The index fund is 50. It’s one of the greatest innovations in personal finance

The views in this article are my own. I am not an investment professional, and this is not meant as financial advice.

The index fund is, without hyperbole, one of the greatest innovations in American personal finance. Though Wall Street scoffed at the idea at first, it has proven itself to be an enduring cornerstone of the American investment landscape, and has done more for the average retirement saver than many other financial innovations of the past 50 years.

As a millennial, it’s hard to imagine a time without index funds. I’ve gotten the messaging from when I was young—first by my dad, then by my first boss—to invest for retirement, and to do so in a low-cost, diversified index fund. As a personal finance reporter, writing about the investment’s many virtues has become second nature. I take for granted that everyone else has heard the good word, too.

But the truth is plenty of savers still don’t know about index funds, or why they’re such a great investment for everyday people.

So if you’re still not familiar with index funds or simply need a refresher on why they are beloved, consider this love letter a primer on why they are the superior retirement investment.

A little background

The first index mutual fund was launched by famed investor John Bogle back in 1976 for his financial firm the Vanguard Group. You’re likely familiar with Vanguard, which is now one of the nation’s largest investment firms and manages many employer-sponsored retirement plans. But you may not know that the company’s focus has long been to offer well-diversified, lost-cost funds for the long-term investor.

That made him something of an outlier in the investment industry at the time. And to accomplish his aims, his thesis was that investment professionals trying to “beat” the returns of the broader stock market year after were on a fool’s errand; instead, investors would be far better off just earning the market average each year. Notably, he wasn’t the only person at the time suggesting a low-cost fund that closely tracked the market would be a boon for average people, and institutions had some access to these types of investments. But he did make it a reality for the non-elite.

He came up with the First Index Investment Trust, which tracked the S&P 500 index. Rather than select individual stocks, investors would own 500 of them. The investment industry wasn’t exactly on board. The idea was labeled “Bogle’s Folly,” and it did not do particularly well at launch. Bogle himself called it a “flop.”

But Bogle stuck by his idea. Over time, more academics and investment titans got on board, and the results of being “average” began to speak for themselves. Today, that first index fund boasts nearly $2 trillion in assets. A $15,000 investment at launch would be worth more than $3.6 million today, according to Morningstar. And passively managed funds more generally account for more than half of U.S. fund assets.

The benefits of index funds

Prior to the index fund, you might have paid a fund manager a lot more to invest your money in actively-managed mutual funds, and then still earned sub-par returns, because people are really bad at stock picking. The index fund flipped both of those things on their heads.

Low fees

There are many benefits to the index funds Bogle championed, but one of the biggest is that they have extraordinarily low fees. You can find a very good fund to invest in with a fee of 0.1%—or even lower. In fact, at the end of 2024, the average index fund expense ratio was just 0.09%, compared to 0.56% for an actively managed fund, according to Vanguard research.

Before the index fund was created, having that low of a fee wasn’t really common, at least for individuals. You’d pay someone at least a few percentage points to pick stocks for you, perhaps via a mutual fund. The stocks they picked might do well one year, but they rarely would over the long term. And when you’re investing for retirement, as most normal people are, the long term is what matters.

It might not seem like a huge difference, but the transition from paying, say, a 1% to 3% fee to less than 1% has saved everyday people billions of dollars over the past 50 years, thanks to compounding. Meaning, the money you saved in fees stays invested and continues to grow for you, and it does that each year. The difference can be quite dramatic.

To understand how this works, here’s an example from Wealthfront:

If you made a one-time investment of $50,000, stayed invested for 10 years, and earned a 7% annual rate of return, your ending balance would be $96,083.53 with a 0.25% annual advisory fee, but just $89,542.39 with a 1% annual fee—a difference of over $6,000.

And the bigger your account balance and the longer your time horizon, the larger that difference becomes. Using the same assumptions from the example above, after 30 years, your balance would be $354,818.75 with a 0.25% fee, but just $287,174.53 with a 1% fee—a difference of over $67,000.

Because index funds simply track an index of companies, they are considered passively managed. There isn’t a bunch of trading going on all of the time, so there’s not much for the fund manager to do. Thus the low fee.

And because index funds are so inexpensive, they have also driven down the cost of active management over the past 50 years. This is an ongoing process. Just a couple years ago, the likes of Vanguard and Fidelity debuted index funds that charge 0% in fees.

