Part of learning how to index invest is knowing where to buy index funds. Not all online brokerage accounts are created equal when it comes to buying index funds and ETFs.
Some online brokers offer rock bottom fees and a wide variety of index funds to choose from. Others charge you for every trade and don’t offer index funds with low expense ratios. Choosing the right one can save you hundreds, if not thousands of dollars ever year.
There are a few things to look for when deciding where to buy index funds. We’ll start by walking through that criteria so you have the knowledge to select the best online brokers on your own. Then, I’ll share some of the best online brokers out there that Just Start Investing has found.
What to Look For When Deciding Where to Buy Index Funds
There are a few things to be aware of when choosing an online broker for index investing. The first and most obvious is whether or not you want to use a traditional broker or a robo-advisor.
Traditional Broker vs Robo-Advisor
In general, there are two types of online brokers to choose from when planning how to invest in index funds: Traditional Brokers and Robo-Advisors.
Each have unique advantages and disadvantages that you can see below.
Traditional Brokers: Traditional brokers give you a platform to make investment decisions, but those decisions are still yours to decide and execute. They give you more self control over your investments, as you select exactly which vehicles to invest in (while keeping costs very low if you go with brokers like Vanguard or Schwab).
- Pros: Low fees; 100% control over your investments
- Con: Requires slightly more oversight and attention
Robo-Advisors: Robo-advisors are online platforms that do 99% of the work for you. In most cases, you complete a set of questions before opening an account and the advisor will automatically select investment vehicles for you based on your answers.
- Pros: Easy to use; tax-loss harvesting capabilities (which is complicated and can sometimes save you money)
- Con: Slightly more expensive
Low Fees
As we have made clear before on this stie, choosing an index fund with low fees is important. But choosing a broker with low fees is important too.
The most common fee a broker will charge is a brokerage fee. This is the commission a broker charges you to make a trade or transaction. Usually, it’s around $5-$10 per trade.
For example, if you buy a stock or fund, then you pay $5-$10. When you go to sell that stock or fund, you pay another $5-$10.
For someone adding money to their investments every month, this can really add up. With the example above, it could be $60-$120 a year!
And that’s assuming you’re only putting money into one stock, fund or ETF. If you’re investing in multiple funds to diversify even further, say 5, then it could be anywhere from $300-$600 in brokerage fees every year!
Luckily, many online brokers charge no brokerage fee or commissions when trading in certain index funds or ETFs. It’s key to find one that offers commission free trades to save money.
Variety of (good) Index Funds and ETFs
For one, the online broker you use must have a variety of index funds and ETFs to choose from. The last thing you want is to decide to diversify internationally only to find there are no good international index funds or ETFs to choose from.
And I say “good” because being forced to use a fund with a high expense ratio is almost as bad as not having that fund available to you at all.
Make sure a broker has everything you want now, and may want in the future, before signing up.
Ease of Use
Ease of use is a very subjective, but still important, factor. It can be broken down into two categories.
Customer service is the first part of ease of use. When it comes to your money and your investments, it’s important to know that you are with a reputable company that will help you whenever you need it.
Online platform usability is the second category within ease of use. Having a clunky online platform can make investing more confusing than it needs to be. It’s important to find a broker with a seamless interface to help simplify things for you when investing.
Where to Buy Index Funds: The Best Online Brokers
Here are some of the best online brokers that we have found using the criteria above. The first three are traditional brokers, while the second two are robo-advisors.
1. Charles Schwab
Charles Schwab is one of the most underrated online brokers. They are on the same level as Vanguard, if not a level higher, when it comes to offering top tier index funds and ETFs with rock bottom prices.
Features:
- 0.02% lowest fee for an ETF or index fund
- $0 commission per trade (with Charles Schwab funds)
- 20+ varieties of Schwab index funds and ETFs
Get our full guide on how to start investing with Charles Schwab here.
2. Vanguard
Vanguard is the leader and pioneer of low cost index investing. They offer a huge variety of funds and are the most popular choice for many index investors.
Features:
- 0.04% lowest fee for an ETF or index fund
- $0 commission per trade (with Vanguard funds)
- 20+ varieties of Vanguard index funds and ETFs
3. Fidelity
Fidelity made a splash in 2018 when it launched funds with no fees at all. That’s right, a 0% expense ratio on it’s funds. That’s pretty hard to beat.
Features:
- 0.00% lowest fee for an ETF or index fund
- $0 commission per trade (with Fidelity funds)
- 4 varieties of zero expense ratio index funds and ETFs
4. Betterment
Betterment is a leading robo-advisor that offers a competitive management fee at 0.25%. They offer tax loss harvesting, which for some investors can make up for this 0.25% fee and then some.
Features:
- 0.25% management fee
- Offers variety of Vanguard, Schwab and other index funds and ETFs
Get our full guide on how to start investing with Betterment here.
5. Wealthfront
Similar to Betterment, Wealthfront is a leading robo-advisor company with low fees (0.25%) and tax loss harvesting capabilities.
Features:
- 0.25% management fee
- Offers variety of Vanguard, Schwab and other index funds and ETFs
