Everything you need to know to start investing — explained in plain English.
An index fund is a type of investment that tracks a market index — like the S&P 500, which holds the 500 largest U.S. companies. Instead of trying to pick winning stocks, an index fund simply buys every stock in the index, giving you instant, automatic diversification.
Think of it as buying a tiny piece of every major U.S. company at once: Apple, Microsoft, Amazon, Google, and hundreds more — all through a single investment.
Index funds use a strategy called passive management. Instead of a fund manager making daily decisions about which stocks to buy or sell, the fund simply mirrors an index automatically. This has two major benefits: dramatically lower fees and broad diversification.
Most index funds charge between 0.03% and 0.20% per year — compared to 1%–2% for actively managed funds. On a $100,000 portfolio, that difference can compound to hundreds of thousands of dollars over a lifetime.
These track the overall U.S. stock market, such as the S&P 500 or Total Stock Market Index. These are ideal for most long-term investors and make up the core of a simple, effective portfolio.
Funds that track stocks outside the U.S. Adding international exposure can further reduce risk by diversifying across multiple economies and currencies.
These track bond markets and provide stability. As you get closer to retirement, many advisors recommend gradually shifting a portion of your holdings into bond index funds to reduce volatility.
Funds focused on specific industries like technology, healthcare, or energy. These carry more concentrated risk but allow you to express a view on specific sectors.
Both track indexes, but they're structured differently. Mutual fund index funds are priced once per day; ETFs trade on a stock exchange throughout the day like regular stocks. For most long-term buy-and-hold investors, the difference is minimal. ETFs tend to have slightly lower costs and work well with fractional shares.