How do I pick an index fund?
In one paragraph
Pick an index fund by matching it to a clear market exposure goal, then selecting the lowest-cost option that tracks a broad, well-constructed index with a long track record and high assets under management.
What this actually means
The phrase "just buy an index fund" glosses over a real decision. There are thousands of index funds tracking everything from the S&P 500 to semiconductor stocks to ESG screens. Knowing which one to buy requires a short framework.
Start with the exposure question: what market segment does the investor want to own? For most investors building a core portfolio, the right answer is broad and diversified — the total U.S. stock market, the total international stock market, or a global all-world fund. Sector-specific or thematic indexes introduce concentration that undermines the diversification logic of indexing.
Once the exposure target is clear, cost is the primary differentiator. For equivalent indexes, choose the fund with the lowest expense ratio. The difference between a 0.03% and a 0.20% expense ratio compounds to meaningful money over 30 years. Vanguard, Fidelity, and Schwab all offer total market index funds with expense ratios near zero.
Tracking error — how closely the fund's returns match its underlying index — is the next check. A well-run index fund should track its benchmark within a few basis points annually. Large deviations indicate poor replication or hidden costs. This data is available in any fund's annual report.
Assets under management (AUM) matter for practical reasons. Very small funds face higher operating cost per share and carry closure risk. Established funds with tens of billions under management have tight bid-ask spreads (for ETFs) and robust operations.
Investors should also check the index construction. A "total market" fund should actually hold thousands of stocks. Some funds labeled "index" use sampling techniques that introduce meaningful deviation from the stated benchmark.
The Elements of Investing by Burton Malkiel and Charles Ellis is the definitive short guide to index fund selection. The Simple Path to Wealth by JL Collins makes the case for why one total stock market fund can serve as the core of an entire portfolio.