You can buy index funds through a brokerage account, a retirement account, or directly from a fund company

Index funds are sold by three types of places: online brokerages (like Fidelity, Charles Schwab, or Vanguard), robo-advisors that manage accounts for you, and the fund companies themselves. Most people use a brokerage because they offer the widest selection, lowest fees, and the ability to hold other investments in the same account. You open an account, fund it with money from your bank, and then buy the index fund you want — the whole process usually takes a few days.

Where you buy matters because different places charge different fees, offer different funds, and have different minimum investments. A fund that costs 0.03% per year at one broker might cost 0.10% at another, which compounds over decades. Some brokerages have no account minimums; others require $1,000 or $2,500 to start. The fund itself also matters — a total stock market index fund at Vanguard is not identical to one at Fidelity, even though they track the same market.

Key Takeaways

  • Online brokerages like Fidelity, Charles Schwab, and Vanguard let you buy index funds with no account minimum and access to hundreds of funds in one place.
  • The same index fund can have different expense ratios (annual fees) depending on which company offers it, so comparing costs before you buy saves money over time.
  • Retirement accounts like 401(k)s and IRAs often include index fund options, and buying through them gives you tax advantages you do not get in a regular brokerage account.
  • Robo-advisors automatically build and rebalance a portfolio of index funds for you, but charge a management fee on top of the fund's own fees.
  • You can buy directly from a fund company, but you will have access to only that company's funds and may face higher minimums than a brokerage offers.

Online brokerages: the most common place to buy

An online brokerage is a company that holds your money and lets you buy and sell investments. The three largest are Fidelity, Charles Schwab, and Vanguard, but dozens of others exist (Merrill Edge, TD Ameritrade, E*TRADE, Interactive Brokers, and Webull are common alternatives). You create an account, link it to your bank, transfer money in, and then search for the index fund you want by its ticker symbol or name.

Most brokerages now charge zero commission to buy or sell index funds, meaning you pay only the fund's own annual fee (called the expense ratio). Account minimums have largely disappeared — you can open an account and buy a single share of an index fund for $50 or $100. The main difference between brokerages is the selection of funds they offer, the quality of their research tools, and whether they charge fees for things like wire transfers or account inactivity.

Fidelity, Schwab, and Vanguard each offer their own index funds alongside funds from other companies. Vanguard's own index funds tend to have the lowest expense ratios in the industry, but you can buy Vanguard funds at Fidelity or Schwab too — you will just pay Vanguard's fee no matter where you buy. The same is true for Fidelity and Schwab's own funds.

Retirement accounts: index funds with tax advantages

If your employer offers a 401(k), the investment options inside it almost always include at least one index fund — often a total stock market index fund and a total bond market index fund. You contribute money before taxes are taken out, which lowers your taxable income for the year. The money grows tax-free inside the account, and you pay taxes only when you withdraw it in retirement.

If you do not have access to a 401(k), you can open an Individual Retirement Account (IRA) at any brokerage. A traditional IRA works like a 401(k): you may deduct your contributions from your taxes, and the money grows tax-free until you withdraw it. A Roth IRA uses after-tax money, but the money grows tax-free and you owe no taxes on withdrawals in retirement. The contribution limits are lower than a 401(k) — $7,000 per year for 2024 if you are under 50 — but you have complete control over which index funds you buy.

Buying index funds inside a retirement account is identical to buying them in a regular brokerage account: you open the account, fund it, search for the fund, and buy it. The difference is the tax treatment, not the buying process. Many people buy index funds in both a retirement account and a regular brokerage account if they have extra money to invest.

Robo-advisors: automated portfolio building

A robo-advisor is a service that builds and manages a portfolio of index funds for you based on your age and risk tolerance. You answer a questionnaire, the service creates a mix of stock and bond index funds, and it automatically rebalances the portfolio once or twice a year to keep the mix steady. Examples include Betterment, Wealthfront, Vanguard Personal Advisor Services, and Schwab Intelligent Portfolios.

