In 1976, the Vanguard Group launched the First Index Investment Trust, which is now the Vanguard 500 Index Fund.
The firm’s goal was to “democratize the institutional strategy of indexing… The index strategy, previously available only to pension funds and other institutional investors, brought low costs and broad diversification to individual investors.”
Nearly 50 years later, index funds are at the core of countless portfolios, from novices just starting out to major insurers and other institutions — and with good reason. They offer an inexpensive, efficient, simple way to reduce risk and grow wealth, even for the greenest investors.
Are Index Funds a Good Way To Invest?
Index funds are a good way to invest because they’re simple, inexpensive and diversified. The purchase of a single share can buy you ownership in hundreds or even thousands of publicly traded companies. On top of that, index funds have historically outperformed expensive actively managed mutual funds.
That’s not to say they are without risk — no investment is. But over the long term, index funds are a good way to grow your wealth because they track large swaths of the market, and the market trends up over time. Also, since index funds don’t change their holdings as frequently as actively managed funds, they result in fewer taxable gains.
They can make excellent additions to 401(k)s, IRAs, Roth IRAs, individual brokerage accounts or any other investment vehicle.
What Are the Top 5 Index Funds?
The five biggest index funds according to assets under management are:
- SPDR S&P 500 ETF Trust (SPY)
- iShares Core S&P 500 ETF (IVV)
- Vanguard S&P 500 ETF (VOO)
- Vanguard Total Stock Market ETF (VTI)
- Invesco QQQ Trust (QQQ)
Bigger Isn’t Always Better
As you can see, some of the biggest and most popular index funds track benchmark indices like the S&P 500 and Nasdaq, and those kinds of funds have excellent track records because they include some of the largest and most stable companies in the world.
But there’s a whole universe of index funds to choose from depending on your investing style, interests and goals.
Here are just a few of the many diverse choices available to index fund investors:
- iShares Core U.S. Aggregate Bond ETF (AGG): A tax-efficient and low-cost fund that offers exposure to U.S. investment-grade bonds.
- iShares Russell 2000 ETF (IWM): This fund mirrors the Russell 2000, an index that tracks the 2,000 smallest publicly traded companies in the United States.
- Vanguard Mid-Cap Growth ETF (VOT): This fund mirrors the performance of the mid-cap stock market, which includes companies that are bigger than small-cap businesses but smaller than the large-cap giants.
- Vanguard Balanced Index Fund Admiral Shares: This index fund provides an easy, low-cost way to gain exposure to both equity and fixed investments. It invests roughly 60% in stocks and 40% in bonds.
Are Index Funds Good for Beginners?
There’s probably no better investment for beginners than index funds, which is why so many professionals recommend them. Since they track entire indexes, they don’t require you to pick individual stocks, research financial reports or try to time the market.
They spread your money across a wide variety of companies, which helps mitigate risk by tracking all of the companies in a specific sector, of a specific market cap or even the entire global stock market.
Index Funds Make Single-Security Portfolios a Reality
The purchase of a single index fund can create an instant portfolio.
For example, if you buy a share or even a partial share of SPY, IVV, VOO or any of the other index funds that track the S&P 500, you’ll own a stake in all 500 of the largest American companies.
That makes them excellent vehicles for buy-and-hold investing — just keep contributing whatever funds you have on a consistent basis and you’ll never have to worry about monitoring or managing your holdings.
Index funds have an excellent track record since the Vanguard Group created the first one in 1976, and since they’re available as ETFs, beginners can buy and sell them in shares on the open market just like individual stocks with nothing more than a brokerage account.
Can I Buy Index Funds With $100?
You can buy index funds with $100, $10, $1 or however much money you have. That’s because it’s become easy to find no-fee brokerages that support partial-share investing. Also called fractional-share investing, the method lets investors buy a portion of a share of a stock or an ETF if they can’t afford or don’t want a whole share.
For example, the popular Vanguard 500 Index Fund ETF (VOO) currently trades for roughly $401 according to Google Finance, which is out of reach for many investors. Until recently, you would have had to save toward the purchase of a full share plus the cost of your broker’s commission.
But thanks to the rise of no-fee brokerages and partial-share investing, $100 can buy you 24.69% of a share, putting your money in play without having to wait until you can spring for a whole share.
Good To Know
Many experts recommend dollar-cost averaging as a strategy that pairs well with index fund investing.
The idea is to invest a fixed amount of money on a regular basis, irrespective of the price of a share. Over time, you’ll buy more shares when the price is low and fewer when the price is high, which can lower your cost basis and minimize your risk in the long term. For example, if you invest $100 per month and your index fund is $100 per share, you will buy one share. But if the price drops to $50 the next month, you’ll buy two shares. It’s a popular investment strategy because it is a simple way to invest consistently with whatever you have.
Information is accurate as of June 23, 2023.
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- Vanguard. "What is an index fund?"
- Forbes. 2023. "Index Funds vs. Mutual Funds."
- ETF Database. "Largest ETFs: Top 100 ETFs By Assets."
- iShares. "iShares Core U.S. Aggregate Bond ETF."
- iShares. "iShares Russell 2000 ETF | IWM."
- Forbes. 2023. "What Are Index Funds? How Do They Work?"
- Forbes. 2023. "How To Invest with Dollar Cost Averaging."