Index funds continue to be the backbone of many successful investment portfolios, offering diversification, low costs, and reliable long-term performance. As we move further into 2025, several index funds stand out for investors looking to build wealth over time. Whether you're just starting your investment journey or looking to optimize an existing portfolio, these top-performing index funds deserve your attention.
Understanding Index Funds in Today's Market
Index funds have revolutionized investing by providing access to broad market segments without the high fees of actively managed funds. These investment vehicles simply track established indexes like the S&P 500 or Nasdaq-100, removing the guesswork and emotion from investing.
"The beauty of index funds is their simplicity," says Jamie Collins, a financial advisor I spoke with last week. "They offer instant diversification across hundreds or thousands of companies with a single purchase."
The current economic landscape makes index funds particularly attractive. With inflation showing signs of stabilization and interest rates potentially shifting, broad market exposure through index funds provides a buffer against sector-specific volatility. Let's explore some standout options for 2025.
S&P 500 Index Funds: The Reliable Foundation
Vanguard S&P 500 ETF (VOO)
The Vanguard S&P 500 ETF remains a gold standard for index investing. Currently priced around $545.04 with an impressively low expense ratio of just 0.03%, this fund provides exposure to 500 of America's largest companies.
VOO has delivered consistent performance, with average annual returns exceeding 11% over the past decade. The fund trades approximately 6.2 million shares daily, ensuring excellent liquidity for investors.
What makes VOO particularly attractive for 2025 is its balance of growth-oriented tech companies and stable value stocks. This balance has helped the fund weather various market conditions while maintaining strong long-term performance.
Schwab S&P 500 Index Fund (SWPPX)
Another excellent S&P 500 option is Schwab's offering, which features an equally impressive expense ratio of 0.02%. I've noticed Schwab has been particularly aggressive in keeping costs low, making this fund slightly cheaper than some competitors.
SWPPX requires no minimum investment, making it accessible for beginners or those wanting to make small regular contributions. The fund has closely tracked the performance of the S&P 500, delivering returns that mirror the broader market with minimal tracking error.
Total Market Index Funds: Maximizing Diversification
Vanguard Total Stock Market ETF (VTI)
For investors wanting broader exposure beyond large-cap stocks, the Vanguard Total Stock Market ETF provides access to essentially the entire U.S. equity market. With an expense ratio of 0.03%, VTI holds over 4,000 stocks across large, mid, and small-cap companies.
This comprehensive approach means you're not just invested in established giants but also in smaller companies with significant growth potential. VTI has slightly outperformed the S&P 500 during certain periods when smaller companies rallied.
The fund's massive diversification makes it particularly suitable for investors who want a "set it and forget it" approach. By owning virtually every publicly traded U.S. company, you eliminate the risk of missing out on the next big winner.
Fidelity Total Market Index Fund (FSKAX)
Fidelity's total market offering deserves attention with its zero minimum investment requirement and low 0.015% expense ratio. The fund provides similar exposure to VTI but in a mutual fund structure rather than an ETF.
FSKAX has shown strong performance consistency and excellent tracking of its benchmark index. Fidelity's platform integration makes this fund particularly convenient for investors who already use Fidelity for other financial services.
Technology-Focused Index Funds: Growth Potential
Invesco QQQ Trust ETF (QQQ)
The Invesco QQQ Trust tracks the Nasdaq-100 Index, which includes 100 of the largest non-financial companies listed on the Nasdaq exchange. With its heavy technology weighting, QQQ offers concentrated exposure to innovation-driven sectors.
QQQ has an expense ratio of 0.20% – higher than broad market funds but reasonable given its specialized focus. The fund has delivered exceptional returns over the past decade, outperforming the S&P 500 by a significant margin during most periods.
For 2025, QQQ remains compelling as technology and AI continue driving economic growth. However, its concentration means higher volatility than broader market funds – something I experienced firsthand during last summer's tech sector pullback.
Shelton NASDAQ-100 Index Direct (NASDX)
As an alternative to QQQ, the Shelton NASDAQ-100 Index Direct fund tracks the same index but in a mutual fund structure. With an expense ratio of 0.49%, it's more expensive than QQQ but might be preferable for investors who prefer mutual funds over ETFs.
NASDX requires a $1,000 minimum investment but allows for automatic investment plans that can start with as little as $100 per month. This feature makes it accessible for dollar-cost averaging strategies.
International Index Funds: Global Diversification
Vanguard FTSE Europe ETF (VGK)
Looking beyond U.S. markets, the Vanguard FTSE Europe ETF offers exposure to developed European markets. With an expense ratio of 0.08%, VGK provides a cost-effective way to diversify internationally.
European markets have lagged U.S. returns in recent years, potentially creating a value opportunity. VGK holds approximately 1,300 stocks across multiple European countries, providing broad exposure to the region's economy.
The fund's dividend yield (around 3.5%) is typically higher than comparable U.S. index funds, making it attractive for income-focused investors. Currency fluctuations between the dollar and euro can impact returns, adding both risk and diversification benefits.
Vanguard Total International Stock ETF (VXUS)
For comprehensive global exposure, VXUS offers access to thousands of companies across developed and emerging markets outside the United States. With an expense ratio of 0.07%, this fund provides remarkable diversification at a low cost.
VXUS includes companies from Europe, the Pacific region, emerging markets, and Canada. This broad international exposure makes it an excellent complement to U.S.-focused index funds, creating a truly global portfolio.
