Best Index Funds & ETFs: A Complete Guide to Smart, Low-Cost Investing

Choosing the right index funds and ETFs shouldn’t feel like deciphering a foreign language. If you’re overwhelmed by expense ratios, tracking errors, and endless ticker symbols, you’re not alone. The good news? You don’t need to be a Wall Street expert to build a solid investment portfolio—you just need to understand a few key principles and know where to look.

This guide cuts through the noise to help you identify the best index funds and ETFs without overpaying or wasting hours comparing options that barely differ. We’ll cover what makes a fund worth your money, which specific funds consistently outperform, and how to avoid the hidden costs that eat into your returns.

What Are Index Funds and ETFs?

Before diving into specific recommendations, let’s clarify what we’re actually talking about.

Index funds are mutual funds designed to track a specific market index, like the S&P 500 or the total U.S. stock market. When you buy shares in an index fund, you’re essentially buying a tiny piece of every company in that index. They’re passively managed, meaning there’s no fund manager actively picking stocks—the fund simply mirrors the index it tracks.

ETFs (Exchange-Traded Funds) work similarly but trade on stock exchanges like individual stocks. You can buy and sell them throughout the trading day at market prices, whereas traditional index funds only trade once per day after the market closes.

Both offer instant diversification and lower costs than actively managed funds, but they have different tax treatments, minimum investments, and trading flexibility.

Why Index Funds and ETFs Beat Active Management

The case for index investing isn’t just theory—it’s backed by decades of data.

Research consistently shows that over 80% of actively managed funds fail to beat their benchmark index over a 15-year period. Why? Three main reasons:

Higher fees: Active funds charge 0.5% to 1.5% annually (or more), while index funds often cost less than 0.1%
Transaction costs: Frequent trading creates additional expenses passed to investors
Human error: Even skilled managers make mistakes or underperform during certain market conditions

An extra 1% in annual fees might not sound like much, but over 30 years on a $100,000 investment, it’s the difference between $574,000 and $761,000—a loss of nearly $200,000.

Key Criteria for Choosing the Best Index Funds & ETFs

Not all index funds are created equal. Here’s what separates the best from the rest:

Expense Ratio

This is the annual fee you pay to own the fund, expressed as a percentage of your investment. For index funds and ETFs, you should rarely pay more than 0.20%, and many excellent options charge 0.03% to 0.10%.

A fund with a 0.03% expense ratio costs you $3 per year for every $10,000 invested. A fund charging 0.50% costs $50—over 16 times more for essentially the same holdings.

Tracking Error

This measures how closely a fund follows its benchmark index. Even passive funds don’t perfectly replicate their index due to fees, cash holdings, and rebalancing timing. The best funds keep tracking error below 0.10% annually.

Assets Under Management (AUM)

Larger funds benefit from economies of scale, reducing costs. They’re also more liquid, meaning you can easily buy or sell shares without affecting the price. Look for funds with at least $1 billion in AUM, though many top options manage over $100 billion.

Tax Efficiency

ETFs generally have a structural tax advantage over mutual funds due to how they handle redemptions. For taxable accounts, this matters. In tax-advantaged accounts like IRAs and 401(k)s, it’s less relevant.

Minimum Investment

Traditional mutual fund index funds often require $1,000 to $3,000 minimums. ETFs let you buy a single share—sometimes as little as $50—making them more accessible for new investors.

Best Broad Market Index Funds & ETFs

These funds give you exposure to the entire U.S. stock market or large segments of it.

Vanguard Total Stock Market Index Fund (VTSAX) / Vanguard Total Stock Market ETF (VTI)

Expense Ratio: 0.04%
Holdings: ~3,700 U.S. stocks across all market caps
Minimum: $3,000 (VTSAX) / ~$250 per share (VTI)

This is the gold standard for U.S. stock market exposure. You’re buying every publicly traded U.S. company in proportion to its market size—from Apple and Microsoft down to small regional banks. It’s the closest thing to “set it and forget it” investing.

Fidelity ZERO Total Market Index Fund (FZROX)

Expense Ratio: 0.00%
Holdings: ~2,400 U.S. stocks
Minimum: $0

Yes, zero fees. Fidelity offers this loss-leader to attract customers to their platform. The catch? You can only buy it at Fidelity, and you can’t transfer it to another brokerage. For long-term holders who don’t plan to switch brokers, it’s an exceptional deal.

