A Guide to Vanguard Index Funds

Building long-term wealth doesn’t have to mean picking individual stocks or constantly monitoring the market. Vanguard index funds have become a favorite among investors by offering broad market exposure, low costs and a simple, passive approach to investing. Whether you’re saving for retirement or another long-term goal, understanding how Vanguard index funds work can help you decide if they’re the right fit for your portfolio.

Consider working with a financial advisor as you decide whether to invest in an index fund.

What Are Vanguard Index Funds?

An index fund is a type of mutual fund that’s designed to match or align with the performance of a specific stock market benchmark. For example, there are index funds that track the S&P 500 index and others that follow the Russell 2000 index.

These funds hold all of the stocks, bonds or other securities that its underlying index owns. This is what makes index funds passive since the fund manager isn’t actively buying and selling individual securities. Vanguard offers both index mutual funds as well as exchange-traded funds (ETFs) that follow a passive investment strategy. Exchange-traded funds are similar to mutual funds, but they trade on an exchange like a stock.

Vanguard’s first index fund was created in 1976 by Jack Bogle. This fund, the Vanguard 500 Index Fund Investor Shares (VFINX), tracks the S&P 500 index, which includes the 500 largest companies in the U.S. As of late 2024, Vanguard offered more than 400 index mutual and exchange-traded funds.

Those options include:

Stock funds
Bond funds
International funds
Sector and specialty funds
Balanced funds
Target-date funds

Balanced funds seek to combine both stocks and bonds together in one fund. Sector and specialty funds focus on a specific stock market sector, such as financials or real estate. Target-date funds adjust their asset allocation automatically, based on a target retirement date. Target-date funds have become an increasingly popular option in 401(k)s and other workplace retirement plans.

How Vanguard Index Funds Work

Vanguard index funds group together investments that represent the index they target. Funds can include a mix of stocks and bonds or focus more heavily on one type of investment than another. For example, the Vanguard Total Bond Market Index Fund (VBTLX) offers investors exposure to the total bond market while the Vanguard Total International Bond Index (VTABX) targets the global bond market.

Regardless of what they invest in, Vanguard index funds have several things in common, including:

Low investment minimums
Below industry average expense ratios
Broad diversification in a simplified package

Index funds by nature tend to be more cost-efficient than other types of mutual funds simply because they’re passively managed. According to Vanguard, their funds have an average expense ratio that’s 0.09% compared with an industry average of 49% – about one-fifth below the industry average. The expense ratio represents the cost of owning an index fund or ETF every year, expressed as a percentage of assets.

Vanguard’s index funds allow for easier diversification since you can invest to match a specific index. Like other mutual funds, Vanguard funds balance risk with rewards, in that the greater the risk the greater the fund’s return potential might be.

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Why Investors Like Index Investing With Vanguard

The main advantages of investing with Vanguard index funds are the costs and the performance of its funds. The lower a fund’s expense ratio, the more of your returns and investment growth you get to keep. Additionally, Vanguard funds that rely on a passive investment strategy can also be cost-friendly from a tax perspective.

In an actively managed fund, the fund manager routinely buys and sells underlying securities to drive fund performance. One side effect of doing so is that when a security is sold at a profit, that results in a capital gain for the fund’s investors. By utilizing a passive investment strategy in which securities are exchanged less often, Vanguard index funds can help investors better manage their tax liability. Aside from that, Vanguard index funds have a solid track record of performance.

Which Vanguard Index Funds Are the Best?

Vanguard offers numerous index fund options, including ETFs, which means investors have the advantage of variety when deciding which ones to invest in. When considering any Vanguard funds, it’s important to look at the expense ratio as well as the fund’s historical performance. The following Vanguard index funds are some of the most popular among investors.

Vanguard 500 Index Fund Investor Shares (VFINX): The original Vanguard index fund tracks the S&P 500 and offers exposure to large-cap companies. This fund is also available as an ETF, Vanguard S&P 500 ETF (VOO).
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX): This fund is designed to provide exposure to the entire stock market, across small-cap, mid-cap and large-cap companies. With an expense ratio of 0.04%, it’s one of Vanguard’s most affordable index funds.
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX): This index fund is designed for investors who are looking to add fixed income to their portfolios. The fund invests approximately 30% of assets in corporate bonds, with the remaining 70% held in government bonds of varying maturities.
Vanguard Total International Stock Index Fund (VTIAX): VTIAX invests in international stocks from both developed and emerging market countries. This fund has high return potential but it can also be more volatile than other index fund options.
Vanguard Real Estate Index Fund Admiral Shares (VGSLX): This fund invests in real estate investment trusts (REITs), which are legal entities that own investment properties. It may appeal to investors who are comfortable taking on more risk in exchange for dividend income.

How to Invest in Vanguard Index Funds

The first step is deciding where to hold your investment. Vanguard index funds can be purchased through taxable brokerage accounts as well as tax-advantaged accounts such as traditional IRAs, Roth IRAs and employer-sponsored retirement plans, if available. The type of account you choose can affect taxes, withdrawal rules and your overall investment strategy.

Vanguard offers a wide range of index mutual funds and exchange-traded funds that track different market segments. Investors can choose broad-market funds that cover the entire U.S. stock or bond market, funds that focus on specific sectors or asset classes, or international funds for global diversification. Your selection should reflect your investment goals, time horizon and tolerance for risk.

Once you’ve chosen an account and a fund, you can invest by purchasing shares through Vanguard or another brokerage that offers Vanguard funds. Mutual funds are typically purchased in dollar amounts and priced once per trading day after the market closes, while ETFs trade throughout the day like stocks. Many brokerages also allow investors to buy fractional ETF shares, making it easier to invest with smaller amounts.

After investing, it’s important to review your portfolio periodically to ensure it remains aligned with your financial goals. As markets fluctuate, your asset allocation may shift over time, making rebalancing necessary to maintain your desired mix of stocks, bonds and other investments. While index funds are designed for long-term investing, occasional portfolio reviews can help keep your strategy on track.

Bottom Line

Vanguard index funds offer a straightforward, low-cost way to build a diversified investment portfolio for a variety of financial goals. With options covering U.S. and international stocks, bonds and balanced portfolios, investors can choose funds that match their risk tolerance and time horizon. While no investment is guaranteed to generate positive returns, Vanguard’s broad selection of index funds can serve as a strong foundation for a long-term, buy-and-hold investment strategy.

Tips for Investing

Consider talking to your financial advisor about the merits of index investing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re considering index investing, it helps to know a little about the various indexes these funds can track. For example, the S&P 500 and the Russell 2000 track different baskets of securities and thus will have different performance. Familiarizing yourself with different indexes can help with choosing funds and ensuring that you’re adding the right amount of diversification to your portfolio.