How to Invest in Index Funds

Quick Answer: Set clear investment goals, research and select index funds that align with those goals and open a brokerage account through an index-fund provider like Frec or Interactive Brokers.

Would index funds be as popular if Warren Buffett hadn’t endorsed them? Maybe not. Index funds, which consist of a mutual fund or exchange-traded fund (ETF) portfolio that tracks a broad segment of the U.S. stock market, offer access to low-cost, diversified portfolios.

How to Invest in Index Funds

Benzinga recommends the following steps to choose and execute the purchase of an index fund.

1. Know Which Index the Fund Follows

Since indexing has become so popular picking an index fund isn’t as easy as it used to be, when there were fewer to choose from. Before you select an index fund, understand its underlying holdings and how it’s behaved in the past, although past performance is no guarantee of future performance.

Is the fund specialized and specific? If so, do thorough research to make sure you understand what you’re putting your money into. Specialized funds can be more slippery than mainstream index funds. Triple check to be sure that a fund you’re considering really does track an index.

2. Choose Where You’d Like to Buy Your Index Fund

You can choose from many options to buy index funds. Most discount brokerages offer them, so it’s a matter of checking out Benzinga’s investing guides.

3. Learn About Fund Fees and Tax Effects

Not all index funds are tax-efficient and not all index funds are cheap. Figure out how much a potential index fund will cost you. Fee information is available on a broker’s website.

4. Decide How Much You’d Like to Invest

This part is a personal decision based on your financial situation. You’ll need to weigh how much you can invest against the fund minimums.

set clear investment goals, then research and select index funds that align with those goals, and finally, either open a brokerage account or directly purchase index funds through an index-fund provider like Vanguard or Fidelity.

Where to Invest in Index Funds

Future Outlook for Index Funds

According to updated projections, by the end of 2027, index funds are expected to control upwards of 60% of the total assets in the investment-management sector. This surge demonstrates an increasing preference among investors for index funds over actively managed portfolios. The most recent data from Morningstar, Inc. indicates a dramatic shift, revealing that investors poured $750 billion into passive funds while actively managed funds saw inflows of only $300 billion last year.

Index funds aren’t going away any time soon. Investors aren’t keen to part with their money in the form of fees and taxes.

Choice or Chance?

Index funds have a promising future, though for every “Index funds are great!” message you’ll hear in the media, there’s the opposite message — “You can’t react to the market. You have limited choice over holdings. You aren’t allowed to determine strategy.”

Index funds may not be right for every investor. If you choose them, there are excellent fund managers out there who do beat the market. It’s your decision.

Frequently Asked Questions