “index” funds that track a single sector or theme, or by panic-selling during a downturn. Others hold several different S&P 500 funds from different providers, which adds no real diversification since they all own the same 500 companies — one broad, low-cost fund is usually enough.
Frequently Asked Questions
Is an index fund a good investment for beginners?
For most beginners, yes. Low fees, instant diversification, and a strong long-term track record make broad index funds one of the most commonly recommended starting points for new investors.
How much money do I need to start investing in an index fund?
Many brokers now allow fractional shares, so you can start an index fund or ETF with as little as a few dollars. See our guide on how to start investing with $100.
Do index funds pay dividends?
Yes. Most S&P 500 and total-market index funds pass through the dividends paid by the underlying companies, either as cash or automatically reinvested, depending on your settings.
Can an index fund lose money?
Yes. An index fund rises and falls with its underlying market, so it can lose value, sometimes sharply, over short periods. Historically, broad US index funds have recovered and grown over long time horizons, but past performance does not guarantee future results.
For an independent, ad-free primer on fund investing, see the SEC’s Investor.gov.
The Bottom Line
An index fund is a simple, low-cost, diversified way to invest in an entire market at once — which is exactly why it is the classic first investment for beginners. Pick a broad, low-fee fund, invest consistently, and give it time.
Educational only, not investment advice. Investing involves risk, including the possible loss of your money.
- Best Index Funds for Beginners in 2026 — real low-cost funds compared on fees and holdings.
- How to Invest in the S&P 500: A Beginner’s Guide — the step-by-step version of everything above.
- How to Invest in ETFs for Beginners — opening the account and placing your first trade.
Izhaq Shah is the founder of GetIntoMarkets. He holds a Master’s in Finance and Commerce, with over 10 years in the financial industry and 15 years of writing experience. He makes investing in stocks, ETFs and crypto simple and practical for everyday people building wealth with confidence.