Index funds are the single most recommended investment for most people. Warren Buffett has said that a simple S&P 500 index fund is better than most actively managed funds. The data backs this up: over 15 years, more than 90% of active fund managers underperform their benchmark index after fees.
Here is everything you need to know to start investing in index funds in 2026.
What Is an Index Fund?
An index fund is a type of investment fund designed to replicate the performance of a market index — like the S&P 500, which tracks 500 of the largest U.S. companies. Instead of a fund manager picking stocks, the fund automatically holds the same stocks in the same proportions as the index.
Because there is no active management, index funds have dramatically lower fees than actively managed funds. The average actively managed mutual fund charges around 1% per year in fees. Many index funds charge 0.03%–0.20% per year — a difference that compounds into tens of thousands of dollars over a long investing horizon.
Types of Index Funds
Mutual Fund Index Funds
Traditional index funds structured as mutual funds. You buy them directly from the fund company (Vanguard, Fidelity, Schwab) at the end-of-day price. Many have no minimum investment today, though some require $1,000 or more.
Exchange-Traded Funds (ETFs)
ETFs are structured like mutual funds but trade on a stock exchange like individual stocks. You can buy as little as one share (or fractional shares with many brokers). They offer more flexibility than mutual funds and often have slightly lower expense ratios.
For practical purposes, both mutual fund index funds and ETFs work well for long-term investors. ETFs have a slight edge in flexibility; mutual funds may be simpler for automatic investing.
The Best Index Funds to Buy in 2026
Total U.S. Stock Market
- Vanguard Total Stock Market Index Fund (VTSAX) — 0.04% expense ratio
- Fidelity ZERO Total Market Index Fund (FZROX) — 0.00% expense ratio
- Schwab Total Stock Market Index Fund (SWTSX) — 0.03% expense ratio
S&P 500
- Vanguard 500 Index Fund Admiral Shares (VFIAX) — 0.04% expense ratio
- Fidelity 500 Index Fund (FXAIX) — 0.015% expense ratio
- iShares Core S&P 500 ETF (IVV) — 0.03% expense ratio
- SPDR S&P 500 ETF Trust (SPY) — 0.095% expense ratio
International Stocks
- Vanguard Total International Stock Index Fund (VTIAX) — 0.12% expense ratio
- Fidelity International Index Fund (FSPSX) — 0.035% expense ratio
Bonds
- Vanguard Total Bond Market Index Fund (VBTLX) — 0.05% expense ratio
- Fidelity U.S. Bond Index Fund (FXNAX) — 0.025% expense ratio
Step-by-Step: How to Start Investing in Index Funds
Step 1: Open a Brokerage Account
Choose a brokerage that offers commission-free index fund investing. Top picks:
- Fidelity: Best for mutual fund index funds, offers zero-expense-ratio funds, no account minimum
- Charles Schwab: Excellent selection, no account minimum, good research tools
- Vanguard: Best for Vanguard-specific funds; platform is more basic
- M1 Finance: Best for automated investing via custom portfolios
Step 2: Choose Your Account Type
- Roth IRA: Tax-free growth, tax-free withdrawals in retirement. Maximum $7,000/year contribution in 2026. Best for most people under 50.
- Traditional IRA: Tax-deductible contributions, taxed on withdrawal. Same limits as Roth.
- 401(k): Employer-sponsored, often with a match. Contribute enough to get the full employer match first — it’s free money.
- Taxable brokerage account: No contribution limits, no special tax treatment. Use after maxing retirement accounts.
Step 3: Pick Your Index Fund(s)
For most beginners, one or two funds is all you need:
- Simplest approach: One total U.S. stock market fund (e.g., FZROX or VTSAX)
- Balanced approach: 80% U.S. stocks + 20% international stocks
- Three-fund portfolio: U.S. stocks + international stocks + bonds
Your allocation between stocks and bonds depends on your timeline and risk tolerance. The general rule: 110 minus your age equals your stock percentage. If you are 30, that’s 80% stocks and 20% bonds. In a Roth IRA with 30+ years to retirement, many advisors recommend 100% stocks.
Step 4: Set Up Automatic Investing
Automate contributions to your account so you invest consistently without thinking about it. Set up a recurring transfer from your checking account to your brokerage account on payday. Enable automatic investment in your chosen fund. This is the “set it and forget it” approach that has made index fund investing so successful for ordinary investors.
Step 5: Reinvest Dividends
Make sure dividend reinvestment is turned on. Dividends paid by the fund will automatically purchase additional shares, accelerating your compounding over time.
What Returns Can You Expect?
The S&P 500 has returned an average of approximately 10% per year historically (about 7% after inflation). This is not a guarantee of future returns, but it illustrates the long-term power of staying invested.
Example: $500/month invested for 30 years at 7% annual return = approximately $566,000
Common Mistakes to Avoid
- Trying to time the market. Staying invested consistently beats trying to buy at the bottom. Time in the market beats timing the market.
- Panic selling during downturns. Every significant market drop in history has been followed by a recovery. Selling during a crash locks in losses permanently.
- Paying high fees. Expense ratios above 0.50% are hard to justify for index funds when 0.03% options exist.
- Waiting for the “right time” to invest. The best time to invest was yesterday. The second best time is today.
Bottom Line
Index fund investing is not complicated: open an account, pick one or two broad low-cost funds, automate your contributions, and do not touch it for decades. The discipline of consistent investing in diversified, low-cost index funds is more powerful than any stock-picking strategy. Start with whatever you can afford — even $50 per month — and increase contributions over time as your income grows.