Consumer Advocacy
What you need to know
Index Investing
  • Can be complicated to manage
  • Research all possible indexes before choosing one
  • Lower-cost alternatives to trading individual stocks and bonds
  • Look for brokers that don't require minimum investment amounts
Our Approach

How we analyzed the best Index Investing Brokerages

Fund Characteristics
Our team tends to prize flexibility. Our top index investing companies offered extensive ranges of industries to track, along with multiple funding options. The more choice, the better.
Fees
Transparency in fee structure is an important metric for ranking any financial instrument. Index funds typically have lower fees, but you should make sure to always read the fine print.
Financial Strength
We looked at major credit reporting agency ratings when choosing our top index investing companies. Financial strength determines a company’s prospective future.
Reputation, Service, & Communication
Consumer Financial Protection Board (CFPB) complaints were an essential source for our rankings. Multiple modes of communication and long customer service hours were given bonus points as well.

Our list of the best Index Investing Brokerages

Company Name
Researchers' Rating
Northern Trust
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Our Research

More insight into our methodology

Fund Characteristics

We took a look at the types of index funds offered by each company. Generally speaking, most companies will offer funds that track the most important indexes, like the S&P 500, the Dow Jones Industrial Average, and the Wilshire 5000. However, some companies may also offer sector funds or specialty funds. These index funds will track the financial performance of a specific industry, like the energy, financial, or technology market. Investing in sector index funds are an easy way to diversify your portfolio by balancing investments in “safer” markets like healthcare with “riskier” markets such as commodities. Specialty funds are also useful if you want to invest in socially responsible companies. These types of funds are growing daily, meaning you're likely to find one that aligns with your beliefs and goals.

Fees

Since index funds are passive investments – meaning they're not actively traded – they're generally low-cost securities when compared to individual stocks or bonds. Simply put, they have lower operating costs than other investment products. Nevertheless, there are operating costs and fees are one of the most important factors that will help you choose which brokerage company to invest with.

Many brokerage firms will charge an annual account management fee, which may be a flat rate or a percentage of your earnings. Additionally, index fees are charged an expense ratio, a percentage that is used to cover administrative costs. Expense ratios range from 0.10% to 2.0% and vary by index fund and company. You may be charged transaction fees by companies that sell index funds managed by other companies. These index funds may be traded as exchange-traded funds (ETFs) and will be subject to trade fees.

Other fees, such as charges for initiating wire transfers, closing out your account, or engaging a financial advisor may apply.

Financial Strength

To evaluate each company’s financial strength, we took a look at their most recent ratings from three important credit rating agencies: Standard & Poor’s, Moody’s, and AM Best. These ratings provide a picture of how stable the company is and how likely they are to remain in business in the near future. While portfolios are typically transferred to another company in the event of a brokerage firm’s failure, a bankruptcy can certainly be disruptive to your portfolio and peace of mind. Keeping your investments in a company with sure footing could help save you some trouble in the future.

Reputation, Service, & Communication

A company's reputation among its customers is key when deciding whether to enter into a business relationship. We surveyed the number of complaints filed against each company with the Consumer Financial Protection Board (CFPB), a US government agency that compiles complaints about financial institutions, banks, and other lending organizations. We also looked at the firm's standing with the Financial Industry Regulatory Authority (FINRA) – an agency dedicated to protecting investors and the market's integrity by regulating brokers – by tallying the number of regulatory events, civil events, and arbitrations in which the company has been involved. Finally, we evaluated how easy it is to get in touch with each firm. Long hours of operation, along with multiple modes of communication, will earn the highest marks.

Helpful information about Index Investing

Far too many people believe that investing in the stock market is complicated – that an elaborate formula is required to earn high returns. Others suspect that putting any amount of money in stocks is like gambling in a casino, so they refrain from investing even the smallest amount of their savings. While there is always some risk and no guarantee of returns when investing in publicly traded stocks, bonds, and funds, those who invest wisely have something very simple and reliable in their corner: the history of strong long-term returns in stock market indexes.

