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How do index funds work?
Index funds are a type of mutual fund or exchange-traded fund (ETF). They are designed to replicate the performance of a certain benchmark index, and they do this by investing proportionally in all the components of their target index.
For example, an S&P 500 ETF would invest in all 500 companies in the S&P 500 index and in the same proportions as each one is represented in the index. The idea is that the S&P 500 index fund would return the same performance (minus any investment fees) as the S&P 500 over time.
Four great index funds to get you started in 2025
Are you looking for some index fund ideas to help you invest better? As I mentioned, there are hundreds to choose from.
However, these four are a good starting point. All of these are broad index funds that could help form a solid backbone for your investment portfolio.
- Vanguard S&P 500 ETF (VOO -1.08%): Tracks the benchmark S&P 500 index, which is widely regarded as the best overall representation of the stock market; $3 annual cost for a $10,000 investment (0.03% expense ratio)
- Vanguard Total Stock Market ETF (VTI -1.14%): Tracks an index of U.S. stocks of all sizes; $3 annual cost for a $10,000 investment (0.03% expense ratio)
- Vanguard Total International Stock ETF (VXUS -0.68%): Tracks an index of global stocks, excluding the U.S.; $5 annual cost for a $10,000 investment (0.05% expense ratio)
- Vanguard Total Bond Market ETF (BND -0.31%): Tracks an index of various bonds; $3 annual cost for a $10,000 investment (0.03% expense ratio)
It’s worth clarifying the annual costs mentioned here, which are technically known as expense ratios. These aren’t actual out-of-pocket costs you pay. They are management fees and are reflected in the share price of the index fund over time.