Schwab Total Stock Market Index Fund (SWTSX) / Schwab U.S. Broad Market ETF (SCHB)

Expense Ratio: 0.03%
Holdings: ~2,500+ U.S. stocks
Minimum: $0 (SWTSX) / ~$56 per share (SCHB)

Schwab’s answer to Vanguard’s total market fund. Nearly identical holdings and performance, with microscopic fees and no minimum for the mutual fund version.

Best S&P 500 Index Funds & ETFs

If you want to focus on the 500 largest U.S. companies—representing about 80% of the U.S. market’s value—these are your best options.

Vanguard 500 Index Fund (VFIAX) / Vanguard S&P 500 ETF (VOO)

Expense Ratio: 0.04%
Holdings: 500 large-cap U.S. stocks
Minimum: $3,000 (VFIAX) / ~$500 per share (VOO)

Warren Buffett famously directed that 90% of his estate be invested in a low-cost S&P 500 index fund. Vanguard’s version is the most popular, with over $1 trillion in combined assets.

Fidelity 500 Index Fund (FXAIX)

Expense Ratio: 0.015%
Holdings: 500 large-cap U.S. stocks
Minimum: $0

Even cheaper than Vanguard’s offering and accessible with no minimum investment. Performance differences are negligible—pick based on which brokerage you prefer.

SPDR S&P 500 ETF Trust (SPY)

Expense Ratio: 0.0945%
Holdings: 500 large-cap U.S. stocks
Minimum: ~$570 per share

SPY is the oldest and most heavily traded ETF in the world. Its higher expense ratio makes it less attractive for long-term buy-and-hold investors, but its liquidity is unmatched for active traders.

Best International Index Funds & ETFs

U.S. stocks represent only about 60% of global market capitalization. International exposure provides diversification and access to growth in emerging markets.

Vanguard Total International Stock Index Fund (VTIAX) / Vanguard Total International Stock ETF (VXUS)

Expense Ratio: 0.11%
Holdings: ~8,000 stocks across developed and emerging markets
Minimum: $3,000 (VTIAX) / ~$66 per share (VXUS)

This fund covers everything outside the U.S.—Europe, Japan, China, emerging markets—in one holding. It’s the international counterpart to VTI.

Fidelity Total International Index Fund (FTIHX)

Expense Ratio: 0.06%
Holdings: ~4,200 international stocks
Minimum: $0

Half the cost of Vanguard’s version with no minimum. Slightly fewer holdings, but the performance is virtually identical.

iShares Core MSCI Total International Stock ETF (IXUS)

Expense Ratio: 0.07%
Holdings: ~4,600 international stocks
Minimum: ~$73 per share

BlackRock’s budget offering for international exposure. Comparable to VXUS but with slightly lower costs and different index methodology.

Best Bond Index Funds & ETFs

Bonds provide stability and income, balancing out stock volatility in your portfolio.

Vanguard Total Bond Market Index Fund (VBTLX) / Vanguard Total Bond Market ETF (BND)

Expense Ratio: 0.05%
Holdings: ~10,000 U.S. government and corporate bonds
Minimum: $3,000 (VBTLX) / ~$72 per share (BND)

The bond equivalent of VTI—broad exposure to the entire U.S. investment-grade bond market.

Fidelity U.S. Bond Index Fund (FXNAX)

Expense Ratio: 0.025%
Holdings: ~8,900 U.S. bonds
Minimum: $0

Half the cost of Vanguard with zero minimum. Excellent for bond allocation in any portfolio.

iShares Core U.S. Aggregate Bond ETF (AGG)

Expense Ratio: 0.03%
Holdings: ~10,800 U.S. bonds
Minimum: ~$101 per share

One of the most popular bond ETFs, tracking the Bloomberg U.S. Aggregate Bond Index.

Best Sector and Specialized Index Funds & ETFs

These funds target specific market segments. They’re higher risk but offer focused exposure.