Stock market indexes are a measurement of a particular segment of the market. The performance of an index is measured by calculating the value of all the companies on the index collectively. In an index with hundreds of companies, each company’s worth, as measured in their stock price, is used in the computation of the index’s value. The Standard & Poor's 500 (S&P 500) is an index of 500 companies from both the New York Stock Exchange (NYSE) and NASDAQ exchange, chosen by S&P to reflect businesses in all the major sectors of the economy. The S&P 500 has become an accepted “bellwether” for the US economy as a whole.

The history of the economy in the United States for the past 100 years is largely one of phenomenal success and sustained growth. While there have been periods of recession with negative returns in the stock market, when one looks at the annualized returns of the S&P 500 in 10 and 20-year segments, that index returned 11% every year for its investors.

Index Funds

In 1975 the first publicly offered index mutual fund tracking the S&P 500 was brought to the market by The Vanguard Group. While investors previously had the opportunity to conveniently own stocks from multiple companies in a single mutual fund, these new index funds were the first time a fund was created to specifically track the performance of an index. The objective of most mutual funds is to out-perform a particular index by actively managing the composition of the fund, frequently buying and selling the assets and charging significant fees to do it. An index fund is a passive investment with low fees; the composition of the fund is changed only when there are changes to the index it is tracking.

The Diversified Portfolio

Any good financial advisor will tell investors that an investment portfolio needs to be diversified. A brokerage account is just a part of that diversity, along with savings products from banks, home equity, and other investments. With potentially dramatic swings in gains or losses, investing in just one index, one sector, or one company is a risky proposition for the average investor. While there will be years when a particular sector has incredibly high returns, the sector could suffer historic negative returns the very next year. In indexes with companies from a wide array of economic sectors, the swings in an index are not nearly as great. By diversifying one’s portfolio with assets in different sectors, investors can hedge against substantial losses in one sector.

For individual index fund investors, diversifying their portfolios with funds from domestic index funds, foreign index funds, and bond index funds will protectively hedge the value of the portfolio through both bull and bear runs in the market. In addition to the S&P 500, there are dozens of different indexes that track domestic companies, foreign companies, and both municipal and corporate bonds. An individual investor’s portfolio that is balanced in a way that meets their financial goals can expect (but not be guaranteed) returns that are based on those long-term historical averages for the particular index funds they have chosen.

DIY

Most discount brokerages will provide an online tool that asks the investor how much they wish to invest, their investment horizon, and their risk tolerance. Investors whose retirement is coming up will be advised to build a portfolio that is conservative, heavily weighed with bond funds, so that their investments will encounter little risk and provide monthly income. Investors with longer horizons and a higher tolerance for risk will likely choose an aggressive profile portfolio that is mainly comprised of domestic index funds. Robo-advisors are simply taking this basic investment profile algorithm and periodically making adjustments to the composition of the portfolio based on the profile of the investor.

Realized gains   

It’s important for investors to remember that the value of the portfolio is only realized when the assets are sold. Until that time, it’s all numbers on a computer screen. Investors who have a long-term investment horizon need to have the patience to see the market rebound through recessions. An investor with $10,000 in an S&P 500 index fund in 2007 saw the value of that fund fall 37% in 2008 to $6,300. The investor who held onto that fund without selling it saw their investment more than double over the next 10 years, bringing its value to over $22,000.

Index investing is a sensible and more conservative way to invest in the stock market. Because they have low fees, index funds return more of their gains to investors. Investors can use nothing but index funds in a portfolio or they can be used to supplement individual stocks and bonds. For consumers who are not looking to beat the market and have the perseverance to stick with their investments through the markets, index investing is a prudent way to share in the long-term gains of the stock market.

FAQs about Index Investing

Can I replicate an index fund and avoid fees by buying stocks myself?

Avoiding the fees of an index fund by individually buying the stocks that comprise it is a sound strategy, but it’s not the answer for everyone. As with actively managed funds, investors who attempt to match an index will essentially be trading the expense ratio of an index money manager for the commission and trade fees of a brokerage. Smart investors research indexes and then replicate them while adding their own twist in order to outsmart the market.

Are indexed funds better than actively managed funds?

