How To Invest In Index Funds With A Regulated Broker

Last Updated November 16th 2022
15 Min Read

In this post, we provide you with a beginner’s guide on how to invest in index funds with a regulated broker. We will tell you about the best index funds to buy today and review some of the best multi-regulated brokerages. We also tell you about the different types of index funds, the advantages of buying into one, and everything you need to know about this all-popular investment vehicle.

Index funds are investment vehicles that track the performance of a market index that is typically made of equities or bonds. By buying into an index fund, you are essentially investing in a basket of the stocks tracked by the fund.

Excellent examples of index funds are the S&P 500, which tracks the performance of the 500 largest companies in the U.S. and the DOW 30, which tracks thirty large-cap technology companies.

But how do you start investing in index funds as a beginner? Read on to learn everything you need to know about index funds.

How To Invest In Index Funds With A Regulated Broker

Investing in index funds doesn’t have to be complicated. Here is a quick 4-step process that teaches you how to invest in an index fund with a reputable broker: 

  • Step 1: Find A Regulated Broker Or Fund Provider And Create An Investor Account - Vet the different regulated brokers and fund providers and create an investor account with the best.
  • Step 2: Research The Index Fund Markets - Research index funds and learn as much as possible about these investment vehicles and how they work. 
  • Step 3: Fund The Approved Investor Account - Deposit funds into the approved broker account. Ensure that you register with a broker who supports your preferred payment option. 
  • Step 4: Buy Into The Fund - From the range of index funds supported by your preferred broker or fund provider, choose one and buy in.

 

invest in index funds

Your capital is at risk. Other fees may apply

In the sections that follow, we expound on this index fund investing process. We tell you what to consider when vetting brokers and fund providers, what an index fund is and how it works, the benefits of investing in index funds today, and the best index funds to consider today.

Step 1: Identifying The Best Index Fund Broker

There are two primary approaches to investing in an index fund. For starters, you could choose to invest in a managed index fund, and excellent examples of these are Vanguard and Fidelity index funds. Alternatively, you could choose to invest in an exchange-traded fund via an online brokerage.

The primary difference between a managed fund – commonly referred to as a mutual fund – and an exchange-traded index fund (ETF) lies in how they are managed and how much they cost. A mutual fund is managed by an investment manager who follows pre-established investment guidelines when allocating resources and rebalancing the fund. Index funds, on the other hand, don’t always have a manager.

Mutual funds also have higher relatively higher overheads in the form of management fees. These managers often impose an annual management fee on your investment, while most online brokerages don’t maintain management fees or commissions.

But where do you buy index funds? We review two of the best places to invest in index funds today.

eToro - Index ETF and Copy/Social Trading

Established in 2007, eToro has morphed itself into one of the best multi-regulated and multi-asset trading platforms. It is also one of the most popular and reputable fully-service online brokers. Some of the supported assets on the platform include cryptocurrencies (both real and CFDs), stocks (both real and stock CFDs), forex, commodities, and 200+ exchange-traded ETFs (including index ETFs, real estate ETFs, bond ETFs, and commodity ETFs). Its support for such a broad range of index funds makes it a top choice for index fund investors.

In addition to having a straightforward client onboarding process, eToro doesn’t charge broker commissions on index fund trading. You only have to deal with the applicable and highly variable spreads. But the brokerage is even more popular because of its social and copy trading features. Social trading lets you interact with other investors on the platform, collaborate on research or trading strategy formulation, and even receive mentorship from pro investors.

Copy trading, on the other hand, lets you earn passively when trading index funds on the platform. Beginner traders earn by copying the trade settings of highly successful traders on the platform. The pro traders are then compensated by the brokerage, according to the assets under copy. And you don’t just get to copy trade settings for individual stocks or cryptos; you can also copy trade settings for index funds and expertly created and rebalanced smart portfolios.

Pros

  • You only need $10 to start trading indices on eToro and $200 to start copy trading.
  • eToro is a multi-asset platform that lists one of the widest ranges of index funds.
  • eToro maintains highly competitive trading fees comprising spreads and commissions.
  • The broker is regulated by virtually all top-tier agencies, including SEC, FINRA, FCA, CySEC, and ASIC.