Vanguard Real Estate Index Fund (VGSLX) / Vanguard Real Estate ETF (VNQ)

Expense Ratio: 0.12%
Holdings: ~160 real estate investment trusts (REITs)

REITs provide exposure to commercial real estate—apartment buildings, offices, shopping centers—without owning property directly.

Vanguard Information Technology Index Fund (VITAX) / Vanguard Information Technology ETF (VGT)

Expense Ratio: 0.10%
Holdings: ~340 tech stocks

Concentrated exposure to Apple, Microsoft, NVIDIA, and other tech giants. Higher volatility but strong historical returns.

Vanguard Small-Cap Index Fund (VSMAX) / Vanguard Small-Cap ETF (VB)

Expense Ratio: 0.05%
Holdings: ~1,400 small-cap stocks

Small companies have historically outperformed large caps over long periods, though with higher volatility.

Building a Simple Three-Fund Portfolio

You don’t need dozens of funds. Many experts recommend a simple three-fund portfolio:

U.S. Total Stock Market: 60% (VTI, VTSAX, or FZROX)
International Total Stock Market: 30% (VXUS, VTIAX, or FTIHX)
U.S. Total Bond Market: 10% (BND, VBTLX, or FXNAX)

Adjust the bond percentage based on your age and risk tolerance. A common rule of thumb: bond percentage = your age. A 30-year-old might hold 30% bonds, while a 60-year-old might hold 60%.

This portfolio gives you exposure to thousands of stocks and bonds globally with just three holdings and minimal fees.

Common Mistakes to Avoid

Chasing Past Performance

Last year’s top performer is often this year’s disappointment. Focus on low costs and broad diversification, not recent returns.

Overdiversifying

Owning 15 different index funds doesn’t make you more diversified—it makes rebalancing complicated. A total market fund already holds thousands of stocks.

Ignoring Tax-Advantaged Accounts

Max out your 401(k) and IRA contributions before investing in taxable accounts. The tax savings are worth far more than minor differences in expense ratios.

Timing the Market

Trying to buy low and sell high usually backfires. Time in the market beats timing the market. Stay invested through downturns.

Paying for Active Management

If you’re holding index funds, you don’t need a financial advisor charging 1% annually to tell you which ones to buy. A simple allocation based on your goals and risk tolerance is sufficient.

Where to Buy Index Funds & ETFs

Your choice of brokerage matters less than you think, but some platforms offer better deals:

Vanguard: Best if you want Vanguard funds. No commission on Vanguard ETFs and mutual funds.
Fidelity: Best for zero-fee index funds (FZROX, FXNAX). Excellent research tools and customer service.
Schwab: Best overall interface and banking integration. Great for one-stop financial management.
M1 Finance: Best for automated investing and fractional shares of ETFs.

All major brokerages now offer commission-free trading on ETFs and mutual funds. For more details on selecting the right platform, check out our guide on the best brokerage accounts.

Index Funds vs. ETFs: Which Should You Choose?

For most investors, ETFs make more sense:

Choose ETFs if:
– You’re starting with less than $3,000
– You want to buy throughout the day at market prices
– You’re investing in a taxable account (better tax efficiency)
– You want fractional shares (available at some brokerages)

Choose index mutual funds if:
– You already meet the minimum investment
– You prefer automatic investing on a schedule
– You’re investing in a retirement account where tax efficiency doesn’t matter
– You want to avoid intraday price fluctuations

The Bottom Line

The best index funds and ETFs share three characteristics: rock-bottom fees (under 0.10%), broad diversification (thousands of holdings), and massive assets under management (billions of dollars). Whether you choose Vanguard, Fidelity, or Schwab matters far less than choosing index funds over active management and staying invested for the long term.

Start with a total U.S. stock market fund, add international exposure, and include bonds as you get older or need stability. That’s it. You don’t need complicated strategies, expensive advisors, or dozens of holdings.

The hardest part isn’t picking the right fund—it’s having the discipline to keep investing when markets drop and resisting the urge to chase the latest hot stock. Index funds remove the guesswork and let you focus on what actually matters: saving consistently and staying invested through market cycles.

If you’re ready to start, open an account at a major brokerage, choose a low-cost total market fund, and set up automatic contributions. Your future self will thank you.

Affiliate Disclosure: We may earn a commission from some of the products mentioned in this article.