Index Fund Calculator

The fund buys the stocks or bonds in an index and adjusts its holdings when the index changes. You buy shares of the fund, through a broker or retirement plan, and own a tiny piece of everything in it. Your return closely follows the index, minus a small fee. Most also pay dividends, which you can take as cash or reinvest.

It's one investment that holds many companies at once, following a preset list such as the S&P 500. Instead of trying to pick which stocks will win, you own them all in proportion to their size. When the market rises, your fund rises, and when it falls, your fund falls. Its low cost is a major part of the appeal.

We can't say what suits you, but investors commonly look for a broad index, a low expense ratio and a tight match to the index. S&P 500 and total US market funds are popular starting points, and adding a total international or bond fund widens your diversification. Compare past returns above, while remembering that they don't predict future results.

It depends on the index and the period. The S&P 500 has historically returned around 10% a year before inflation over very long stretches, though individual years vary from big gains to big losses. Results over any 10-year period can land well above or below that. Use the calculator to see what specific funds actually did over the time you care about.

For you, the fund earns money in two ways. Companies in the index pay dividends, which the fund passes along, and share prices can rise over time. For the fund company, the money comes from the expense ratio. Some funds also earn small amounts by lending their shares. A very low expense ratio is sustainable because the funds are large and cheap to run.

The fund collects dividends from the companies it holds and passes them on, often quarterly. Your broker can pay them as cash or reinvest them to buy more shares. If you reinvest, your share count grows and compounds over time. In a taxable account, they're usually taxable that year either way. Our returns assume reinvestment.

Often only a few. One broad fund can hold thousands of companies, and a simple portfolio could be a total US fund, a total international fund and a bond fund. Owning several funds that overlap, such as an S&P 500 fund and a large-cap growth fund, adds complexity without much diversification. Check the holdings before adding another fund.

For a broad fund, that would require nearly every company in the index to become worthless at the same time, which is about as unlikely as it gets. But it can suffer big drops. A narrow index, such as a single sector, is riskier than a broad one. Fund providers can also close a fund, in which case investors are paid out, not wiped out.

An ETF is a structure, and an index fund is a strategy, so the two overlap. Many ETFs track indexes, and many index funds are mutual funds. An index mutual fund trades once a day at NAV and may have a minimum. An index ETF trades all day on an exchange. Costs are often similar. In taxable accounts, ETFs can be more tax efficient.

In a taxable account, dividends are usually taxed each year, often at qualified rates, and you owe capital gains tax on any profit when you sell. Index funds tend to distribute fewer capital gains than active funds because they trade less. In a Roth IRA or 401(k), there's no yearly tax. Holding for more than a year generally qualifies a sale for lower long-term rates.

You can buy them through most brokerages, including Vanguard, Fidelity and Schwab, as well as many workplace retirement plans and robo-advisers. Compare the expense ratio and any account fees, and check whether you can buy fractional shares. Many brokers have dropped commissions on ETFs. Once you've chosen, setting up automatic purchases can keep you investing through ups and downs.