Index funds are investment funds that track a specific market index, and some of the most popular ones include the Vanguard S&P 500 ETF (VOO), the Vanguard Total Stock Market ETF (VTI), and the iShares Core S&P 500 ETF (IVV). These funds hold hundreds or thousands of stocks to mirror the performance of a particular slice of the market, and they charge very low fees compared to actively managed funds. Here’s a breakdown of the main categories and specific funds worth knowing about.
S&P 500 Index Funds
S&P 500 funds track the 500 largest publicly traded U.S. companies, which together represent roughly 80% of the total U.S. stock market’s value. They’re the most widely held index funds for a reason: broad exposure to big, established companies with extremely low costs.
The most popular options include:
- Vanguard S&P 500 ETF (VOO) with an expense ratio of 0.03%, making it one of the cheapest ways to own the index. It holds hundreds of billions in assets.
- iShares Core S&P 500 ETF (IVV) from BlackRock, also at 0.03%, and one of the largest ETFs in existence.
- Schwab S&P 500 Index Fund (SWPPX) at just 0.02%, the cheapest on this list. It’s a mutual fund rather than an ETF, which some investors prefer for automatic investing.
- SPDR S&P 500 ETF Trust (SPY) at 0.095%. It was the first ETF ever created back in 1993 and remains the most heavily traded, which makes it popular with active traders.
- Fidelity ZERO Large Cap Index (FNILX) with an expense ratio of literally 0%. Fidelity achieves this by tracking its own proprietary index rather than licensing the official S&P 500 index, but the holdings are nearly identical.
The expense ratio is the annual fee you pay as a percentage of your investment. At 0.03%, you’d pay $3 per year for every $10,000 invested. That’s essentially free compared to actively managed funds, which often charge 0.50% to 1.00% or more.
Total U.S. Stock Market Funds
If you want to go broader than the S&P 500, total stock market funds hold not just large companies but also mid-size and small companies. That means you’re investing in several thousand stocks instead of 500, capturing more of the U.S. economy.
The main options here are:
- Vanguard Total Stock Market ETF (VTI) at 0.03%. This covers the entire universe of publicly traded U.S. stocks across all company sizes and sectors.
- Vanguard Total Stock Market Index Fund (VTSAX) at 0.04%. This is the mutual fund version of VTI, requiring a $3,000 minimum investment.
- Schwab Total Stock Market Index Fund (SWTSX) at 0.03%. A strong alternative with no minimum investment requirement.
In practice, total market funds and S&P 500 funds perform very similarly because large companies dominate both. The total market fund just adds a small slice of exposure to smaller companies. Owning one or the other covers your U.S. stock allocation well. You don’t need both.
Nasdaq 100 and Growth-Focused Funds
The Nasdaq 100 index holds the 100 largest non-financial companies listed on the Nasdaq exchange. Because the Nasdaq has historically attracted technology and innovation-driven companies, these funds lean heavily toward tech, with additional exposure to consumer discretionary, healthcare, and industrials.
The Invesco NASDAQ 100 ETF (QQQM) is designed for long-term investors seeking exposure to large-cap U.S. growth stocks. It’s a lower-cost alternative to the older and more heavily traded Invesco QQQ Trust (QQQ). These funds have delivered strong returns over the past decade, but they’re more concentrated than a total market fund. When tech stocks struggle, Nasdaq 100 funds fall harder than the broader market.
Bond Index Funds
Bond index funds hold thousands of government and corporate bonds, providing steady income and lower volatility than stock funds. They’re commonly used to balance out the risk in a portfolio. The most popular bond index funds track the Bloomberg U.S. Aggregate Bond Index, which includes Treasury bonds, corporate bonds, and mortgage-backed securities.
- Vanguard Total Bond Market ETF (BND) is the most widely held bond index fund.
- iShares Core U.S. Aggregate Bond ETF (AGG) from BlackRock tracks the same index and is similarly massive.
- Schwab U.S. Aggregate Bond ETF (SCHZ) and SPDR Portfolio Aggregate Bond ETF (SPAB) are low-cost alternatives from Schwab and State Street.
Bond funds don’t grow as fast as stock funds over long periods, but they cushion your portfolio during stock market downturns. A common approach is to hold a mix of stock and bond index funds based on your age and risk tolerance.
International Stock Funds
International index funds invest in companies outside the United States, giving you exposure to economies in Europe, Asia, and emerging markets. Adding international funds reduces your dependence on the U.S. market alone.
The iShares Core MSCI EAFE ETF (IEFA) covers developed markets outside the U.S. and Canada, holding stocks across Europe, Australia, and parts of Asia. Most of the companies in the fund pay dividends, so it doubles as a source of income. For investors specifically seeking international dividend income, the Vanguard International Dividend Appreciation ETF (VIGI) focuses on foreign companies that have raised their dividends for at least seven consecutive years.
How to Choose Between Them
Most investors don’t need all of these. A simple, effective portfolio can be built with just two or three index funds. One common combination is a total U.S. stock market fund, a total international stock fund, and a bond fund. This “three-fund portfolio” approach covers nearly every publicly traded stock and bond in the world at a combined cost of a few dollars per year for every $10,000 invested.
When comparing similar funds, look at expense ratios first. The difference between 0.03% and 0.10% sounds trivial, but over 30 years on a $100,000 portfolio, that gap can add up to thousands of dollars in fees. Beyond cost, consider whether you want an ETF (which trades throughout the day like a stock) or a mutual fund (which you buy at the end-of-day price and can set up for automatic recurring purchases). Both hold the same underlying investments.
If you already have a brokerage account at Fidelity, Schwab, or Vanguard, their in-house index funds are typically the cheapest and most convenient option since you’ll pay no trading commissions. But nearly all major brokerages now offer commission-free trading on most ETFs, so you can buy a Vanguard ETF through a Schwab account or vice versa without paying extra.