The best index funds for building long-term wealth, comparing total market, S&P 500, and growth-oriented options with rock-bottom fees.
- The best index funds charge expense ratios of 0.03% or less, meaning you pay just $3 per year for every $10,000 invested.
- For most investors, either option is excellent, and the choice between them is far less important than the decision to invest in index funds in the first place.
- Predicting which style will lead in the future is unreliable, which is why a total market blend fund that includes both styles is the simplest and most robust approach.
Index funds are the foundation of most successful long-term investment strategies. They provide instant diversification, charge minimal fees, and have historically outperformed the majority of actively managed funds over extended periods. For most investors, a portfolio built around a few well-chosen index funds is the most reliable path to long-term wealth.
What an Index Fund Actually Does
An index fund is a mutual fund or ETF that aims to replicate the performance of a specific market index. A total stock market index fund, for example, holds shares in virtually every publicly traded company in the United States, weighted by market capitalisation. An S&P 500 index fund holds the 500 largest U.S. companies. The fund does not try to pick winners or time the market; it simply owns the entire index and delivers whatever return the market produces.
This passive approach keeps costs extraordinarily low. The best index funds charge expense ratios of 0.03% or less, meaning you pay just $3 per year for every $10,000 invested. Compare that to the 0.50% to 1.00% charged by most actively managed funds, which amounts to $50 to $100 per year on the same balance. Over decades, this fee difference compounds into a substantial amount of money that stays in your pocket.
Total Market vs S&P 500
The two most popular index fund categories are total stock market funds and S&P 500 funds. A total stock market fund holds thousands of stocks across all sizes: large-cap, mid-cap, and small-cap companies. An S&P 500 fund holds only the 500 largest companies. In practice, the performance of these two is very similar because large-cap stocks dominate both indices by weight.
The total stock market fund provides slightly broader diversification by including mid-cap and small-cap stocks, which have historically delivered slightly higher returns over very long periods, though with more volatility. For most investors, either option is excellent, and the choice between them is far less important than the decision to invest in index funds in the first place.
Growth vs Value vs Blend
Within index funds, you can choose funds that focus on growth stocks (companies expected to grow faster than average), value stocks (companies trading below their perceived intrinsic worth), or a blend of both. Total market and S&P 500 funds are blend funds that include both growth and value stocks.
Growth-focused index funds have outperformed value funds during the past decade, driven largely by the technology sector. However, value funds have outperformed over other historical periods. Predicting which style will lead in the future is unreliable, which is why a total market blend fund that includes both styles is the simplest and most robust approach.
Expense Ratios Matter More Than You Think
The difference between an expense ratio of 0.03% and 0.50% seems trivial in any single year. But over a 30-year investment horizon on a $100,000 portfolio earning 7% annually, the lower-cost fund leaves you with approximately $15,000 more. On larger portfolios or longer time horizons, the difference is even more dramatic. Always choose the lowest-cost option available for the index you want to track.
Mutual Fund vs ETF Format
Many index funds are available in both mutual fund and ETF formats. The underlying investments are identical; the difference is in how you buy and sell them. Mutual funds are purchased at the end-of-day price in dollar amounts. ETFs trade throughout the day like stocks and are purchased in share quantities. For long-term, buy-and-hold investors, the format matters very little. Choose whichever your brokerage makes easiest to buy and hold.
Building a Portfolio
A single total stock market index fund is a perfectly adequate portfolio for a young investor with decades ahead. For a more complete approach, combine a domestic total stock market fund with an international stock index fund and a bond index fund. This three-fund portfolio provides global diversification and adjustable risk levels based on how much you allocate to bonds. It is simple, effective, and endorsed by countless financial professionals.
All investments carry risk, including loss of principal. Past performance does not guarantee future results. See our financial disclaimer for important disclosures.
A worked example
Imagine investing $500/month for 30 years at an average 8% annual return. Total contributions: $180,000. Final balance: roughly $745,000. The first $180,000 is yours; the other $565,000 is compounded growth. Now imagine starting 10 years later - same $500/month for 20 years at 8%: contributions $120,000, balance $295,000. The 10 years cost you about $450,000 in foregone growth. Time in the market beats timing the market by an enormous margin.
Common mistakes to avoid
- Trying to time the market. Studies consistently show that missing just the 10 best market days over 20 years cuts returns roughly in half. You can't reliably know which days those will be.
- Picking individual stocks based on news or tips. By the time it's news, the price already reflects it. Index funds aren't exciting but they outperform most retail stock-picking by a wide margin.
- Panic-selling in a downturn. Selling locks in losses. Markets have always recovered. The investors who do worst are the ones who sell low and re-buy high.
Frequently asked questions
How much money do I need to start investing?
Less than you think. Most major brokerages (Fidelity, Schwab, Vanguard) have no minimum balance. Fractional shares mean you can buy a $1 slice of any stock or ETF. Realistically, $50-100/month into a low-cost index fund is enough to start building real wealth over decades.
Is it too late to start investing at 40, 50, or 60?
No - but the strategy changes. At 40 you still have 25 years of compounding ahead. At 50 the focus shifts to maximizing 401(k) contributions (you can contribute extra after age 50). At 60 it's about preserving what you have and shifting to a more conservative allocation. The worst day to start was 20 years ago; the second-best is today.
Should I invest in individual stocks or index funds?
Index funds for nearly everyone. Over 20-year periods, 80%+ of professional fund managers fail to beat the index - and they have PhD analysts and millions in research budgets. A target-date retirement fund or a total-market index ETF will outperform what almost any retail investor can do picking individual stocks.
What is the safest investment?
FDIC-insured savings accounts and CDs (up to $250,000 per bank per ownership type) and US Treasury bills/bonds are the safest. They won't make you rich but they won't lose principal. For real (inflation-adjusted) safety, TIPS and I-Bonds protect against inflation, which traditional bonds don't.
How much should I have in stocks vs bonds?
A starting heuristic is 'your age in bonds' - so a 30-year-old holds 70% stocks / 30% bonds. Many financial planners now suggest something more aggressive given longer lifespans: 110 or 120 minus your age in stocks. Target-date funds do this automatically based on your retirement year.
Where this guide fits in
This article is part of the Chase The Dollar editorial library of practical money guides. We update guides as rules and rates change. If you spot a mistake or want us to cover a topic, the contact form is the fastest way to reach us.