Best Vanguard Retirement Funds for an IRA

Are you investing toward your retirement (or plan to soon)? If so, you can thank Vanguard for how inexpensive doing that has become—even if you don’t invest in a Vanguard account or own any Vanguard funds.

Vanguard is responsible for creating the index fund—a product that didn’t just bring down expenses in-house, but triggered a decades-long fee war that drove costs lower across the industry and around the world.

Today, Vanguard remains one of the investing world’s low-cost leaders. As such, it offers some of the most popular retirement-focused funds, of both the index and actively managed variety. And many of these funds are right at home in an individual retirement account (IRA).

Let me introduce you to a handful of these IRA-ready funds—each of which is inexpensive, effective, and helps meet a common long-term investing objective. These funds also make sense for many tax-advantaged plans, so you can consider holding them not just in IRAs, but also HSAs or (when available) 401(k)s.

Disclaimer: This article does not constitute individualized investment advice. Individual securities, funds, and/or other investments appear for your consideration and not as personalized investment recommendations. Act at your own discretion.

What Should You Look for When Evaluating a Retirement Fund?

---

When you invest your retirement savings in an account like an IRA, you’ll want to keep a few things in mind.

• Costs are first and foremost. If you own a mutual fund that charges you $5 annually for every $100 invested, that’s $5 (or $10, or $15, etc., depending on how many shares you own) that can’t grow and compound for you over time. Thus, if all else is equal, the lower the cost, the better. Just note that some funds can justify their higher fees. Vanguard rarely has to justify its fees, however, as the best Vanguard retirement funds’ fees typically sit near or at the bottom of their category.
• Income matters, too. You probably want your retirement portfolio to produce at least some regular income—in the form of both bond interest and dividend income. Stock prices can suffer during nasty corrections and bear markets, but income-generating funds can help provide for your living expenses without forcing you to sell at an inopportune time. How much income your account should produce depends on your own circumstances. For instance, older investors tend to be more concerned with income while younger investors focus more on growth.
• Don’t forget taxes. Standard taxable brokerage accounts are better suited to take advantage of certain tax-advantaged investments, such as municipal bonds, which are exempt from federal taxes, as well as state and local levies if you live where the bond was issued. However, because investments grow free of tax consequences within HSAs, these and other tax-advantaged accounts are much better suited to hold traditional bond funds (which throw off fully taxable interest income) and actively managed stock funds (which distribute capital gains generated by trading within the fund, aka “turnover”).
• Diversification matters (in more than one way). You’ve probably heard that your portfolio should be “diversified,” which means holding a variety of investments, whether that’s holding multiple assets (stocks, bonds, alternative investments), but that could also mean holding, say, stocks from different countries, or stocks from different sectors. And investment funds, which can own any number of stocks, bonds, or other holdings all at once, can help you achieve that diversification. But every fund has its own level of built-in diversification. Some funds hold dozens of stocks while others hold thousands. Some funds invest heavily in their biggest stocks while others spread their assets out more evenly. So always consider how diversified a fund really is, as well as whether that level of diversification suits your needs.

Related: 9 Best Vanguard Retirement Funds [Save More in 2026]

What Types of Funds Are Available in IRAs?

---

Once you back out the different tax treatment, an IRA will look, feel, and act very similar to a tax-advantaged brokerage account. They’re typically self-directed and extremely flexible. Most IRAs will let you own any type of fund—mutual funds, exchange-traded funds (ETFs), and even closed-end funds (CEFs).

If given the choice, many investors will own ETFs because they usually beat both mutual funds and CEFs on fees. However, I can think of a few reasons to consider owning Vanguard mutual funds in an IRA.

They’re cheap, for one. Vanguard mutual funds typically offer very low fees—in many cases lower than even many ETFs with a similar strategy. Many of the company’s products are highly rated by independent fund analysts, too.

