The post Best Online Brokers for Index Funds by Dan Schmidt appeared first on Benzinga. Visit Benzinga to get more great content like this.
Want to skip to the answer? Benzinga reader’s top picks for best brokers for index funds is Interactive Brokers and Vanguard.
The commission wars are over and the retail investor is one of the few parties who can claim a total win. While brokers can make plenty of money in other ways from various services (or selling order flow), those who invest with a buy-and-hold mentality will reap benefits in the long term as money that used to go to commissions and fees will now compound like the rest of their capital. That leads us to the best online brokers for index funds, a type of stock market fund or bond index fund.
For most investors with long time horizons, index funds are the way to go. An index fund might not be a glamorous or exciting investment, but if you aren’t digging deep into the guts of the market and economy every night, you likely won’t become an elite stock picker. Especially not over a multidecade period. Index funds are both low-cost and liquid, making them ideal for all kinds of portfolios.
If you’re looking to start investing in index funds, you’ll need to pick a suitable broker. A strong list of commission-free ETFs is no longer enough to spike the punchbowl – everyone has commission-free ETFs now. When choosing a broker, you’ll need to think about your financial goals while comparing the features and offerings.
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5 Best Online Brokers for Index Funds
Index funds are core holdings in both taxable and tax-advantaged accounts. When choosing a broker, you’ll need to look at more than just index fund availability since everyone’s got cheap ones now. You’ll want a broker that meets your needs as an investor. Here are our top choices.
- Best for Low Fees: Interactive Brokers
- Best for Retirement Saving: Vanguard
- Best for Research and Tools: TD Ameritrade
- Best for Zero Cost Offerings: Fidelity
- Best for Casual Investors: IQcent
1. Best for Low Fees: Interactive Brokers
get started
securely through Interactive Broker Primary’s
website
This latest groundbreaking technology is IBKR GlobalAnalyst, a new trading tool that helps investors compare the rate of PEG or price-earnings growth valuations and provide more immediate and comprehensive financial metrics of stocks, globally.
Recognizing that stock selection can be challenging for investors to compare the valuations of domestic and international stocks, Interactive Brokers created GlobalAnalyst to offer investors a simple, yet powerful tool to easily evaluate investment opportunities around the world.
Using GlobalAnalyst, investors can search for stocks by region, country, industry, market capitalization and currency to uncover undervalued stocks worldwide. The resulting table displays the current market and financial metrics, including the PEG Ratio. The PEG Ratio is the PE ratio divided by the three-year compound earnings growth rate, and smaller PEG Ratios typically indicate undervalued companies.
Best For
- Price earnings growth valuations
- Easily evaluate investment opportunities
Interactive Brokers Lite clients enjoy commissions as low as $0 for US-listed stocks and ETFs and the lowest commissions on stocks, options, futures, currencies, bonds and funds from a single integrated account for US-listed stocks and ETFs and the lowest commissions on stocks, options, futures, currencies, bonds and funds from a single integrated account for US-listed stocks and ETFs and the lowest commissions on stocks, options, futures, currencies, bonds and funds from a single integrated account. IBKR Pro clients access the IB SmartRoutingSM system, which provides $0.47 per 100 shares price improvement vs. the industry.
Unlike other brokers with separate bank accounts in which you have to transfer cash back and forth, IBKR’s cash management is integrated into your brokerage account. This means that you can always borrow at the lowest rates without having to worry about first transferring cash.
When placing your money with a broker, you need to make sure your broker is secure and can endure through good and bad times. IBKR’s strong capital position, conservative balance sheet and automated risk controls are designed to protect IBKR and their clients from large trading losses.
Pros
- Low trading fees
- Great research tools
- Other assets available to trade
Cons
- Complicated account opening process
- Customer service is lacking
2. Best for Retirement Savers: Vanguard
get started
securely through Vanguard’s
website
Vanguard was the first to offer low-commission trading on inexpensive index funds based on consumer-friendly investment principles. Day traders might not find Vanguard’s old-school style appealing, but retirement savers, buy-and-hold investors and companies that seek employer-sponsored programs might want to take a gander. Vanguard is a sensible choice for common-sense investment advice and efficient products. It’s a company that sticks to the morals of its hardy pioneer, Jack Bogle.
Best For
- Retirement savers
- Buy-and-hold investors
- Investors looking for a simple stock trading platform
- Large family of inexpensive ETFs and mutual funds
- Strong stock research selections
- Non-intimidating platform and mobile app
- Only 10 technical indicators available for charts
- No futures or forex trading
- Not ideal for day traders
Vanguard is an online broker that started offering index funds back when most of the industry was still ridiculing them. As a leader in the industry, Vanguard offers several funds that provide exposure for the investor that meets their needs. There are no cookie-cutter funds at Vanguard.
Today, Vanguard is still the ideal spot for retirement savers thanks to its wide index fund selection, low-fee accounts and top-notch customer service. You can choose from funds like the Balanced Index Fund (VBIAX), Communication Services Index Fund (VTCAX) or Consumer Discretionary Index Fund Admiral Shares (VCDAX).
