How to Invest in Index Funds

An index fund is an investment that tracks a market index, typically made up of stocks or bonds. Index funds invest in all the components that are included in the index they track, and they have fund managers whose job is to make sure that the index fund performs the same as the index does

Pick an Index

There are hundreds of different indexes you can track using index funds. The most popular index is the S&P 500 which includes 500 of the top companies in the U.S. stock market.

In addition to these broad indexes, you can find sector indexes that are tied to specific industries, country indexes that target stocks in single nations, style indexes that emphasize fast-growing companies or value-priced stocks, and other indexes that limit their investments based on their own filtering systems.

Choose the right fund for your index

Ask yourself the following questions: which index fund most closely tracks the performance of the index?

Which index fund has the lowest costs.
Are there any limitations or restrictions on an index fund that prevent you from investing in it?
Does the fund provider have other index funds that you’re also interested in using?

4 index funds to get you started

Vanguard 500 Index (NasdaqMutFund:VFIAX): Tracks the S&P 500 index; $4 annual cost for a $10,000 investment

The Vanguard Total Stock Market (VFSAX) tracks the total market size of U.S. stocks of all sizes, $4 annually cost for the same amount of money; $5 for a 10,000 dollar investment.
VTI: Tracks the global market cap of global stocks, excluding the US. $11 annual cost per $10k investment.

Buy index fund shares

Open an account directly with the mutual fund company that offers the fund.

Alternatively, you can open a brokerage account with a broker that allows you to buy and sell shares of the index fund you’re interested in.
Brokerage option is best if you anticipate investing in several different index funds offered by different fund managers