You also might well prefer to have a human manager overseeing certain strategies rather than buy a fund that simply follows an index. Mutual funds boast a richer array of these products (that’s certainly the case at Vanguard). If so, again, mutual funds are more tax-efficiently held within an IRA.

Related: 7 Best Fidelity Retirement Funds [Low-Cost + Long-Term]

What Is a Mutual Fund?

---

A mutual fund is an investment company that pools money from many investors to buy stocks, bonds or other securities. The investors get the benefits of professional management and certain economies of scale. A pool of potentially millions or even billions of dollars is large enough to diversify and might have access to investments that would be impractical for an individual investor to own.

Here’s an example: An investor wanting to mimic the S&P 500 Index (an index made up of 500 large, U.S.-listed companies) would generally have a hard time buying and managing a portfolio of 500 individual stocks, especially in the exact proportions of the S&P 500 Index. Another example: An investor wanting a diversified bond portfolio might have a hard time building one when individual bond issues can have minimum purchase sizes of thousands (or tens of thousands!) of dollars.

Equity funds or bond funds will generally be a far more practical solution.

To invest in a mutual fund, you’ll need to open an account with the fund sponsor or open a brokerage account with a broker that has a selling agreement in place with the fund sponsor. As a general rule, most large, popular mutual funds will be available at most brokers, so if you open a traditional investment account (like an IRA or brokerage), you’ll have access to most of the mutual funds you’d ever want to invest in.

Why Vanguard?

---

Vanguard Group is a massive firm that, as it points out itself, “is owned by its funds, which in turn are owned by Vanguard’s fund shareholders.” Its sheer scale—it’s responsible for approximately $12 trillion in assets—and alignment with shareholders’ interests allow it to charge a laughably low 0.06% expense ratio (a mere 60¢ for every $1,000 invested) on average across its 400-plus Vanguard mutual funds and Vanguard ETFs. The average asset-weighted expense ratio for U.S. mutual funds and ETFs is more than six times that, at 0.44%.

Very shortly put: Even when a Vanguard fund isn’t the absolute cheapest in its category, it’s still going to be one of your most cost-efficient options.

If anything, Vanguard has only gotten more aggressive about its low-cost leadership. It was 0.08% in 2024, but declined to 0.07% in 2025 after Vanguard cut expenses on 168 share classes across 87 funds. Its drop to 0.06% occurred in early 2026 when the company announced it would slash fees on another 84 share classes across 53 funds. All told, Vanguard estimates that’s $600 million in savings for investors, which the firm claims is its “largest-ever two-year combined cost reduction.”

By the way, Vanguard’s price vigilance doesn’t just benefit people who own Vanguard retirement funds. We all collectively pay less in fees and expenses and enjoy better returns thanks to Vanguard founder Jack Bogle’s index revolution, which has put downward price pressure on the rest of the industry.

Just remember: There’s more to Vanguard than low fees. This firm grew into the powerhouse mutual fund company it is today by taking care of its clients and genuinely looking after their interests. 

Related: The 16 Best ETFs to Buy for a Prosperous 2026

Vanguard’s Best Retirement Funds for IRAs

---

These Vanguard retirement funds are ordered by their Morningstar Portfolio Risk Score for the trailing 10-year period, from least risky to most. Here are the risk levels each score range represents: 

• 0-23: Conservative
• 24-47: Moderate
• 48-78: Aggressive
• 79-99: Very Aggressive
• 100+: Extreme

Importantly, these scores are a general gauge of risk compared to all other investments. For example, a bond fund with a score of 20 might be considered a conservative strategy overall, but it could simultaneously be riskier than a number of other bond funds.

Lastly, these funds have a required minimum initial investment of $3,000 unless otherwise indicated. In other words, if you want to invest in these funds via an IRA, you’ll need to be able to purchase at least $3,000 worth of shares up front. Once invested, you can spend as much or as little as your IRA provider allows on subsequent purchases.

With that out of the way, let’s dig into some of the best Vanguard retirement funds for IRAs in 2026.

