Updated October 2026
Index funds are the most important investing concept a beginner needs to understand. They are also the simplest. Once you understand them, you will wonder why anyone invests differently.
What Is an Index Fund?
An index fund automatically tracks a stock market index — like the S&P 500 (500 largest US companies) or the Total US Stock Market (~3,700 companies). Instead of a manager picking stocks, the fund simply buys every stock in the index, proportionally. No guessing. No strategy. No active management.
When the S&P 500 goes up 12% in a year, your S&P 500 index fund goes up approximately 12%. When it drops 20%, your fund drops approximately 20%. You own the whole market — the good years and the bad ones.
Why Index Funds Beat Active Funds
A 2024 S&P SPIVA report found that over a 15-year period, 92.2% of actively managed large-cap US funds underperformed the S&P 500 index. The professionals trying their hardest to beat the market almost always lost to it.
The reason: active funds charge 1-2% annual fees. Index funds charge 0.03-0.04%. That 1% fee difference compounds against you: on $100,000 over 30 years, a 1% annual fee costs approximately $90,000 in lost growth.
Jack Bogle, the Vanguard founder who invented the index fund, said it best: "Do not look for the needle in the haystack. Just buy the haystack."
The Two Index Funds You Need to Know
Total US Stock Market Fund
- Fidelity: FSKAX — expense ratio 0.015% (essentially free)
- Vanguard: VTSAX — expense ratio 0.04%
- Schwab: SWTSX — expense ratio 0.03%
Owns every publicly traded US company. Maximum US diversification in one fund.
Total World Stock Market Fund
- Fidelity: FZILX — expense ratio 0.00% (free)
- Vanguard: VTWAX — expense ratio 0.10%
Owns stocks from every country. If you want ultimate diversification — US and international — one total world fund is your entire portfolio.
Index Funds vs. ETFs: Does It Matter?
- Mutual fund index fund: Priced once daily, easy to automate contributions, sometimes has minimum investment
- ETF (exchange-traded fund): Trades like a stock throughout the day, no minimum, more tax-efficient in taxable accounts
VTI (Vanguard Total Market ETF) is the ETF version of VTSAX — same holdings, same performance, no minimum. For a Roth IRA at Fidelity, FSKAX is the simplest starting point.
The One-Fund Portfolio
You do not need 15 funds. One total market index fund is a complete, diversified portfolio. Add an international fund if you want broader exposure. That is it. Complexity does not equal better returns — it usually just means higher fees and more decisions.
My First Index Fund Investment
I opened my Roth IRA at Fidelity on a Tuesday evening with $500 I had saved from one month of the 50/30/20 budget rule. I typed "FSKAX" into the search bar, read the description — "invests in stocks of companies, representing approximately the total US stock market" — and clicked Buy.
That was my entire research process. No stock screening. No earnings reports. No market timing. Within three minutes I owned a proportional slice of approximately 3,700 US companies — from Apple and Microsoft down to small regional businesses.
Three months later the market dropped 9% during a rate hike cycle. My account showed a loss. I checked the account, reminded myself that every single previous market drop in US history had been followed by full recovery, and closed the app. Today that account has more than tripled from its initial balance — not because of any decision I made after the purchase, but because I stayed invested through the volatility.
The Long-Term Numbers Are Unambiguous
The S&P 500 has returned an average of approximately 10.7% annually since 1926, according to data compiled by Macrotrends through December 2025. The total US stock market has performed similarly. No actively managed fund has consistently beaten these benchmarks over 20+ year periods.
The SPIVA (S&P Indices Versus Active) scorecard, published annually by S&P Global, tracks the performance of every actively managed US fund against its benchmark index. The 2024 report found that over a 20-year period, 94.5% of large-cap active funds underperformed the S&P 500 index. The 5.5% that outperformed in one decade typically underperformed in the next.
This is not a criticism of professional fund managers — many are brilliant. It is an acknowledgment of a structural reality: beating an index after fees, consistently, over decades, is extraordinarily difficult. For the individual investor who does not have time to research stocks full-time, the index fund captures the market return reliably at near-zero cost.
As Jack Bogle, Vanguard founder and pioneer of the index fund, stated in his final book published in 2018: "The index fund is a most unlikely hero for the typical investor. Make no mistake: it is the investor's best friend." He was right then and the data has only confirmed it since.
The Cost of Fees Over Time: Why 1% Matters More Than You Think
The difference between a 0.04% expense ratio (index fund) and a 1.0% expense ratio (typical active fund) seems trivial — it is less than one percentage point. Over 30 years, it is not trivial at all.
According to a 2024 Vanguard analysis, on a $100,000 initial investment growing at 7% annually over 30 years:
- At 0.04% annual fee (index fund): ending balance approximately $760,000
- At 1.00% annual fee (active fund): ending balance approximately $660,000
- Difference: $100,000 — lost entirely to fees
The principle is simple but the math is counterintuitive: fees compound against you the same way returns compound for you. A fee paid each year reduces the base on which next year's growth is calculated. Over 30 years, 1% annual fees consume approximately 13% of total portfolio value.
John C. Bogle, who founded Vanguard in 1974 specifically to offer low-cost index funds, stated the case definitively: "In investing, you get what you don't pay for. Whatever returns financial markets are generous enough to provide, costs will reduce your share by exactly that amount." The SPIVA (S&P Indices Versus Active) 2024 report confirmed his thesis for the 22nd consecutive year: 94.5% of large-cap active managers underperformed the S&P 500 over a 20-year period, after fees.
Quick Action Steps
- Open a Roth IRA at Fidelity or Vanguard if you have not already (see the getting started guide)
- Search for FSKAX (Fidelity) or VTSAX (Vanguard)
- Buy with whatever amount you have — even $50
- Set up monthly automatic contributions
- Do not sell when the market drops
Not sure which account to use? Read: Roth IRA vs Traditional IRA — which is right for your situation.