Money · Investing and retirement
Index funds and fees
An index fund is a mutual fund or ETF that tries to match a market index, not beat it. That usually means less trading, lower taxes and lower fees. Fees are the one thing you control: in the SEC's example, $100,000 over 20 years ends near $208,000 at a 0.25% fee but near $179,000 at 1%. Look up each fund's expense ratio before you pick, and know that no fund is insured against losses.
You'll need
- Your 401(k) or 403(b) fund list, or the fund's prospectus
- A calculator, or FINRA's free Fund Analyzer
What to know
- Know what you're buying. An index fund is a mutual fund, ETF or unit investment trust that follows a passive strategy meant to get about the same return as a particular index, before fees, mainly by owning the stocks or bonds in that index. Source: Investor.gov1
- Know why people like them. Passive management usually means less trading, lower transaction costs, lower realized capital gains (so lower taxes) and lower fees than actively managed funds. Source: Investor.gov1 An actively managed fund has a manager picking investments; it might beat the market, but it isn't tied to an index. Source: Investor.gov4
- Find the expense ratio. It's the percentage of the fund's assets taken each year to pay its operating costs, including management fees and 12b-1 (distribution) fees. It's listed in the fee table of the fund's prospectus. Source: Investor.gov2 You never get a bill: fund costs come straight out of the fund's value. Source: Investor.gov4
- Compare funds side by side. Small fee gaps become large dollar gaps over time, and a high-cost fund has to perform better just to give you the same result as a low-cost one. Source: Investor.gov4 FINRA's Fund Analyzer, linked from Investor.gov, shows how costs add up. Source: Investor.gov4
- Decide your mix. Asset allocation means splitting money among stocks, bonds and cash. A longer time horizon can usually handle more ups and downs; money you need soon belongs in steadier places. Source: Investor.gov6
- Spread out inside each type too: many companies and industries, so one bad company or sector doesn't sink you. Owning funds is one easy way to do that. Source: Investor.gov6
- Check your mix once or twice a year. If stocks grow from 60% to 80% of your account, rebalancing back means selling some winners or adding to the rest. Experts suggest every 6 or 12 months, or when a category drifts past a set percentage; less often tends to work better. Source: Investor.gov6
- Ask any adviser: How do you get paid (commission, a percentage of what you have, or a flat fee)? What are all the fees to buy, hold and sell? How much does this have to go up before I break even? Source: Investor.gov3
What fees cost you
The SEC's example: $100,000 growing 4% a year for 20 years. Source: Investor.gov3
| Yearly fee | Worth after 20 years (about) |
|---|---|
| 0.25% | $208,000 |
| 0.50% | $198,000 |
| 1.00% | $179,000 |
Mutual fund or ETF?
Both pool many investors' money. Details from Investor.gov. Source: Investor.gov4
| Mutual fund | ETF | |
|---|---|---|
| How you buy and sell | From the fund (or through a broker), once a day at the next calculated price (NAV), plus any fees | On a stock exchange at the market price whenever the market is open, usually through a brokerage account |
| Price you get | The fund's NAV | Market price, which can be a bit above or below NAV |
| Taxes | Can pay out capital gains each year | Typically fewer capital gains payouts, so lower taxes |
| Reinvesting dividends | Usually an easy setting | Can be more complicated and may cost commissions |
Before you pick a fund
- What index does it track, or what is its goal? (prospectus) Source: Investor.gov4
- Expense ratio, and any sales loads, redemption fees or account fees Source: Investor.gov3
- Does it fit your time horizon and how much loss you can stand? Source: Investor.gov6
- If it's a target date fund that invests in other funds, is there a double layer of fees? Source: Investor.gov4
See it done
Video by Two Cents PBS Digital Studios Public media
What The Heck Is An Index Fund?
2019 · Checked October 3, 2026
Video won't load at school or work? No problem. Everything you need is in the steps; the video's just a bonus. Watch it on YouTube later.
If it doesn't work
- Already in a high-fee fund? Ask whether you can cut fees by buying more directly, and compare with similar lower-cost options before switching. Source: Investor.gov3
- Account drifted way off your plan after a big market move? Rebalance; it forces you to buy low and sell high, even though it feels backwards. Source: Investor.gov6
Good to know
The details, if you want them. Tap a line to open it.
Target date funds
These hold a mix of stock and bond funds and shift more conservative as the target year (usually a planned retirement year) gets closer, with the fund handling rebalancing for you. Check the fees. Source: Investor.gov4
Money market funds
These hold short-term debt and cash equivalents; many people use them to park cash. They're still funds, not FDIC-insured bank accounts. Source: Investor.gov4
Time does the heavy lifting
Low fees matter most over long periods. See Why starting early matters.
Take it with you
Printable cardDownload card (PDF)Sources
- U.S. Securities and Exchange Commission Index fund (Investor.gov)
- U.S. Securities and Exchange Commission Expense ratio (Investor.gov)
- U.S. Securities and Exchange Commission Understanding fees (Investor.gov)
- U.S. Securities and Exchange Commission Mutual funds (Investor.gov)
- U.S. Securities and Exchange Commission Exchange-traded funds (Investor.gov)
- U.S. Securities and Exchange Commission Asset allocation and diversification (Investor.gov)
Lesson M9.3 · Last checked October 2, 2026 against the sources listed.
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