Cons

  • eToro charges relatively high non-trading fees, including a $5 withdrawal fee.
  • The broker only has one base currency – the USD.

invest in index funds

Your capital is at risk. Other fees may apply

Capital.com – Pure CFD Broker With AI-Powered Trading Platform

Capital.com is a pure-CFD trading platform. This implies that, unlike eToro, which will let you buy and own some assets traded on their platform (like stocks and cryptocurrencies), Capital.com will only process CFD trades. But we still consider it one of the best index fund trading platforms because of its highly innovative trading platform, the high number of supported index fund CFDs, and competitive fees.

When trading on the multi-regulated online brokerage, for instance, you will get to interact with 50+ of the most popular index funds. The client onboarding process is straightforward, and you only need to deposit a minimum of $20 to start trading. Further, the broker charges no commission - so you only have to contend with the ultra-competitive spreads charged on the platform.

Other factors that make Capital.com the online brokerage for index funds investing include its highly innovative trading platform. Here, you get to interact with a growing range of highly advanced research, trading and risk management tools.

But even more importantly, the brokerage has integrated A.I. (artificial intelligence) technology into its trading platform. This comes in handy in helping investors eliminate bias when trading by providing a post-trade behaviour analysis report.

Pros 

  • The broker allows retail traders to margin trade index funds with leverages of up to 1:20.
  • It supports an extensive range of educational material and research resources.
  • When trading pure CFDs, you can long or short index fund trades.
  • Capital.com is a multi-regulated broker licensed by FCA, CySEC, and ASIC.

Cons

  • Capital.com is a pure CFD trading platform.
  • The broker does not accept U.S. residents.

Step 2: Research the Index Fund Markets

After identifying the best index funds, you now need to learn as much as you can about indexes and index funds. And below, we learn about the different types of indices and index funds, how index funds work, and go over a few reasons why you should consider investing in index funds today.

Types of Index

An index is a benchmark, a system used to track the performance of a basket of related financial instruments. And there are four primary types of indices – based on such factors as the niche, country, or market.

Let us go over each of these types of indices:

  • Regional market index

A regional market index tracks the performance of financial assets traded within a specific geographical region, e.g., North America, Europe, or Asia.

A good example of a regional market index is the MCSI AC Asia Pacific index. It tracks the performance of 1506 large and mid-cap companies in 5 developed and eight emerging economies across Asia and the Pacific region.

  • Sovereign market index

The Sovereign market indices, on the other hand, track the performance of financial instruments in a specific country across multiple sectors.

Good examples of a sovereign market index are the S&P 500 – which tracks the performance of the top 500 companies in the USA, as well as the FTSE 100 – which tracks the 100 largest companies in the U.K.

  • Sector-based market index

 Sector-based market indices track the performance of financial assets in specific sectors of the economy like finance, healthcare, or technology.

An example of a sector-specific market index is the Dow Jones U.S. Financial Services Index which tracks the performance of the stock of listed financial services providers in the U.S.

  • Stock exchange index

Stock exchange indices refer to benchmarks that track the performance of stocks listed with a specific stock exchange.

Good examples of stock exchange indices are the NASDAQ 100, which tracks the performance of the top 100 companies listed with the NASDAQ stock exchange. And the NYSE Composite Index tracks the performance of 2000+ stocks of companies listed on the New York Stock Exchange (both U.S-based and foreign companies).

Types Of Index Funds

All indices are then categorized into two groups, depending on where they are sold and traded as well as their mode of management.

The two primary types of index funds are:

  • Exchange Traded Index Funds

The exchange-traded index fund is a basket of stocks based on such factors as a specific sector of the economy, country, region, or stock market. And just as the name suggests, these types of indexes are primarily traded on stock exchanges and online brokerages like eToro and Capital.com.

They differ from mutual funds in the sense that they don’t attract management fees - and most brokerages do not charge trading commissions. Online trading platforms will also let you trade index CFDs – allowing you to go long or short on the index fund and trade them using leveraged funds.

  • Mutual Funds

Mutual Funds are also a basket of stocks that are carefully selected by a mutual fund or portfolio manager who uses a predetermined investing strategy. And as the name suggests, these are offered by specific mutual funds. To invest in such a managed fund, you will start need to create an investor account with such mutual fund/trust companies as Vanguard or Fidelity.