1. Vanguard Short-Term Treasury Index Fund Admiral Shares

---

• Style: Short-term U.S. Treasury bond
• Management: Index
• Assets under management: $32.7 billion*
• SEC yield: 3.7%**
• Expense ratio: 0.06%, or 60¢ per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 6 (Conservative)

No retirement asset allocation is complete without bond funds. As an asset class, bond funds play an important role in lowering volatility and providing regular income. However, bond interest is taxable at your federal income tax rate—if you’re in the 37% tax bracket, then you’re losing 37% of your bond interest to taxes—and because interest is the predominant source of returns on bonds, bond funds are best held in tax-advantaged accounts such as IRAs.

Between 2022 and 2024, the yield curve was inverted (inversion is when short-term rates are higher than long-term rates). That’s no longer the case, but short-term bonds still offer relatively high yields for relatively low risk. Thus, it makes sense to keep a decent chunk of your overall bond exposure in short-term bond funds, such as the Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX).

VSBSX tracks the Bloomberg US Treasury 1-3 Year Bond Index—a collection of roughly 100 federal bond issues with maturities of between one and three years. U.S. Treasuries are among the best-rated bonds on the planet, meaning that the major credit-rating agencies believe bonds issued by our federal government are likelier than most to repay you fully with interest. These bonds are considered all the more secure given their short maturities—at most, these bonds will mature in just three years, which is a relatively small time for the security of those bonds to change.

One of the most critical metrics to consider when considering bond funds is duration, which is a measure of interest-rate sensitivity. As an example, a bond with a duration of two years would see its price rise by 2% if interest rates fell by 1 percentage point (or conversely, would see its price fall by 2% if interest rates rose by 1 percentage point). The actual calculation of duration is fairly complex; it’s the weighted average of the bond’s cash flows. But the key takeaway is that, all else equal, the longer a bond’s time to maturity, the higher its duration—and thus the higher the interest-rate risk.

VSBSX has a duration of just 1.9 years, which is very low. And in return, you currently receive a yield that’s closer to 4% than it is to 3%. That combination of low risk and competitive income makes Vanguard Short-Term Treasury Index Fund one of the very best Vanguard IRA funds you can own in an IRA.

This mutual fund, like many Vanguard index funds, is also available as an ETF: the Vanguard Short-Term Treasury ETF (VGSH, 0.03% expense ratio), which trades around $60 per share currently.

* Many Vanguard funds have multiple share classes, including ETFs. Listed net assets for Vanguard funds in this story refer to assets under management across all of a given fund’s share classes.

** SEC yield reflects the interest earned across the most recent 30-day period. This is a standard measure for funds holding bonds and preferred stocks.

Want to learn more about VSBSX? Check out the Vanguard provider site.

Related: 7 Best Vanguard Dividend Funds [Low-Cost Income]

2. Vanguard Total Bond Market Index Fund Admiral Shares

---

• Style: Intermediate-term core bond
• Management: Index
• Assets under management: $395.3 billion
• SEC yield: 4.3%
• Expense ratio: 0.04%, or 40¢ per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 15 (Conservative)

Bond funds play an important role in lowering volatility and providing regular income. However, they don’t need to be as conservative as the aforementioned VSBSX. 

The Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX), for instance, covers many more debt categories with holdings that boast longer maturities. But despite the higher risk, it still stands out as one of the very best Vanguard retirement funds for its combination of high-quality holdings, competitive yield, and rock-bottom fees. 

VBTLX holds nearly 11,500 debt issues, providing extremely broad exposure to the investment-grade bond universe. A little less than half of its portfolio is made up of Treasury or agency debt backed by the U.S. government, 25% is corporate debt, another 20% is invested in government mortgage-backed securities (MBSes), and the rest is spread across foreign bonds, commercial mortgage-backed securities (CMBSes), and other debt.

