What Is an Index Fund?

An index fund automatically owns a small piece of every company in a market index — like the ASX 200 (200 largest Australian companies) or the S&P 500 (500 largest US companies). When the market rises, your investment rises proportionally. No stock-picking, no active management.

Why Index Funds Beat Most Active Investing

Over 15-year periods, more than 90% of actively managed funds underperform simple index funds after fees. Index funds charge 0.03–0.20% per year in management fees. Active funds typically charge 0.5–1.5%+. That difference compounds enormously over decades.

How to Get Started

  1. 1

    Open a brokerage account

    Stake (no brokerage fees on US ETFs, small fee on ASX), Pearler (designed for long-term index investing with auto-invest), CommSec Pocket (simple, $2 per trade under $1,000), or SelfWealth ($9.50 flat per trade). Stake or Pearler are most beginner-friendly for regular investing.

  2. 2

    Choose your ETFs

    The simplest effective portfolio for Australians: VAS (Vanguard Australian Shares Index ETF) — tracks the ASX 300, fee 0.07%. VGS (Vanguard MSCI International Shares ETF) — global developed markets, fee 0.18%. A common split: 30% VAS, 70% VGS. Or just 100% VGS for simplicity.

  3. 3

    Invest a fixed amount monthly

    Set a recurring transfer of whatever you can afford — even $100/month makes a meaningful difference over time. Invest it all into your chosen ETF each month regardless of whether markets are up or down. This is dollar-cost averaging — you automatically buy more shares when prices are low.

  4. 4

    Reinvest dividends

    ETFs pay quarterly dividends. Reinvest these by buying more units rather than taking cash. Compounding dividends dramatically accelerates long-term growth.

  5. 5

    Leave it alone

    Do not check the price daily. Do not sell when markets fall. Time in the market consistently beats timing the market. $500/month invested at 7% average annual return grows to over $600,000 in 30 years.

General information only — not personal financial adviceSpeak with a licensed financial adviser for advice tailored to your specific situation, tax circumstances and financial goals.

Frequently Asked Questions

A savings account earns a fixed rate (currently 4–5% in Australia) with no risk of losing money. Index funds have historically returned 7–10% annually over long periods but fluctuate — your investment will sometimes be worth less than you put in. Index funds are for money you will not need for at least 5–7 years. Keep your emergency fund in a high-interest savings account.
Many super funds offer low-cost index investment options which historically outperform actively managed options within super. Check your fund's investment menu and compare fees between options. This is one of the highest-impact financial moves most Australians can make — small differences in super fees compound significantly over a working life.