Beginner Guide

Index Funds 101: what they are, why they work, how to buy

Index funds (and index ETFs) are the boring default that beats most “clever” strategies after fees. This guide shows the core idea, the few numbers that matter, and a simple buy-and-hold setup—especially if you’re investing from outside the US.

1) What is an index (and what is an index fund)?

An index is not a product. It’s a rulebook. It defines which securities qualify, how they’re weighted, and when they’re added or removed. A fund (or ETF) then tracks that rulebook.

• Example: the S&P 500 is a list of large US companies, weighted by market value.
• Index fund / index ETF: owns those companies in similar weights.
• Goal: match the index return minus a small cost, not “beat” it.

If you want the simplest explanation of the wrapper, read What is an ETF?.

2) Why index funds beat most stock pickers (after costs)

Indexing is not magic. It’s an edge from removing unnecessary drag: fees, trading, taxes, and behavior mistakes.

• Lower fees: small differences compound for decades.
• Less trading: fewer mistakes and less tax friction.
• Harder to sabotage: a basket is easier to hold than single stocks you overthink.
• Arithmetic: before costs, investors as a group earn the market return; after costs, the average must earn less.

Pair this with Why fees really matter and the related study page you already link to.

3) The main index fund types you’ll see

Most confusion comes from buying narrow products when you wanted broad exposure.

• Broad stock indexes: total market, S&P 500, global/all-world.
• Bond indexes: government/investment-grade aggregates (stability tool).
• Regional indexes: US-only, Europe-only, emerging markets (tilts).
• Sector/theme indexes: concentrated; treat as satellites, not core.
• Factor indexes: rules like value/quality/small-cap; optional complexity.

If you’re still deciding between individual stocks and funds, see Stocks vs ETFs.

4) Where bond index funds fit (and the 60/40 idea)

Stocks drive growth. Bonds reduce the depth of drawdowns. A mix can make the plan easier to stick with.

• 100% stocks: highest expected growth, harsh drawdowns.
• 60/40: classic compromise—less pain, still meaningful growth.
• More defensive mixes: smoother ride, lower long-run return.

Your studies link for this topic is already strong—keep it prominently in your funnel block.

5) Simple index portfolio templates (pick one)

You do not need dozens of ETFs. A clean setup is usually 2–4 funds max.

• One-fund approach: one broad global stock ETF (simple).
• Two-fund approach: global stocks + bond index (classic).
• Three-fund approach: US stocks + international stocks + bonds (more control).

The point is not “best ETFs”. The point is a repeatable allocation you can fund for years.

6) Index funds as a non-US investor (the real frictions)

If you’re outside the US, the math still works, but the plumbing changes:

• Access rules: some regions restrict US-domiciled ETFs; you may need local/UCITS equivalents.
• Withholding tax: dividends can be taxed before they reach you; domicile and treaty rules matter.
• FX cost: spreads and conversions can quietly beat you up if you trade too often.
• Broker reality: what you can buy depends on what your broker actually supports.

Keep your core boring and minimize unnecessary trades. That’s how you keep friction low.

7) Step-by-step: how to buy your first index fund

1. Pick your allocation: choose a stock/bond split you can hold through crashes.
2. Pick the fund(s): broad index first; check expense ratio + liquidity.
3. Pick a broker: legal for your country, low FX friction, usable long-term.
4. Fund the account: transfer in sensible chunks to reduce FX fixed fees.
5. Buy and automate: recurring transfers + recurring buys (or a monthly manual 10-minute ritual).
6. Rebalance rarely: once/twice per year or at a drift threshold (don’t micromanage).

If you want a broker decision framework, use How to Pick Your First US Broker (Checklist).