Risk is higher than Vanguard’s short-term government-bond fund for a number of reasons. For one, roughly a third of VBTLX’s bonds aren’t government- or agency-related—they’re corporates and other issues with ratings that, while high, are lower than U.S. Treasury debt. Time remaining on these bonds is longer, too, with an average effective maturity of more than eight years. As a result, duration is higher—at 5.8 years, a percentage-point increase in market interest rates would theoretically send the fund 5.8% lower in the short term.

On the flip side, you’re rewarded with a higher yield and more potential upside should rates go lower. And with an expense ratio of just 0.04%, Vanguard Total Bond Market Index Funds is all but free to own.

VBTLX is also available as an ETF: the Vanguard Total Bond Market ETF (BND, 0.03% expense ratio), which trades around $75 per share currently.

Want to learn more about VBTLX? Check out the Vanguard provider site.

Related: Best Vanguard Retirement Funds for 401(k) Plans

3. Vanguard Wellington Fund Investor Shares

---

• Style: Moderate allocation
• Management: Active
• Assets under management: $119.8 billion
• Dividend yield: 2.1%
• Expense ratio: 0.24%, or $2.40 per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 46 (Moderate)

Vanguard’s oldest mutual fund, Vanguard Wellington Fund Investor Shares (VWELX), is a “portfolio in a can.” While stock funds allow you to hold hundreds or thousands of individual stocks, and bond funds allow you to hold hundreds or thousands of bonds, “balanced” or “allocation” funds like VWELX allow you to get all of that exposure in just one fund.

Vanguard Wellington, which came to life in 1929, is a moderate allocation fund that invests roughly two-thirds of its assets in stocks, and the other third in bonds. The stock portion of the portfolio currently holds about 80 predominantly large-cap stocks—a “who’s who” of mega-cap blue-chip firms such as Nvidia (NVDA) and Apple (AAPL)—with a median market cap of around $330 billion. Most holdings are U.S.-domiciled, but you do get a little exposure to international companies including UBS Group (UBS) and British American Tobacco (BTI).

The bond portfolio is much more broadly diversified, at more than 1,500 investment-grade issues. Two-thirds of that is invested in corporate bonds, with another 20% in Treasuries and agency bonds, and the rest peppered across MBSes, foreign sovereign bonds, and other debt.

Turnover (how much the fund tends to buy and sell holdings) is on the elevated side, with about 60% of the portfolio turning over every year, so VWELX generates some capital gains distributions. It also produces a decent chunk of interest income from its bond portfolio. An IRA can help you avoid both sets of tax consequences.

Vanguard Wellington, as the name suggests, is managed by Wellington Management, an investment management company with nearly a century of operational experience. And this one-stop shop for your large-cap stock and bond needs charges just 0.24% in annual fees—very inexpensive for the skilled management and strong performance track record you’re getting in return.

Just make sure you’re considering your own investment needs. If you don’t want a third of your portfolio to be in bonds, you’ll want to put additional money into individual stocks, equity funds, and/or alternative investments.

Want to learn more about VWELX? Check out the Vanguard provider site.

Make Young and the Invested your preferred news source on Google

Simply click here and select the ✓ box for Young and the Invested. Once you’ve made this update, you’ll see Young and the Invested show up more often in Google’s “Top Stories” feed, as well as in a dedicated “From Your Sources” section on Google’s search results page.

Related: 10 Monthly Dividend Stocks for Frequent, Regular Income

4. Vanguard Target Retirement Funds

---

• Style: Target-date
• Management: Active
• Expense ratio: 0.08%, or 80¢ per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 20-61 (Conservative to Aggressive)

One of the challenges in retirement planning is getting the asset allocation right, or having an asset class mix that is appropriate for an investor at your age and stage of life. An ideal portfolio for a 20-year-old is likely going to be very different from that of a 40-year-old, and both those portfolios will be different from what’s ideal for a 60-year-old.

This is where Vanguard Target Retirement Funds can really add value. 

