Beginner's Guide to Index Funds in 2025: Passive Investing Made Easy

What Is an Index Fund?

Index Mutual Funds: These funds follow a passive strategy but often require a minimum investment (e.g., $3,000 for Vanguard 500). They usually allow trades once per day.
Exchange-Traded Funds (ETFs): ETFs trade like individual stocks on exchanges. They allow investors to buy fractional shares, lowering the barrier to entry—sometimes you can invest with as little as $1. ETFs offer more flexibility, with the ability to buy and sell throughout the trading day.

Deposit Funds: Link your bank account and transfer money to your brokerage account. Robinhood offers instant deposits, so your money is available to invest immediately.
Search for the ETF: Look up the Vanguard S&P 500 ETF by its symbol VOO.
Review Fund Details: Check the sector breakdown and top holdings to understand where your money is going. For example, about a third of the investment goes into technology companies.
Purchase Shares: Enter the dollar amount you want to invest. You can buy fractional shares, so even $1 can get you started.
Enable Dividend Reinvestment: Turn on dividend reinvestment to automatically use dividends to buy more shares, compounding your returns over time.
Set Up Recurring Investments: Automate your investing by scheduling regular contributions daily, weekly, or monthly to build wealth consistently.

Investing $500 per month for 10 years could grow your portfolio to nearly $100,000.
Extending that to 20 years significantly accelerates growth to approximately $343,000—more than triple the value due to compounding.
At around 31 years, your portfolio could surpass $1 million, even with total contributions of only $186,000. The rest comes from market gains and reinvested dividends.

Bond ETFs: For more stability, funds like the Vanguard Total Bond Market ETF (BND) are popular choices.
International ETFs: Expand your exposure globally with funds like the Vanguard Total World Stock ETF (VT).
Sector-Specific ETFs: Invest in specific industries such as healthcare, energy, or financials if you want targeted exposure.
Dividend ETFs: These focus on companies with strong dividend payouts, ideal for income-focused investors.

Taxable Brokerage Accounts: You may owe long-term capital gains taxes (up to 20% federally) on profits when you sell investments held longer than a year. Dividends are also taxable annually.
Retirement Accounts (e.g., Roth IRA): Contributions are made with after-tax dollars, but qualified withdrawals—including capital gains and dividends—are tax-free after age 59½. This can significantly boost your net returns over time.