While online brokerages charge spreads, mutual funds charge an annual investment management fee. Mutual funds aren’t actively traded. You can only liquidate your investment in the fund – which attracts an exit fee. This implies that mutual funds have relatively higher expense-to-income ratios than exchange-traded funds.

How Does Investing In Index Funds Work?

In the case of a mutual fund, you will start by registering an account with a fund. Most funds have a minimum buy-in and also call for regular top-ups to this investment. You will also be required to hold on to the investment for a specific period of time, after which you can cash out the original investment plus accrued gains. Premature withdrawals will almost always attract penalties or fines, commonly referred to as exit fees.

Exchange-traded indices are a tad more versatile, especially when dealing with such online brokerages as eToro. These allow virtually anyone to create a trader account and start buying mutual funds after depositing a minimum of $10. They will also provide you with leveraged funds to increase your trade amounts.

But more importantly, the broker serves as the market maker, which means that you can buy and sell the index to them at any time without incurring any penalties. And when trading Index CFDs, you get to enter into short positions.

invest in index funds

Your capital is at risk. Other fees may apply

What Are The Advantages Of Index Funds?

 There is a reason why index funds continue to be one of the most popular investment vehicles today. There also are multiple reasons why you should consider investing in an index fund today.

Below, we look at the five most popular:

  • Diversification: Index funds are massively diversified. This makes them low-risk investments because they are less reactive to changes in the markets.
  • Low fees: Index funds, especially exchange-traded index funds, have relatively low expense-to-income ratios. At times, you only have to pay the spreads as some brokers don’t charge commission or other fees for the index CFDs.
  • Attractive gains: Most index funds are moderately profitable. Some have consistently outperformed their individual constituent stocks and entire markets for years.
  • Beginner-friendly: You do not need to be a pro-investor to start investing/trading index funds. Mutual funds are expertly managed, and online brokers will provide sufficient educational resources to teach you how to open your first index fund trade.
  • Excellent long-term investments: Proven resilience and a history of consistent profitability make index funds one of the best long-term and low-risk investments, especially for anyone planning for retirement.

How To Find The Most Popular Index Funds To Invest In

The market is currently flooded with different types of index and mutual funds. How, then, do you find the one that appeals most to you? Here are a few factors you to consider when finding the best index fund to invest in:

  • Possible returns: It is important that you only invest in an index/mutual fund with a proven history of resilience and profitability.
  • Risk tolerance: Index funds are more resilient to market dynamics than most individual stocks. But some are still more risk-tolerant than others. Take this into account and compare it to your risk tolerance level when settling on the best index fund to buy into today.
  • Investment costs: The cost of investing in index funds – both management fees for mutual funds and spreads/commissions for index funds – have a direct impact on your ultimate take home. Only invest in index funds with a low expense-to-income ratio.
  • Investment goals: Understand that index funds are fashioned to serve as long-term investment vehicles. Price fluctuations and tax will most likely even out any gains from your short-term investing in index funds.

Top 5 Index Funds To Watch Right Now

You now understand what index funds are and the advantages of investing in one. We have also looked at the factors that you should give priority to when identifying the best index fund. And in this section, we look at what our analysts consider the best five index funds (both mutual and exchange-traded) worth investing in today

  • Fidelity ZERO Large Cap Index (FNILX)

Fidelity ZERO large-cap index is a mutual fund established in 2018 and overseen by Fidelity. It tracks the Fidelity Large Cap index, a composite of the top 500 companies in the U.S., similar to the S&P 500. But by not using the term ‘S&P 500’, Fidelity is able to avoid hefty licensing fees – which goes a long way in keeping the management fees for the fund at ZERO – hence the moniker.

In the three years that FNILX has been around, it has recorded average returns of 12.1%, which makes it more profitable than some individual stocks. It appeals to long-term investors looking for a broadly diversified index fund with the lowest expense-to-income ratio. It can be purchased directly from Fidelity or select online brokerages.

  • Schwab S&P 500 Index Fund (SWPPX)

Schwab S&P 500 Index Fund is a mutual fund with the backing of Charles Schwab. It was started in 1997 and has, over time, attracted tens of billions of dollars in investor funds, making it one of the largest and most reputable mutual funds. Like most popular index funds, it tracks the performance of the S&P index – the top 500 large-cap companies in the U.S.