Target-date funds—also called life-cycle funds—are a type of mutual fund that are designed to change their asset allocation over time. Target-date funds start out invested heavily in stocks, then slowly reduce their stock exposure and replace it with bond exposure as they approach their target retirement date, following a glide path.

The target retirement dates are intended to be estimates; they don’t have to be super precise. Generally, most mutual fund families will create target-date funds in five-year increments (say, 2025, 2030, 2035, etc.).

Given the hyper-specific focus on retirement, target-date funds tend to be most commonly found in 401(k) plans, but there’s nothing keeping you from holding them in an IRA or other tax-advantaged account as well.

Vanguard Target Retirement Funds hold varying blends of both U.S. and international stocks of various sizes, as well as U.S. and international bonds. They’re unsurprisingly dirt-cheap, at just 0.08% annually, and the entire series earns a respectable Silver Medalist rating from Morningstar. And even better: Unlike most Vanguard funds, which have a $3,000 minimum initial investment, Vanguard’s target-date series has a lower bar to clear: $1,000.

Want to learn more about Vanguard Target Retirement Funds? Check out the Vanguard provider site.

Related: 5 Best Energy ETFs for the Rise of Oil, Natural Gas + More

5. Vanguard International Core Stock Fund Investor Shares

---

• Style: International large-cap stock
• Management: Active
• Assets under management: $6.7 billion
• Dividend yield: 1.3%
• Expense ratio: 0.48%, or $4.80 per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 70 (Aggressive)

U.S. markets have long been among the most productive in the world, and if you believe in the American economy’s ability to keep growing, that should remain the case. Still, America’s stock markets do catch the occasional cold, and that’s why most experts will tell you it’s worth having at least some exposure to international stocks.

You can do that via funds such as the Vanguard International Core Stock Fund Investor Shares (VWICX).

VWICX, which is run by Wellington Management’s F. Halsey Morris and Anna Lunden, currently own 95 companies that have been selected from a universe of 350 to 400 equities from around the globe (excluding the U.S.). Morris and Lunden favor firms from more established nations—companies from developed markets such as Japan and the U.K. make up 75% of assets—but they also hold stocks from emerging markets such as China, India, and Taiwan.

The managers blend growth and value styles, but they generally lean heavily on large-cap stocks; VWICX’s median market cap is close to $75 billion. In other words, this is a predominantly blue-chip portfolio, one that includes multinationals such as Taiwan Semiconductor (TSM), China internet giant Alibaba (BABA), and British oil-and-gas giant Shell (SHEL).

Also, as is common with developed-country funds, VWICX’s yield is higher than comparable U.S. funds.

Vanguard International Core Stock Fund also does more trading than any other fund on this list, with turnover sitting around almost 90% right now—which means most of the portfolio turns over each year. As that can result in capital gains distributions, VWICX is a great Vanguard retirement fund for an IRA, but a little less so for taxable accounts.

Want to learn more about VWICX? Check out the Vanguard provider site.

Related: The 11 Best Fidelity Funds You Can Own

6. Vanguard 500 Index Fund Admiral Shares

---

• Style: U.S. large-cap stock
• Management: Index
• Assets under management: $1.5 trillion
• Dividend yield: 1.1%
• Expense ratio: 0.04%, or 40¢ per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 74 (Aggressive)

The S&P 500 Index is tough to top. Just ask professional mutual fund managers of large-cap products, the majority of whom fail to consistently beat the S&P 500 Index, especially once fees are factored in.

According to S&P Dow Jones Indices, in 2025, “79% of all active large-cap U.S. equity funds underperformed the S&P 500, worse than the 65% rate observed in 2024 and the fourth-worst year for active large-cap managers over the 25-year history of our SPIVA Scorecards.” With that data now folded in, SPIVA reports that just 14% of large-cap funds have outperformed the S&P 500 over the trailing 10-year period, and just 10% across the trailing 15 years.

The pros can’t beat it, so let’s own it instead.

The Vanguard 500 Index Fund Admiral Shares (VFIAX) is Vanguard’s oldest index strategy, and it remains one of the very best Vanguard retirement funds—for IRAs or wherever else you can stash it.

