Where to buy index funds and what it costs

You buy index funds through a brokerage — a company that holds your money and executes trades. The cost depends on which brokerage you choose and what type of account you open. Most major brokerages now charge zero commission to buy index funds, meaning you pay nothing per transaction. What you do pay is the fund's internal expense ratio, which is a yearly percentage fee taken from your balance.

The largest brokerages that offer low-cost index funds include Vanguard, Fidelity, Charles Schwab, and Merrill Edge. Each holds index funds from multiple fund families, so you are not locked into one provider's offerings. Smaller brokerages and robo-advisors (automated investment services) also offer index funds, often with lower minimum account balances but sometimes with higher expense ratios or advisory fees.

Opening an account takes 10 to 20 minutes online. You will need your Social Security number, a government ID, proof of address, and a bank account to transfer money from. Most brokerages let you start with any amount, though some index funds themselves have $1,000 or $3,000 minimums. After your account is open and funded, you can buy index funds immediately through the brokerage's website or app.

Key Takeaways

  • Index funds charge an expense ratio — a yearly percentage fee — but most major brokerages charge zero commission to buy them, so you only pay the fund's internal costs.
  • Vanguard, Fidelity, Charles Schwab, and Merrill Edge all offer broad-market index funds with expense ratios below 0.10 percent, meaning you pay less than $10 per year on a $10,000 balance.
  • Opening a brokerage account requires your Social Security number, ID, proof of address, and a bank account, and takes about 15 minutes online.
  • You can start with any amount at most brokerages, though individual index funds may have minimum investments of $1,000 to $3,000.

Understanding expense ratios and why they matter

An expense ratio is the percentage of your investment that the fund company charges each year to manage the fund. A 0.05 percent expense ratio on a $10,000 investment costs you $5 per year. A 1.0 percent expense ratio on the same $10,000 costs you $100 per year. Over decades, this difference compounds: on a $100,000 balance, paying 0.05 percent instead of 1.0 percent saves you roughly $950 per year, which grows as your balance grows.

Index funds have lower expense ratios than actively managed funds because they simply track an index rather than paying managers to pick stocks. The lowest-cost index funds charge between 0.03 and 0.10 percent. Vanguard's Total Stock Market Index Fund (VTSAX or VTI) charges 0.03 percent. Fidelity's equivalent fund (FSKAX) charges 0.015 percent. Charles Schwab's U.S. Broad Market ETF (SWTSX) charges 0.03 percent. These differences are small in absolute terms but meaningful over time.

When comparing index funds, always check the expense ratio before you buy. The brokerage website displays it clearly in the fund's fact sheet. Some brokerages also charge advisory fees if you use their robo-advisor service, which typically ranges from 0.25 to 0.50 percent per year on top of the fund's expense ratio. If you are buying index funds directly without an advisor, you pay only the expense ratio.

Choosing between mutual funds and ETFs

Index funds come in two legal structures: mutual funds and exchange-traded funds (ETFs). Both track the same indexes and charge similar expense ratios. The practical differences are small for most people buying index funds to hold long-term.

Mutual funds are bought and sold directly through the fund company or brokerage at the end of each trading day. You place an order during the day, and it executes at that day's closing price. ETFs trade like stocks throughout the day, so you see the price change in real time and can buy or sell at any moment the market is open. ETFs may have a small bid-ask spread (the difference between the buy and sell price), typically a few cents on funds with high trading volume.

For someone starting out with a small amount of money and planning to hold for years, the choice between mutual funds and ETFs matters very little. Mutual funds are simpler if you plan to set up automatic monthly deposits, because many brokerages let you buy fractional shares without a minimum. ETFs also allow fractional shares at most brokerages now, so this advantage has narrowed. Pick whichever structure your chosen brokerage makes easiest to use.

Setting up automatic deposits and staying low-cost

Most brokerages let you set up automatic transfers from your bank account to your brokerage account on a schedule you choose — weekly, biweekly, or monthly. Once the money arrives, you can set up automatic purchases of your chosen index fund on the same schedule. This is called dollar-cost averaging, and it removes the need to time the market or decide when to buy.