One of its greatest appeals is the relatively low management fee of 0.02%. This implies that for every $10,000 invested, you are charged a management fee of $2. Its history of resilience and profitability – seeing that it has maintained an overall uptrending price action since launch – has made it appealing to long-term investors.

  • iShares Core S&P 500 ETF (IVV)

iShares Core S&P 500 is an exchange-traded fund and one of the oldest and most reputable index funds around. It started in 2000 and is sponsored by the largest and most liquid investment company in the world – BlackRock. It, too, tracks the performance of the S&P 500 index.

IVV has a proven record of resilience and has consistently recorded exemplary price action since its establishment. It has a low expense-to-income ratio of 0.03% - implying that every $10,000 invested here attracts an annual charge of $3. And such a low expense-to-income ratio plus attractive gains have made it appealing to most long-term investors.

  • SPDR S&P 500 ETF Trust (SPY)

Established in 1993, SPDR S&P 500 ETF Trust is one of the oldest and most reputable index funds. It is sponsored by State Street Global Advisors and currently has hundreds of Billions of dollars in assets under management. As the name suggests, it tracks the S&P 500 index, making it appealing to long-term investors looking for a diversified index fund.

It, however, has a higher expense-to-income ratio than the three index funds we have discussed above. At 0.095%, it implies that for every $10,000 you invest in SPY, you will have to part an annual management fee of $9.50. Nonetheless, its massive resilience and overall uptrending price action make it appealing to both index fund investors.

  • Invesco QQQ Trust ETF (QQQ)

Invesco QQQ Trust ETF is a stock-exchanged-based ETF. Unlike most of the funds listed above that track the S&P 500 index, QQQ tracks the performance of the largest non-financial companies listed with the NASDAQ exchange – the NASDAQ-100 index. It started in 1999 and has, over time, morphed into one of the largest and most reputable index funds for individuals interested in technology and growth companies.

Like the four other funds listed above, QQQ’s greatest appeal to investors lies in its solid reputation, proven resilience, and attractive gains. The brokerage also maintains a relatively low expense-to-income ratio of 0.20% - translating to a $20 annual charge for every $10,000 invested in the fund.

Your capital is at risk. Other fees may apply

Conclusion – How To Invest In Index Funds With A Regulated Broker

There goes everything you need to know about investing in index funds today. In this post, we have defined index funds, told you about the different types of indexes, and also helped you understand the difference between index and mutual funds.

We have also gone over such important subjects as the best places to trade and invest in index funds, looked at some of the factors why you should consider investing in an index fund, and told you the factors that you need to consider when looking for the best index fund.

But even more importantly, we introduced you to what we consider the best index funds today. We discussed the key features for each – including their expense-to-income ratio – and where to buy them.

Want to jump straight to investing in index funds? Start by registering an investor account with a reputable online brokerage like eToro, deposit at least $10, and start investing/trading the 50+ index ETFs listed there.

eToro – Best Broker To Invest In Index Funds

etoro broker

eToro have proven themselves trustworthy within the industry over many years – we recommend you try them out.

Your capital is at risk. Other fees may apply

FAQs About Investing In Index Funds Today

Are index funds the best investment in 2023?

Yes, several factors – key among them being resilience as well as consistent, attractive gains – make index funds one of the best investments in 2023. Others include the fact that they are beginner-friendly and have consistently outperformed individual stocks.

What is the cost of investing in an index fund?

The cost of investing in an index fund varies from one fund to another. Looking at the top index fund, you can see that it ranges from 0% to as high as 0.02% per annum.

How much do you need to start investing in index funds?

When investing in index funds, you need as much as is required to buy into the fund and extra to cover the management fees/spreads. Both these amounts are variable and determined by such factors as your preferred index fund and online brokerage. Some brokerages, like eToro that allow for fraction trading of ETF CFDs will, for instance, let you start trading with as little as $10.

Are index funds taxed?

Yes, capital gains from index funds are taxable income. Note, however, that tax rates are complicated and vary from one country to another. In some countries, the applicable tax rate will also depend on the capital gains amount and the investment period. We advise you to engage a tax consultant or financial expert in the country before investing in an index fund.

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