VFIAX, by virtue of tracking the S&P 500, holds shares of 500 large U.S. companies. But it doesn’t hold them equally. The S&P 500 is “market-cap weighted,” which means the larger the company, the more weight the stock has in the index (and thus the more impact it has on returns). Thus, right now, VFIAX dedicates the largest portions of its assets to companies like Nvidia, Apple, and Google parent Alphabet (GOOG/GOOGL), whose market caps are measured in trillions of dollars.

It’s also considered to be a “blend” fund, which means it has relatively even exposure to value stocks and growth stocks.

Turnover is traditionally low, as only a handful of stocks enter or leave the index in any given year, so VFIAX typically makes little to no capital gains distributions. That makes this Vanguard index fund an extremely tax-efficient option for taxable accounts. But again, if you primarily invest through your IRA, and your goal is simply to maximize performance, it still makes sense to own the S&P 500 in your IRA.

Also, VFIAX has an ETF share class, Vanguard S&P 500 ETF (VOO, 0.03% expense ratio), which costs 1 basis point less in fees and goes for about $580 per share currently.

Want to learn more about VFIAX? Check out the Vanguard provider site.

Related: 10 Best 401(k) Alternatives [If You Can’t Get One Through Work]

7. Vanguard Strategic Equity Fund Investor Shares

---

• Style: U.S. mid-cap stock
• Management: Active
• Assets under management: $10.5 billion
• Dividend yield: 1.1%
• Expense ratio: 0.17%, or $1.70 per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 85 (Very Aggressive)

Large-cap companies, like those in the S&P 500, have the potential for outsized growth. But smaller companies tend to be more explosive—for better or worse. They benefit from investing’s rule of large numbers (effectively, doubling your revenues from $1 million to $2 million is a lot easier than doing so from $1 billion to $2 billion). And when institutional investors become interested in these stocks, large influxes of new investment money can send their stocks skyward.

But they’re riskier. Smaller firms have fewer and narrow revenue streams, meaning if a core product line struggles, it can more easily lead to stock turbulence and losses. They also have less access to capital than larger companies, so if times get tight, it’s harder for them to survive.

Products like Vanguard Strategic Equity Fund Investor Shares (VSEQX) help defray that risk by allowing you to buy many smaller companies at once, so one stock’s failure doesn’t torpedo your portfolio’s worth.

Fund manager Cesar Orosco is tasked with buying mid- and small-cap stocks with above-average growth potential. He takes a quantitative approach, attempting to identify the most attractive stocks within an MSCI index of small- and midsized companies based on variables such as improving fundamentals and attractive valuation. He currently has about 600 equity positions, split roughly 60/40 between small caps and mid-caps.

“Clearly, portfolio manager Orosco has been the driving force since his arrival nearly five years ago.,” Morningstar analyst Todd Trubey says. “Long-term, it’s a great choice for smaller-cap U.S. equities.”

VSEQX does a fair bit of trading, with turnover of more than 60%. You can snuff out the tax liability of the resulting capital gains by stuffing this Vanguard fund into an IRA.

Want to learn more about VSEQX? Check out the Vanguard provider site.

Related: 13 Dividend Kings for Royally Resilient Income

Track Your Portfolio With Empower

---

• Available: Sign up here
• Price: Tools: Free. Wealth Management: Starts at 0.89% of assets annually.*

Empower is one of our top-rated financial services firms for people of any income level thanks to the quality and breadth of its offerings:

• Free financial tools: Empower’s free Personal Dashboard includes a host of useful tools, including a savings planner, retirement planner, financial calculators, and even a cost planner for your children’s education. But the tool that sets Empower apart is its Investment Checkup tool, which assesses portfolio risk, analyzes past performance, provides a target allocation for your portfolio, and lets you compare your portfolio to the S&P 500 and Empower’s “Smart Weighting” Recommendation.
• Fee-based wealth management services: Empower also offers several suites of advisory services depending on your investible assets. People with as little as $100,000 can get unlimited financial advice and retirement planning and a professionally managed portfolio. Clients with higher assets can access more services, including dedicated financial advisors, specialists in areas such as real estate and stock options, and even access to private equity. 