Automatic investing keeps costs low because you are not tempted to trade frequently or chase performance. Each purchase incurs no commission at major brokerages. The only cost is the fund's expense ratio, which you pay whether you buy once or buy monthly. Over time, small regular deposits compound into substantial balances.

To avoid accidentally paying high fees, do not use a brokerage's advisory service unless you need it. Do not buy actively managed funds or funds with sales loads (upfront commissions). Do not trade in and out of index funds frequently — the goal is to buy and hold. Stick to broad-market index funds (total stock market, total bond market, or total international market) rather than sector-specific or themed funds, which often charge higher fees and do not offer the diversification benefit of a broad index.

Tax-advantaged accounts for index fund investing

The type of account you open affects how much tax you owe on your gains. A taxable brokerage account has no contribution limits and no restrictions on when you withdraw money, but you owe capital gains tax each year on any profits. A 401(k) or IRA lets you invest pre-tax dollars (or contribute after-tax dollars in a Roth IRA) and defer or eliminate taxes on gains.

If your employer offers a 401(k), check whether it includes low-cost index funds. Many do, though some still offer only high-fee actively managed funds. If your 401(k) offers index funds, that is usually the best place to start because contributions reduce your taxable income. If it does not, or if you do not have access to a 401(k), open an IRA at a brokerage like Vanguard or Fidelity and buy index funds there. IRAs have annual contribution limits (currently $7,000 for people under 50), but there is no limit on how much you can invest in a taxable brokerage account.

For most people starting out, the account type matters less than simply starting. A taxable brokerage account with low-cost index funds beats a high-fee 401(k) or IRA. Once you understand the basics, you can optimize by using tax-advantaged accounts first, then moving to a taxable account if you have more to invest.

Common mistakes that raise your costs

The most common mistake is buying index funds through a financial advisor or bank branch instead of directly through a brokerage. Advisors often charge 0.5 to 1.0 percent in annual fees on top of the fund's expense ratio, or they sell you funds with sales loads (upfront commissions of 3 to 6 percent). You can avoid this entirely by opening an account yourself at Vanguard, Fidelity, or Charles Schwab and buying index funds directly.

A second mistake is buying too many different index funds. You do not need a fund for every sector or country. A simple portfolio of three funds — a U.S. total market index, an international index, and a bond index — covers most investors' needs. Each additional fund adds complexity and does not meaningfully reduce risk if you already own a broad market index.

A third mistake is selling during market downturns. Index funds fluctuate in value, and many new investors panic when the market drops and sell at a loss. The cost of this mistake is real: you lock in losses and miss the recovery. Index funds are designed to be held through multiple market cycles, not traded based on short-term price movements.

Frequently Asked Questions

Do I need a lot of money to start buying index funds?

No. Most brokerages let you open an account with any amount and buy fractional shares of index funds, so you can start with $50 or $100. Some individual index funds have $1,000 or $3,000 minimums, but you can avoid these by choosing funds with no minimum or by starting with an ETF, which has no minimum at most brokerages.

What is the difference between a brokerage account and a retirement account?

A brokerage account has no contribution limits and no tax advantages, but you can withdraw money anytime without penalty. A retirement account like an IRA or 401(k) has annual contribution limits and tax penalties for early withdrawal, but contributions or gains are tax-deferred or tax-free. Most people should max out retirement accounts first, then use a brokerage account for additional investing.

Can I buy index funds through my bank?

Yes, but banks often charge higher fees or push you toward advisors who charge commissions. You will usually pay less by opening an account directly at a brokerage like Vanguard, Fidelity, or Charles Schwab, where you can buy index funds with zero commission and low expense ratios.

How often should I buy index funds?

Set up automatic monthly or biweekly purchases and do not change them based on market conditions. This removes emotion from investing and takes advantage of dollar-cost averaging. Once you have built a balance, you can stop adding money and simply let the funds grow, or continue adding as your income allows.

What happens if the brokerage goes out of business?

Your investments are protected by the Securities Investor Protection Corporation (SIPC), which covers up to $500,000 per account at a failed brokerage. This is why using a large, established brokerage like Vanguard, Fidelity, or Charles Schwab is safer than using a small or new platform.