“Index funds feature near-zero operating costs, diversification, liquidity—what’s not to like?” says Edward Mahaffy, a Texas-based certified financial planner (CFP). “The fee savings alone … can add up to a fortune over time.”

Diversification

As Mahaffy mentions, another benefit of an index fund is how diversified it is. Aside from believing that fees could be lower, Bogle’s whole other investing philosophy was that individuals should not stock pick. Instead, they should own the whole market (or the part of the market that makes up an index), so that when one company’s stock is doing poorly, the stocks still doing well can make up for it. At the end of the year, your overall return is the average of the entire index, rather than a single company’s returns.

This allows you to take a “set-it-and-forget-it” approach to investing for retirement, says Sean Lovison, New Jersey-based CFP. Instead of paying a money manager a bunch of money to “hunt for needles in a haystack,” you can simply buy the entire haystack at a very low cost.

“You get instant, broad-market diversification that compounds over decades, allowing savers to capture overall market growth without managing trades or stressing over daily headlines,” says Lovison.

Each year, S&P Dow Jones Indices compares the returns of active versus passive management. The researchers have found that active management underperforms the indexes in every single category of investment.

How to invest in index funds in 2026

Bogle’s first index fund is now called the Vanguard 500 Index Fund, or VFIAX—one of the best around. It currently boasts a management fee of just 0.04% and gives you exposure to the 500 companies in the S&P 500 index, which are some of the largest and best-performing in the country.

Given his lifelong commitment to bringing investors these low-cost funds, Bogle has many acolytes, including the aptly-named Bogleheads. This community preaches the gospel of a three fund portfolio, meaning you need to invest in only three funds for a secure retirement: a “total market” U.S. stock index fund, a “total market” international stock index fund, and a “total market” bond index fund.

At Vanguard, these funds are:

Vanguard Total Stock Market Index Fund (VTSAX)
Vanguard Total International Stock Index Fund (VTIAX)
Vanguard Total Bond Market Fund (VBTLX)

In theory, these low-cost funds give you exposure to the entire U.S. stock market, the international stock market, and the U.S. bond market all at once. Future returns are not guaranteed, but this strategy is a pretty safe bet, as far as investing for retirement goes.

In the 50 years since the launch of that first index funds, they have proliferated—so you have tons of other great options outside of Vanguard funds. Exchange-traded funds (ETFs) are a type of index fund that have also become more popular. They offer some additional tax efficiencies and low fees, though for most people they are generally inextinguishable from a standard index mutual fund. In the three-fund model, they include:

Vanguard Total Stock Market ETF (VTI)
Vanguard Total International Stock Index Fund (VXUS)
Vanguard Total Bond Market ETF (BND)

That said, there are plenty of funds that aren’t necessarily worth your time (and certainly not your money). In fact, there are now more index funds available than there are individual stocks, so you need to be selective.

When you’re looking for one to invest in, always check the fine print: you want broad, total-market exposure with an expense ratio under 0.10% (and ideally under 0.05% for core U.S. stock funds), says Lovison.

“You still have to check the expense ratio, and this is especially true inside workplace 401(k) plans at smaller employers,” he says. “It is surprisingly common to see a small-business 401(k) offer an S&P 500 index fund with an expense ratio of 0.50% or higher.”

One possible downside of index funds is how they are constructed. You may have heard of the “Magnificent 7,” which is made up of seven tech stocks that dominate the market, including Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla. Many index funds have a lot of exposure to these stocks because they are currently so valuable.

@aliciatalksmoney
3/20/26: The 10 biggest companies in the S&P 500 make up 40% of the index. #economy #stocks #retirement
♬ original sound - Alicia Adamczyk

But that also means the index fund might not be as diversified as you think. Should something go wrong in the tech sector—like, say, the AI bubble popping—index fund investors could take enormous hits to their portfolios. At the same time, it could arguably be malpractice for index funds not to have so much exposure to these stocks, because they are so valuable.

So, it’s important to understand the stock holdings of the index funds you’re invested in, and add other types of funds to adjust your exposure.

A lot of people say index funds are boring; they believe there must be some other secret, better type of investment they’re missing out on. But 50 years in, the evidence is clear: Low-cost, diversified index funds are the best investment options for those saving for retirement. Being average never felt so good.

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