Best Mutual Fund Companies to Buy Index Funds

How and Where to Buy the Best Index Funds

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If you want to buy the best index funds, you won't find them at just any random mutual fund company, brokerage firm, insurance company, or bank. There are only a handful of financial entities where investors can buy the best index funds on the market. There are also a few companies you'll want to avoid for buying your next index fund.

Here we share the best mutual fund companies and discount brokers to buy index funds, plus a few financial firms that charge too much for index funds (and should therefore avoid).

Mutual Fund Companies That Offer the Best Index Funds

The best index funds are generally those that have two primary qualities: 1) Low expense ratios and 2) Tight index tracking. In different words, since index funds are passively managed investments designed to replicate the performance of a target index, you're simply looking for low costs and performance that is nearly identical to the index.

Here are four of the best companies where investors can get the best index funds:

Best Fund Companies for Index Funds: Vanguard Investments

Vanguard Investments is among the best and favorite of mutual fund companies for the do-it-yourself crowd. Founder Jack C. "Jack" Bogle formed Vanguard his idea that low-cost index funds can provide superior returns for the long-term investor. The late Bogle effectively and consistently demonstrated to the investor community that it is foolish to attempt an actively-managed approach where a simple, low-cost passively-managed index fund strategy can provide superior returns.

Vanguard is the first mutual fund company to offer a publicly traded index fund, which is today called Vanguard 500 Index (VFINX). They also have the biggest stock mutual fund in the world, Vanguard Total Stock Market Index (VTSMX), and the biggest bond mutual fund in the world, Vanguard Total Bond Market Index (VBMFX). And with the largest selection of low-cost, no-load index funds, Vanguard is the largest and best provider of index mutual funds in the world.

Vanguard also offers index funds that combine stocks and bonds like Vanguard Balanced Index (VBINX) and index funds that focus on specific sectors, called sector funds, such as Vanguard Energy (VGENX), Vanguard Health Care (VGHCX), and several Exchange Traded Funds, or ETFs, that are similar to mutual funds. Vanguard index funds require a minimum $3,000 initial investment to get started. Minimum ongoing contributions are typically $100 or lower.

Best Fund Companies for Index Funds: Fidelity Investments

Fidelity Investments is best known as a mutual fund company and provider of retirement services and products, such as 401(k) plans and IRAs, for businesses and individuals. Fidelity, founded in 1946, is one of the largest multinational financial services corporations in the world.

As a mutual fund company and brokerage firm, Fidelity has risen on the backs of some of their widely held actively managed mutual funds, such as Fidelity Contrafund (FCNTX), managed by William Danoff and Fidelity Magellan (FMAGX), made famous in the 1980's by the legendary fund manager, Peter Lynch.

Although Fidelity specializes in actively-managed mutual funds, they have several of the cheapest, high-quality index funds on the market. For example, Fidelity 500 Index (FXAIX), formerly FXAIX, has an expense ratio of just 0.015%, which is lower than that of 0.14% for Vanguard 500 Index. Because of the lower expenses, over time FXAIX would be expected to edge out VFINX in return to the investor.

In general, the lower the internal expenses to operate a mutual fund, the more return to the investor. Fidelity also has several other outstanding index funds, such as Fidelity U.S. Bond Index (FYNAX), Fidelity Mid Cap Enhanced Index (FMEIX), Fidelity Small Cap Index (FCPEX), Fidelity Total Market Index (FSTMX), and several others. Fidelity index funds require a minimum $2,500 initial investment to get started. Minimum ongoing contributions are typically $100 or lower.

Best Fund Companies for Index Funds: Charles Schwab

Also known simply as Schwab and named after its founder, Charles Schwab Corporation is a discount brokerage firm offering mutual funds and financial services to individual investors. Founded in 1971 under the name First Commander Corporation, Schwab began offering brokerage services to individuals at a discount in 1975. Before that time, investing in the stock market was considered primarily as a wealthy person's privilege.this is a discount brokerage firm that also has its own line of mutual funds.

Schwab index funds are some of the cheapest and best available on the market. Among their best index funds are Schwab S&P 500 Index (SWPPX) and Schwab Total Stock Market Index (SWTSX), both of which have rock bottom expense ratios of just 0.020%, which compares to the industry average of 0.40% for equity index funds. The minimum initial investment of $100 is also an industry low.

Finding the Best Index Funds at Discount Brokerage Firms

Many online brokers that are accessible to everyday investors are often referred to as discount brokers. Most people don't think of brokerage firms when they think of mutual funds. Instead, and rightly so, they think of some of the best no-load mutual fund companies, such as Vanguard, Fidelity, and T. Rowe Price. Discount online brokers that offer a wide selection of mutual funds (although not their own) are Etrade and TD Ameritrade. Charles Schwab is also a discount broker but they offer their own funds, as previously highlighted in this story.

Keep in mind that brokerage firms, as well as mutual fund companies, often charge transaction fees when buying or selling shares of funds from other companies. These fees are usually low and average around $10 per trade. Discount brokers often offer thousands of mutual funds but be sure to begin your search by looking through their respective choices of "no-transaction-fee" funds or "NTF Funds."

Watch for Index Funds That Are Too Expensive

As you now know, index funds are passively-managed, which means the management team simply buys the securities found in the index and therefore doesn't need to do any research and there is very little trading needed. This naturally keeps internal costs of operating the index funds very low. Therefore there is no good reason to charge expenses to investors more than the average for index funds, which is about 0.40%.

Here are some of the most expensive S&P 500 Index funds:

  • Invesco S&P 500 Index Fund (SPICX): 1.29% expense ratio
  • Deutsche S&P 500 Index Fund (SXPCX): 1.28% expense ratio
  • Wells Fargo Index (WFINX): 1.20% expense ratio

In addition to the high expense ratios, each of these fund share classes charge a 1.00% level load, which is charged for purchase and when selling shares, making them even more expensive. Note that these funds may have other share classes that are less expensive than these; however still above average in expense ratio.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.