Use our exclusive link to sign up for the Empower Personal Dashboard, whether that’s for the free tools or the advisory services. If you have $100,000 or more in investible assets, you’ll also be able to schedule a free initial 30-minute financial consultation with an Empower professional.

Related: 15 Best High-Yield Investments [Safe Options Right Now]

Vanguard Retirement Funds for IRAs: Frequently Asked Questions (FAQs)

---

What is the minimum investment amount on Vanguard mutual funds?

Vanguard funds are known for being shareholder-friendly. The Vanguard mutual fund company blazed new trails with the index fund, and Vanguard has done more than any other investment firm to keep costs to a minimum for investors.

But there is one hitch. Many of Vanguard’s cheapest funds in terms of fees have initial investment minimums of around $3,000.

If that is a problem for you, don’t sweat it. Most popular Vanguard index funds are also available as ETFs. Most brokers will allow you to buy as little as one share, and some even allow for fractional shares. And if you use a commission-free brokerage, you can buy those ETFs without incurring additional fees. ETF prices vary, of course, but many cost less than $100, and they rarely exceed $400 per share.

Also worth noting? If you invest in a 401(k) and any of these Vanguard funds are available to you there, consider investing in them that way. There is no minimum investment through a 401(k) plan—you just pick an allocation percentage, and when money is taken from your paycheck to contribute to your plan, whatever dollar amount that translates into will be invested into the fund.

Related: 9 Best Fidelity ETFs for 2026 [Invest Tactically]

What are index funds?

There are two kinds of funds: actively managed funds and index funds.

With an actively managed fund, one or more managers are in charge of selecting all of the fund’s holdings. They’ll likely have a specific strategy to adhere to, and they’ll be tasked with beating a benchmark index, but they’ll be given a lot of discretion about how to achieve that. These managers will identify opportunities, conduct research, and ultimately buy and sell a fund’s stocks, bonds, commodities, and so on.

An index fund, on the other hand, is effectively run by algorithm. The fund will attempt to track an index, which is just a group of assets that are selected by a series of rules. The S&P 500 and Dow Jones Industrial Average? Those are indexes with their own selection rules. Index funds that track these indexes will generally hold the same stocks, in the same proportions, giving you equal exposure and performance (minus fees) to those indexes.

If you guessed that it’s more expensive to pay a conference room full of fund managers than it is a computer that tracks an index, you’d be right. That’s why actively managed funds tend to cost much more in fees than index funds.

And that’s why ETFs are generally cheaper. Most (but not all) mutual funds are actively managed, while most (but not all) ETFs are index funds.

Make sure you sign up for The Weekend Tea, Young and the Invested’s free weekly newsletter that over 10k monthly readers use to level up their money know-how.

Why does a fund’s expense ratio matter so much?

Every dollar you pay in expenses is a dollar that comes directly out of your returns. So, it is absolutely in your best interests to keep your expense ratios to an absolute minimum.

The expense ratio is the percentage of your investment lost each year to management fees, trading expenses and other fund expenses. Because index funds are passively managed and don’t have large staffs of portfolio managers and analysts to pay, they tend to have some of the lowest expense ratios of all mutual funds.

This matters because every dollar not lost to expenses is a dollar that is available to grow and compound. And over an investing lifetime, even a half a percent can have a huge impact. If you invest just $1,000 in a fund generating 5% per year after fees, over a 30-year horizon, it will grow to $4,116. However, if you invested $1,000 in the same fund, but it had an additional 50 basis points in fees (so it only generated 4.5% per year in returns), it would grow to only $3,584 over the same period.

Related: The 7 Best Index Funds for Beginners