You’ll never pay a fee to trade exchange-traded funds (ETFs) or mutual funds, even ones from other companies. Certain mutual funds do have load and redemption charges, so be sure to confirm the fee schedule before making any investments. Vanguard has low margin rates (ideal for index investors) and a wealth of educational material on retirement saving.
Pros
- Long history of strong performance
- Trusted online broker
- No inactivity fees
Cons
- High margin rates
3. Best for Research and Tools: TD Ameritrade
get started
securely through TD Ameritrade’s
website
This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.
Best For
- Novice investors
- Retirement savers
- Day traders
- World-class trading platforms
- Detailed research reports and Education Center
- Assets ranging from stocks and ETFs to derivatives like futures and options
- Thinkorswim can be overwhelming to inexperienced traders
- Derivatives trading more costly than some competitors
- Expensive margin rates
Index funds may not have active managers, but that doesn’t mean they can’t be actively traded. If you’re looking to flip index funds based on economic trends and technical signals, TD Ameritrade is the broker for you.
Research reports from Morningstar, Dow Jones, Argus and Market Edge are available to Ameritrade clients. You’ll also get the powerful Thinkorswim platform, which can analyze complex trading data and provide better entry and exit points. Plus plenty of tools for options trading (because index funds aren’t just for the risk-averse!)
Pros
- Free research tools
- High quality online broker
- Great customer service support
- Large investment selection
Cons
- No fractional shares
- Lack of international trading options
4. Best for Zero Cost Offerings: Fidelity
get started
securely through Fidelity Investments’s
website
Fidelity is a comprehensive and responsive brokerage suitable for both new and experienced traders alike. With complete access to the full U.S. stock and options markets, a set of state-of-the-art education and research tools, as well as a wide fee-free fund selection, Fidelity is equally useful for the veteran swing traders to novices opening their first accounts. Mobile traders will be especially happy with Fidelity’s app, which mirrors full capabilities of the platform. Though there isn’t much to criticize about Fidelity, the broker does have a few areas where it can afford to improve. Margin rates are significantly higher than most other brokers, especially for traders borrowing less than $25,000. It also doesn’t offer any access to the futures markets. Despite these minor flaws, Fidelity remains a strong choice for most investors.
Best For
- Easy-to-navigate yet functional platform strikes the perfect balance between expert tools and comfort for beginners
- Mobile trading app is fully-optimized and mirrors full functionality of the desktop platform
- Wide range of education and research options make learning more about securities and the market easier and less time-consuming
- Complete range of both independent and managed services available at exceptionally affordable prices
- Offers access to both domestic markets and 25 foreign markets, as well as a wide range of options contracts and over 10,000 mutual funds
- Mobile app that is well-integrated and works just as well as the desktop platform
- Wide selection of education tools and resources available free of charge
- Margin rates higher than many other competing brokerages
- No access to futures trading
- High fees for buying a non-Fidelity mutual fund (with over 3,300 fee-free funds available)
Fidelity Investments is a strong brokerage account and investment firm to consider. Most online brokers have completely removed commissions, including Fidelity. But commission isn’t the only fee paid by investors. Mutual funds and ETFs all have expense ratios that take a minor cut out of investor capital for the pleasure of holding the fund. The fees are small, usually between 5 to 10 basis points, although they can get larger when tracking less liquid indices.
However, Fidelity offers funds that truly have zero cost. As in an expense ratio of 0.0. Yes, zero point zero. Take the Fidelity ZERO Total Market Index Fund (FZROX), which can be bought and sold without commission or load charges on Fidelity. You won’t pay a penny to own the fund at any point in your investment. Fidelity is a worthwhile broker for investors of all skill levels thanks to its impressive array of research and trading tools.
Pros
- Strong customer service support
- Expense-ratio-free index funds
- Impressive mobile app
Cons
- High broker-assisted trade fee compared to other options
5. Best for Casual Investors: IQcent
get started
securely through IQCent’s
website
IQcent is a comprehensive online trading center that offers you a single place to trade stocks, indexes, digital currencies and more. IQcent offers its own proprietary platform, which supports 24/7 trading on any type of major device — no download necessary. Customer service is also available around the clock and in multiple languages, which can be a major benefit for international traders.
IQcent’s commission-free trading, wide selection of more than 100 tradable assets and low $500 account minimum can make the broker appealing to frequent traders and new investors alike. However, it’s important to note that IQcent’s services are currently not available in any part of the United States nor is it regulated by any domestic financial body. This means that if you experience a funding problem with your account, your recourse routes are limited — so always be sure to avoid investing more than you can afford to lose.
Best For
- Casual investors looking for an all-in-one place to trade
- Traders looking for quick withdrawals
- Experienced traders looking for higher leverage limits
- Provides copy trading features that help you mimic professional trading strategies
- Offers up to 1:500 leverage
- Guaranteed withdrawal processing one hour after you settle a trade
- Not registered with any U.S.-based regulatory body; does not provide account services to U.S. citizens
IQcent is an all-in-one trading platform with the capacity to help you trade crypto, other digital assets, indices, stocks, etc. This platform serves as a powerful took for international traders who want to diversify their portfolios and make it easier to gain access to a range of financial markets.