The advantage is simplicity: you do not have to decide which index funds to buy or how much of each. The disadvantage is cost. Most robo-advisors charge 0.25% to 0.50% per year on top of the index fund's own expense ratio. If your index fund costs 0.05% and the robo-advisor charges 0.25%, you are paying 0.30% total — three times the fund's cost. Over 30 years, that compounds into a meaningful difference.

Robo-advisors make sense if you have a large amount to invest and want hands-off management, or if you are uncomfortable choosing funds yourself. For people who are willing to spend an hour learning how to pick an index fund, a regular brokerage account costs less.

Direct purchase from the fund company

You can buy index funds directly from Vanguard, Fidelity, or Schwab without using a brokerage account. You go to their website, open an account, and buy their funds. The advantage is that you avoid any middleman fees. The disadvantage is that you can buy only that company's funds — if you want a Vanguard index fund and a Fidelity index fund in the same portfolio, you would need accounts at both companies.

Most people do not buy this way anymore because brokerages now offer zero-commission trading and access to funds from all companies. Buying directly makes sense only if you want to invest in a single fund company and want to avoid any possibility of brokerage fees, which are rare now anyway.

Comparing costs across brokerages and funds

The expense ratio is the annual fee the fund company charges to manage the fund. It is expressed as a percentage of your investment. A fund with a 0.05% expense ratio costs $5 per year for every $10,000 you invest. A fund with a 0.50% expense ratio costs $50 per year on the same $10,000. Over 30 years, the difference between 0.05% and 0.50% can reduce your final balance by 10% or more, depending on how much you invest and how the market performs.

The same index fund can have different expense ratios at different brokerages. Vanguard's Total Stock Market Index Fund (ticker VTSAX) has an expense ratio of 0.04%. Fidelity's equivalent fund (FSKAX) has an expense ratio of 0.015%. Both track the same market, but Fidelity's costs less. You can buy either one at either brokerage, but the fund's fee stays the same no matter where you buy it.

Before you open an account, search for the specific index fund you want on the brokerage's website and check its expense ratio. Then compare that fund's cost to similar funds from other companies. A difference of 0.05% or 0.10% per year is worth paying attention to if you are investing a large amount or for a long time.

Account types and tax treatment

A taxable brokerage account (also called a regular or standard account) is the simplest type. You buy index funds with after-tax money, and you owe capital gains tax when you sell the fund at a profit. You also owe tax on any dividends the fund distributes, even if you reinvest them. This is the only option if you have already maxed out your retirement account contributions.

A tax-advantaged account like a 401(k) or IRA shields you from those taxes while the money is invested. You pay taxes later (in a traditional account) or never (in a Roth account). If you have the choice between putting money in a taxable account or a retirement account, the retirement account is almost always better because of the tax savings.

Some brokerages offer custodial accounts for children and trust accounts for specific legal situations. These have their own tax rules. For most people, a regular taxable account or a retirement account is the only choice you need to make.

Frequently Asked Questions

Can I buy index funds with a small amount of money?

Yes. Most brokerages have no account minimum and no minimum per purchase. You can open an account and buy a single share of an index fund for $50 or $100. Some funds have higher minimums if you buy directly from the fund company, but buying through a brokerage avoids that.

Do I need to use the same brokerage for all my investments?

No. You can have accounts at multiple brokerages. Many people keep a 401(k) at their employer, an IRA at one brokerage, and a taxable account at another. The downside is managing multiple logins and statements. The upside is that you can choose the best brokerage for each account type.

What happens if the brokerage goes out of business?

Your money is protected by the Securities Investor Protection Corporation (SIPC), which covers up to $500,000 per account if a brokerage fails. The funds you own are held separately from the brokerage's own money, so they belong to you even if the company collapses. This protection applies at all major brokerages.

Should I buy index funds in a retirement account or a regular brokerage account?

Retirement accounts have tax advantages, so max those out first. Once you have contributed the annual limit to your 401(k) or IRA, any extra money goes into a taxable brokerage account. Both can hold index funds; the difference is the tax treatment.

Is there a difference between buying one index fund versus many?

A single total market index fund gives you broad diversification across thousands of companies. Buying multiple index funds (like one for stocks and one for bonds) lets you control the mix between stocks and bonds. One fund is simpler; multiple funds give you more control. Either approach works.