How to Pick Your First Total Stock Market Index Fund

Michael Chen

Michael Chen writes about personal finance fundamentals. Bay Area-based · finance enthusiast for 15 years.

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Quick answer: Compare the expense ratio (ideally under 0.10%), the minimum investment, ETF versus mutual fund, and which brokerage you use. Most big total market funds hold nearly the same stocks, so cost and convenience decide the choice.↗ Share on X

To choose your first total stock market index fund, compare four things: the expense ratio (the yearly fee, ideally under 0.10%), the minimum investment, whether it is a mutual fund or an ETF, and which brokerage you already use or plan to use. Most large total market funds hold almost the same stocks, so the differences that matter are cost and convenience. If two funds track the whole US market and both charge a tiny fee, either one is a reasonable first pick.

This article walks you through the choice step by step, with real fund examples and simple math.

What is a total stock market index fund?

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An index fund is a basket of stocks that copies a list, called an index. It does not try to beat the market. It just tries to match it.

A total stock market index fund copies an index that covers almost every publicly traded company in the United States. That means large companies like Apple and Microsoft, plus thousands of mid-sized and small companies. With one purchase, you own a tiny piece of all of them.

Why beginners like them:

• Wide spread. If one company fails, it is a very small part of your fund.
• Low fees. No team of managers is picking stocks, so costs stay low.
• Simple. You do not need to research individual companies.

They still go up and down with the market. In a bad year, your fund can lose a large part of its value. This is money for long-term goals, like retirement, not for rent next month.

Which funds are the most common choices?

Here are some well-known total US stock market funds. Fees and minimums change, so always confirm the current numbers on the fund company's website before you buy.

These funds track slightly different indexes, but they all cover the broad US market. Their returns over time tend to be very close to each other.

Step 1: Check the expense ratio

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The expense ratio is the fee the fund takes each year, as a percentage of your money. You never get a bill. It is taken out quietly.

Here is what it costs on a $10,000 balance:

The difference looks small at first. But fees are charged every year on a growing balance, so over decades a high fee can eat a large slice of your money. For a total market index fund, there is no good reason to pay more than about 0.10%. Many good options charge 0.05% or less.

Step 2: Decide between a mutual fund and an ETF

Both can hold the same stocks. The difference is how you buy them.

A simple rule:

• If you want to set up automatic investing of a fixed amount every month and you plan to stay at one brokerage, a mutual fund from that brokerage is very easy.
• If you want flexibility to move your account later, or you are investing in a regular taxable account, an ETF is often the better fit.

Step 3: Match the fund to your brokerage

This step saves more hassle than people expect.

1. Buying a company's own mutual fund at that company is usually free. Fidelity funds at Fidelity, Vanguard funds at Vanguard, Schwab funds at Schwab.

2. Buying another company's mutual fund can come with a transaction fee. Check before you buy.

3. ETFs from major companies usually trade with no commission at the big brokerages.

4. Some funds are locked to one broker. For example, Fidelity's ZERO funds can only be held in a Fidelity account. If you move brokers later, you would have to sell, which can create a tax bill in a taxable account.

So, if you already have an account somewhere, start by looking at that company's own total market fund or a low-cost ETF.

Step 4: Pick the right account to hold it

The fund is what you buy. The account is the "box" you put it in. The box changes your taxes.

• 401(k) through your job: If your employer matches your contributions, this is often the first place to invest. Look in your plan's fund list for a "total market" or "extended market" index fund. Your choices may be limited to what the plan offers.
• Roth IRA or traditional IRA: Accounts you open yourself, with tax benefits and yearly contribution limits set by the IRS.
• Regular taxable brokerage account: No contribution limits, but you pay tax on gains and dividends. ETFs are often more tax-efficient here.

If you are unsure which account fits your situation, this is a good question for a tax professional or a fee-only financial advisor.

What mistakes should first-time investors avoid?

1. Buying several funds that hold the same thing. Owning VTI, ITOT, and SCHB together does not add variety. They hold nearly the same companies.

2. Picking based on last year's return. Total market funds move together. A small difference in one year is usually noise.

3. Ignoring the fee. Some "total market" funds sold through advisors or certain 401(k) plans charge much more than the examples above. Always check.

4. Selling during a drop. Markets fall sometimes, often sharply. Selling in a panic locks in the loss. Investors who stayed in through past downturns have historically been rewarded over long periods, but past results do not promise future ones.

5. Investing money you will need soon. Keep an emergency fund in a savings account first. Many people aim for three to six months of basic expenses.

Is one fund enough?

For many beginners, a single total US stock market fund is a solid core. Some investors also add:

• An international stock fund, to own companies outside the US.
• A bond fund, to reduce swings as they get closer to needing the money.

Another option is a target-date fund, which mixes stocks and bonds for you and shifts more toward bonds as your retirement year gets closer. It costs a bit more but is very hands-off.

*This article is for general information only. It is not personal investment advice and does not replace advice from a licensed financial professional. All investing involves risk, including the loss of money you invest.*

Your next step today

Log in to the brokerage or 401(k) you already have, or choose one to open. Search for its total stock market index fund or a low-cost total market ETF, and write down three numbers: the expense ratio, the minimum investment, and any trading fee. If the expense ratio is under 0.10% and the minimum fits your budget, set up a small automatic monthly investment, even $50, and let it run.

FAQ

What is a good expense ratio for a total stock market fund?

Many good total market funds charge 0.05% or less. There is rarely a reason to pay more than about 0.10% for this type of fund.

Is an ETF or a mutual fund better for beginners?

A mutual fund makes automatic dollar-amount investing easy at one brokerage. An ETF is more flexible to move between brokers and is often more tax-efficient in a taxable account.

Should I own several total market funds?

No. Funds like VTI, ITOT, and SCHB hold nearly the same companies, so owning all of them adds no real variety.

Educational content, not personalized financial advice. Sources cited where applicable.