With IQcent, you also get:
- A massive array of tradable assets
- High leverage options
- Small minimum order sizes
- Multiple (and instant) funding options
IQcent offers a proprietary trading platform that’s compatible with a range of devices, and there’s no software or app to download. Straightforward and easy to navigate, experienced or novice traders can jump into IQcent and get started today. They also offer excellent customer service to assist with brokerage account related queries.
Pros
- Provides copy trading features that help you mimic professional trading strategies
- Guaranteed withdrawal processing one hour after you settle a trade
Cons
- Not registered with any U.S.-based regulatory body; does not provide account services to U.S. citizens
- Poor education content
What is an Index Fund?
Vanguard founder John Bogle is thought to be the progenitor of modern index funds. Bogle noticed that the large majority of mutual fund managers who actively picked stocks failed to beat market averages. Some years would be good and others bad, but very few could consistently beat the returns of the S&P 500. Of course, investors would pay the manager the same fee in good years and bad, too.
Instead of paying fund managers to try and beat the market, why not slash those fees and simply invest in an index like the Dow or S&P 500? Unlike other mutual funds that actively pick stocks based on a specific theme or strategy, index funds buy and sell stocks based on their position in the index, usually with a market cap or stock price as the weighting methodology.
Bogle figured (correctly) that over a long time horizon the index investors would outperform investors in actively managed funds simply by taking the market average and compounding the money they save on fees. Bogle introduced the first index fund in 1976, which still trades today under the name Vanguard Index Trust 500 (VFINX) and has nearly $700 billion in assets.
Pros and Cons of Index Funds
| Pros | Cons |
| Cheaper on average than actively managed funds | Investors accept market returns; no alpha or outperformance |
| More liquidity than actively managed funds | Tracking errors may cause the fund to detach from the corresponding index |
| More tax-efficient because index funds buy and sell securities less frequently than active managers | Less flexible than actively managed funds since rules must be followed to remain as close to the index as possible |
How Does an Index Fund Work?
An index fund works pretty much like your standard mutual fund or ETF, just without the active manager selecting securities by hand. One of the most popular ETFs on the market today is the Ark Invest Innovation ETF (NSDQ: ARKK) run by the current ‘belle of the bull’ Cathie Wood. Wood actively selects the stocks for her fund, choosing to buy shares when she personally sees an opportunity.
Index funds are the opposite of ARKK. The manager of an index fund isn’t trying to get a leg up on the competition, they simply want to match the underlying index as closely as possible. Index funds buy and sell shares based on the weights of the shares in the index. For example, SPY tracks the S&P 500 and weights the holdings by market cap. Right now, Apple (NYSE: AAPL) is the largest company in the S&P 500, so it’s also the largest holding in the SPY portfolio.
Types of Index Funds
Index funds track their underlying indices in two primary ways: market cap weighting and price weighting. The S&P 500 is a market cap-weighted index; the companies with the largest market caps hold the most weight. In contrast, the Dow Jones Industrial Average is price-weighted — the higher the price of the stock, the more weight it holds in the index.
- Sector index funds: Certain index funds concentrate only on certain sectors, like financials or healthcare companies. For example, XLF is an ETF that tracks the Financial Select Sector Index composed of the largest banks and financial firms in the United States.
- Regional index funds: Like sector index funds, only grouped by region or country instead of industry.
- Index funds by market cap: One of the most common ways to break up index funds is by market cap. Large-cap stocks and small-cap stocks each have their own indices that are tracked by different funds.
- Index funds by strategy: Are you a growth or value investor? Whichever way you answer, there are index funds that track stocks based on your investing strategy.
Index Funds Should be a Staple for any Investor with a Long Time Horizon
Index funds might not be exciting or carry the promise of outsized returns but can be the bedrock of a long-term portfolio. Index funds are affordable, and tax-efficient, and you won’t have to worry about underperforming the market since the market’s return is all you’re expecting. And it’s important to know about the best brokers for index funds for the best results.
These funds have provided simple retirement vehicles for millions of Americans who don’t have the time to check the markets each day or simply don’t understand the ebbs and flows of market fluctuations. If you want to set and forget your investments, index funds are the choice.
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Frequently Asked Questions
What is an index fund and how does it work?
Index funds are low-cost vehicles that pool investor money together to invest in a wide range of stocks. Unlike active funds, index funds simply track an underlying index in an attempt to match its performance.
Answer Link
Are index funds good for beginners?
Yes! Index funds are an ideal first investment because they’re low risk, low cost and easy to understand. Most people begin the investing journey buying index funds for a retirement account.
Answer Link
What are the best brokers for index funds?
See Benzinga’s list above for the best brokers for index funds.
Answer Link
The post Best Online Brokers for Index Funds by Dan Schmidt appeared first on Benzinga. Visit Benzinga to get more great content like this.