Small-Cap Index Funds: Growth Potential
Vanguard Russell 2000 ETF (VTWO)
Small-cap stocks have historically delivered strong long-term returns, albeit with higher volatility. The Vanguard Russell 2000 ETF tracks 2,000 smaller U.S. companies with an expense ratio of 0.10%.
VTWO provides exposure to companies typically excluded from large-cap indexes, offering growth potential as these smaller businesses expand. Small-cap stocks often perform differently than large caps, providing portfolio diversification benefits.
After underperforming large caps for several years, small-cap valuations currently appear relatively attractive. This potential value opportunity makes VTWO worth considering for 2025 and beyond.
Inflation-Protected Index Funds: Preserving Purchasing Power
Schwab US TIPS ETF (SCHP)
With inflation concerns still relevant, Treasury Inflation-Protected Securities (TIPS) funds offer a hedge against rising prices. The Schwab US TIPS ETF provides exposure to these inflation-linked government bonds with an expense ratio of 0.04%.
SCHP's principal value adjusts with inflation, providing protection that conventional bonds lack. The fund pays interest semi-annually, combining income with inflation protection.
While TIPS funds underperform during periods of low inflation, they provide important portfolio insurance against unexpected inflation spikes. SCHP works well as a complement to conventional bond holdings.
iShares Short-Term TIPS Bond Index (BKIPX)
For investors concerned specifically about near-term inflation, the iShares Short-Term TIPS Bond Index fund focuses on TIPS with maturities under five years. With an expense ratio of 0.06%, BKIPX offers inflation protection with less interest rate risk than longer-duration TIPS funds.
BKIPX has shown lower volatility than broader TIPS funds, making it suitable for conservative investors or those with shorter time horizons. The fund's shorter duration means it's less affected by rising interest rates, which can negatively impact longer-term bonds.
How Should You Choose the Right Index Funds?
When selecting index funds for your portfolio, several factors deserve consideration:
- Investment goals: Long-term growth investors might lean toward stock index funds, while those needing income could include bond index funds.
- Risk tolerance: More conservative investors might prefer total market funds over concentrated sector funds.
- Expense ratios: Even small differences in expenses compound significantly over decades.
- Tax considerations: ETFs generally offer tax advantages in taxable accounts compared to mutual funds.
- Account type: Some funds work better in tax-advantaged accounts like IRAs, while others are more tax-efficient for brokerage accounts.
I've found that building a core portfolio with broad market index funds (like VTI or VOO) and then adding specialized funds for specific objectives works well. This approach provides diversification while allowing for some customization based on your outlook and goals.
Common Questions About Index Fund Investing
Are Index Funds Better Than Actively Managed Funds?
This question comes up constantly in my conversations with new investors. The data is compelling: over long periods, the majority of actively managed funds underperform their benchmark indexes after fees. This doesn't mean active management never works, but the odds favor index funds for most investors.
Index funds offer several advantages:
- Lower costs (often 0.1% or less versus 0.5-1% for active funds)
- Greater tax efficiency due to lower turnover
- More predictable performance relative to their benchmarks
- Less research required to select funds
That said, certain market segments occasionally offer opportunities for skilled active managers. Some investors may prefer a core-and-satellite approach, using index funds for the majority of their portfolio while selecting active funds in less efficient markets.
Building a Balanced Portfolio with Index Funds
Creating a well-diversified portfolio doesn't require dozens of funds. A simple three-fund portfolio might include:
- A U.S. total market fund (like VTI)
- An international fund (like VXUS)
- A bond index fund (like BND)
This straightforward approach provides exposure to thousands of securities across global markets. The exact allocation between these funds would depend on your age, risk tolerance, and financial goals.
For those wanting more customization, consider adding:
- A small-cap index fund for additional growth potential
- A REIT index fund for real estate exposure
- A TIPS fund for inflation protection
The beauty of index investing lies in its simplicity. You don't need to constantly monitor company news or economic forecasts – regular contributions to a diversified set of low-cost index funds has historically been a winning strategy.
Looking Ahead: Index Fund Trends for 2025 and Beyond
Several trends are shaping the index fund landscape as we move through 2025:
- Even lower costs: Competition continues driving expense ratios down, with some funds now charging just 0.02% annually.
- ESG integration: More index funds are incorporating environmental, social, and governance factors without significantly higher fees.
- Direct indexing opportunities: New technologies are making customized indexing more accessible to individual investors.
- Thematic indexes: Specialized indexes focusing on specific trends (AI, clean energy, etc.) are gaining popularity, though these carry higher concentration risks.
The core principles of index investing remain unchanged: broad diversification, low costs, and long-term discipline. These fundamentals have served investors well for decades and will likely continue to do so.
Final Thoughts: The Long-Term Perspective
Index funds aren't exciting – and that's their strength. They deliver market returns without the drama and excessive costs of trying to beat the market. For most investors, capturing market returns efficiently is the surest path to building wealth.
Remember that even the best index funds experience significant volatility. The S&P 500 has historically dropped by 10% or more about once per year and by 20% or more every few years. These declines are the price of admission for long-term growth.
By focusing on low-cost index funds that match your investment goals and risk tolerance, you position yourself for long-term success. The specific funds highlighted in this article offer excellent starting points for building a robust portfolio designed to grow wealth over time.
Disclaimer: This content is for informational purposes only and should not be considered financial advice. Investment decisions should be based on your personal financial situation, goals, and risk tolerance. Past performance is not indicative of future results. Always conduct your own research or consult with a financial professional before making investment decisions.