Where to buy index funds and what it costs

You can buy index funds through a brokerage account — an account that lets you buy and sell investments. The main cost is the fund's expense ratio, which is what the fund company charges yearly to run the fund. For index funds, this is usually between 0.03% and 0.20% per year. That means on a $10,000 investment, you might pay $3 to $20 per year.

The brokerage itself — the company holding your account — may charge a separate fee to buy or sell, though most major brokerages stopped charging per-trade commissions around 2019. Some brokerages charge account maintenance fees if your balance is below a certain amount, but many waive this if you set up automatic deposits or use their mobile app.

The lowest-cost index funds are offered by Vanguard, Fidelity, and Schwab. These three companies also run their own brokerages, so you can buy their own index funds with no commission and no account fees. You can also buy index funds from other companies through these brokerages, though the expense ratios will be higher.

Key Takeaways

  • Index funds charge an annual expense ratio (usually 0.03% to 0.20%), which is deducted from your returns automatically — you do not pay it separately.
  • Vanguard, Fidelity, and Schwab offer their own low-cost index funds with no trading commissions or account maintenance fees for most investors.
  • Opening a brokerage account takes 10 to 15 minutes online and requires your Social Security number, address, and bank account information.
  • A total stock market index fund (tracking all U.S. companies) or a target-date fund (automatically adjusting as you age) are common starting points for beginners.

Opening a brokerage account step by step

Go to the website of Vanguard, Fidelity, or Schwab and click the button to open an account. You will be asked for your name, address, date of birth, Social Security number, and employment status. You will also need to link a bank account so you can transfer money in.

The brokerage will ask what type of account you want. For most people starting out, a taxable brokerage account is the simplest — there are no contribution limits and no age restrictions. If you are saving for retirement and your employer does not offer a 401(k), a traditional IRA or Roth IRA may be better, but those have annual contribution limits (currently $7,000 for people under 50).

After you submit your information, the brokerage will verify your identity. This usually takes a few minutes to a few hours. Once approved, you can log in and transfer money from your bank account. Most brokerages let you transfer electronically (called an ACH transfer), which takes one to three business days.

Choosing which index fund to buy

If you are unsure where to start, a total stock market index fund is the simplest choice. This single fund holds shares in thousands of U.S. companies, so you own a piece of the entire market. Vanguard calls theirs the Total Stock Market Index Fund (ticker VTSAX if you want to buy it in a regular account, or VTSAX in an IRA). Fidelity's version is the Fidelity U.S. Stock Index Fund (FSKAX). Schwab's is the U.S. Broad Market Index Fund (SWBROKX).

Each of these funds has an expense ratio around 0.03% to 0.04% per year. The differences between them are tiny — you will not notice a difference in your returns. Pick whichever brokerage you opened your account with.

If you want to add international stocks, you can buy a separate international index fund alongside your U.S. fund. A common mix is 70% U.S. and 30% international, though this varies based on your age and risk tolerance. If you do not want to think about rebalancing, a target-date fund automatically adjusts the mix as you get older — you just pick the fund with your expected retirement year.

How much money to start with

Most brokerages have no minimum to open an account. Vanguard, Fidelity, and Schwab all let you start with as little as $1. However, some index funds have a minimum initial investment — Vanguard's Admiral Shares (their lowest-cost versions) require $3,000 to start, though their Investor Shares version has no minimum.

If you have less than $3,000, you can start with a lower-cost index fund that has no minimum, or you can wait until you have saved $3,000. The difference in cost is small — Vanguard's Admiral Shares charge 0.03% while Investor Shares charge 0.04%, so on a $1,000 investment you would pay $0.30 versus $0.40 per year.

Many people set up automatic monthly transfers once their account is open. This is called dollar-cost averaging — you invest the same amount every month regardless of whether the market is up or down. You can set this up in your brokerage's settings, and it takes a few minutes to configure.

Understanding expense ratios and why they matter

An expense ratio is a percentage of your investment that the fund company charges each year to cover operating costs. It is deducted automatically from the fund's value, so you never write a check for it — you just see it reflected in your returns.

The difference between a 0.03% expense ratio and a 0.50% expense ratio seems tiny, but it compounds over decades. On a $10,000 investment growing at 7% per year, the 0.03% fund would cost you about $30 per year while the 0.50% fund would cost $500 per year. Over 30 years, that difference adds up to tens of thousands of dollars in lost growth.

This is why index funds are popular for beginners — they are passively managed (meaning a computer tracks an index rather than a person picking stocks), so they cost much less than actively managed funds. Most actively managed funds charge 0.50% to 1.50% per year and still underperform index funds after fees.

Avoiding common mistakes when buying index funds

Do not buy an index fund through a financial advisor or insurance agent unless you understand exactly what they are charging. Some advisors sell index funds with a sales commission built in (called a load), which can be 1% to 5% of your investment. You can buy the same fund directly from the brokerage for no commission.

Do not assume all index funds are the same. An S&P 500 index fund tracks 500 large U.S. companies, while a total stock market index fund tracks about 3,500 companies including small ones. Both are index funds, but they track different things. Read the fund's name and description before buying.

Do not panic-sell during market downturns. Index funds go up and down with the market — that is normal. If you sell during a downturn, you lock in losses. If you hold and keep investing, you buy more shares when prices are low, which helps your long-term returns.

Tax considerations for index funds in regular accounts

If you buy index funds in a regular taxable brokerage account (not an IRA), you will owe taxes on any gains when you sell. Index funds are tax-efficient compared to actively managed funds because they trade less often, but you still owe taxes on dividends and capital gains.

If you hold an index fund for more than one year before selling, you pay long-term capital gains tax, which is lower than short-term rates. If you sell within one year, you pay short-term rates (taxed as ordinary income). This is one reason to hold index funds for the long term — the tax treatment improves.

If you are saving for retirement, a traditional IRA or Roth IRA lets you avoid these taxes until you withdraw the money (or never, in the case of a Roth). These accounts have annual contribution limits, so many people use both an IRA and a taxable account.

Frequently Asked Questions

Can I buy index funds through my bank?

Some banks offer brokerage services, but they usually charge higher fees than Vanguard, Fidelity, or Schwab. Your bank may also have higher expense ratios on their index funds or charge commissions. It is worth checking, but most people save money by opening a separate brokerage account.

What is the difference between a mutual fund and an ETF?

Both are baskets of stocks or bonds that you can buy as a single investment. Mutual funds are priced once per day after the market closes, while ETFs trade throughout the day like stocks. For index funds, the expense ratios are similar, so the choice comes down to personal preference. Vanguard and Fidelity offer both versions of their index funds.

Do I need to pick individual stocks if I buy an index fund?

No. An index fund holds hundreds or thousands of stocks automatically, so you own a diversified portfolio with a single purchase. You do not pick individual stocks, and you do not need to rebalance unless you add money or want to change your overall strategy.

What happens if the brokerage goes out of business?

Your investments are protected by the Securities Investor Protection Corporation (SIPC), which covers up to $500,000 per account if a brokerage fails. Vanguard, Fidelity, and Schwab are large, established firms, so this is extremely unlikely. Your index funds are held in your name, not the brokerage's name, so they are yours regardless.

Can I buy index funds through my phone?

Yes. Vanguard, Fidelity, and Schwab all have mobile apps that let you open an account, transfer money, and buy index funds from your phone. The process is the same as on a computer, and it usually takes about 15 minutes.