Index funds are almost always a better alternative than actively managed funds for those investing for the long term. Due to the volatile nature of actively managed assets, investors can potentially lose more money than what they invested in the first place. Other types of funds traditionally underperform in the market when compared to the much safer index funds. For example, 82.38% of U.S. funds underperformed the S&P 500, one of the top indexes in the world. Index funds are subject to market swings, but because they hold a diversified selection of company stocks with the shareholder funds, they are less prone to severe losses in all but total market crashes.

What's the difference between an index fund and an ETF?

The chief difference between index funds and ETFs (Exchange-Traded Funds) is their flexibility. Both products consist of a collection of securities but, unlike index funds, ETFs are traded like common stocks. Being traded like a stock in the market means ETFs are more flexible than index funds, easier to buy and to sell. By trading like stocks, they also avoid the added documentation that index funds require. Another difference is cost. Index funds make money primarily by charging their shareholders a fee based on the fund’s expense ratio. Index funds also require a minimum investment that can run as high as a few thousand dollars. With ETFs, the investor isn’t asked to make an investment up front since they are most likely trading them through a brokerage. On the other hand, investors must pay transaction fees when trading ETFs.

How much do index funds charge in fees?

Index funds are typically charged an expense ratio, which is an annual fee deducted to pay for administrative, management, and operating costs of the fund. This is usually expressed in a percentage. Although it's an annual fee, it's typically accrued on a daily basis. The expense ratio doesn't include portfolio transaction fees or brokerage costs. Additionally, some index fund products may also have a minimum investment account. However, some companies, such as Fidelity, now offer index funds with no expense ratio. There are also several companies offering index investing with no minimum.

What are some broad-based indexes?

Companies tend to limit their selection of index funds to those that track indexes with larger or numerous companies. Some of the most popular indexes used by companies managing index funds are the S&P 500, the Dow Jones Industrial Average, the NASDAQ, the Wilshire 5000, and the Russell 3000 and 2000. The MSCI (Morgan Stanley Capital Investments) indexes are also popular in the field of foreign stock investing. The Bloomberg Barclays US Aggregate Bond Index (previously the Lehman Aggregate Bond Index) is a common benchmark for bond funds. The BarCap Aggregate is a broad bond index covering most of the US traded bonds and some foreign bonds traded in the BarCap.

How safe are index funds?

Index funds are some of the safest investments currently available in the stock market. Because most index funds follow a diversified list of company stocks, they are a safer alternative than trading individual stocks. They generally do better than other types of funds as well due to large, safe indexes like the S&P 500 and the Dow that require minimal effort to track and provide a steady profit over time. However, not all indexes are created equally. Some, for example, are back-tested with historical results, which has led to the creation of many indexes that are backed not by factual results, but by theory and speculation in an attempt to “beat the market.” The safest index funds are those that track an index’s real market data.

What is a mutual fund?

A mutual fund is a managed portfolio of investments that is funded by its shareholders. The money pooled from investors is used by the mutual fund’s managers to purchase securities, such as stocks, bonds, and other types of asset. The whole of a mutual fund’s combined holdings is called its portfolio. Each mutual fund may have a different kind of investment goals, such as fixed-income or long-term growth. Because the securities are being traded by the fund’s management, investors usually must pay various fees and other additional expenses. Mutual funds may be categorized as passive or actively managed: index funds are an example of passively managed mutual funds because they match the performance of an index. The diverse assortment of securities in mutual funds, professional management services, and affordability make the product a popular choice among investors of all levels.

Who decides what's included in an index?

What’s included in an index depends on the person or entity selecting the stocks in it. Anyone can create an index since an index is, fundamentally, a list of stocks.

What is an index?

In the field of investing, an index is a tool used to measure the performance of a group of stocks in the market. Indexes are also used to measure the performance of the stock market as a whole. Simply put, they track changes in the price movement of a given stock portfolio, which is representative of a larger market to which the individual stocks are relevant. For example, Standard & Poor's 500 (S&P 500) tracks the stocks of the 500 largest companies in the US whereas the Dow Jones Industrial Average only tracks the performance of the 30 largest and most widely held publicly traded companies.