When I first started investing in 2017, I was hooked. I spent hours poring over 10-Ks, listening to earnings reports, and making dozens of weekly trades. (For context, I had just finished watching “The Big Short” and thought I was the second coming of Michael Burry.) The result? I underperformed the S&P 500 by 3% and paid hundreds of dollars in brokerage commission fees. I also spent the better part of a month reviewing my daily trading summaries to figure out how much I owed in capital gains taxes. Not fun.

Many investment banking and capital markets professionals opt to have their personal investments passively managed with index funds. This approach is both cost-effective and time-efficient, allowing you to spend your free time on what truly matters in life (for me, sleeping).

The two types of index funds and their tax consequences

An index fund is a financial instrument that tracks the performance of an underlying group of assets, whether they be stocks, bonds, commodities, or real estate. They come in two flavors: mutual funds and exchange-traded funds (ETFs). The subtle differences:

The important thing to focus on here is tax efficiency. After all, the goal of index investing is to keep costs low, and a big part of that is minimizing taxes. 

Overall, mutual funds tend to generate higher capital gains than ETFs. When investors buy and sell units in a mutual fund, the fund manager is forced to buy and sell the underlying securities held. This can cause short-term and long-term capital gains taxes to arise, which are passed on to unitholders. This might not be a concern in your Roth IRA or 401(k) but can quickly add up to create drag in a taxable account.

The 5 best brokerage platforms for index fund investing

The Vanguard Group

Some trivia: Did you know that Vanguard’s late Founder and Chairman John Bogle actually invented the first index fund in 1976? Since then, Vanguard has become a household name for index fund brokers and passive investing, managing nearly $7.1 trillion in assets and over 200 US funds. 

The company is known for its investor-friendly philosophy, with a history of reducing their fees continuously and advocating for passive investing education. Vanguard’s brokerage platform is great because it charges $0 trading commissions for ETFs, mutual funds, and stocks, and requires no minimum investment to open an account (though there are sometimes minimums to invest in specific mutual funds).

Opening a brokerage account with Vanguard also gives you access to their other services, including assistance with placing trades, personalized advice, and various other financial planning tools such as fund screeners. The user interface can look a bit dated, but it’s still clear and usable.

Charles Schwab

Like Vanguard, Schwab also keeps its fees low, with zero commissions on individual stock, ETF, and mutual fund trades. Opening and maintaining a brokerage account with them is also free of fees. You also get a decent breadth of news, research, calculators, and investor education articles within the platform.

Notable features for Schwab include its ETF select list, which highlights funds particularly suitable for investors, such as those with a good track record, low expense ratios, and diversified holdings. The platform is offered in browser form, as a dedicated workstation for advanced investors, and as a mobile app. 

Fidelity Investments

Fidelity is the only brokerage on this list offering its own proprietary mutual funds with a mind-boggling 0% expense ratio. That’s right: You pay absolutely nothing to invest in the accounts. The company has also eliminated pesky account transfer and closure, domestic wire, and check deposit fees. 

Couple this with no account minimums and zero-commission stock, ETFs, and mutual funds trades, and what you have is a great low-cost platform for hands-off investors. Fidelity is also known for the high quality of its educational resources in article, webinar, video, and infographic forms.

TD Ameritrade

Technically, TD Ameritrade is now a part of Charles Schwab.  Still, the company and its brokerage platform operate independently. If you think you’ll graduate one day beyond index funds to a bit of active trading, this platform is for you. The company offers the highly acclaimed Thinkorswim trading program, which is best suited for advanced investors.

For hands-off index investing, TD Ameritrade still has what we want: namely, zero commissions on stocks, ETFs, and mutual fund trades and perhaps the best educational offerings on the market (I highly recommend the How to Invest series). However, the platform does not offer fractional shares (although it may in the future now that Schwab is the owner). 

E*TRADE

Like many others, E*TRADE offers the now-standard features of zero-commission trades, no account minimums, and a dedicated fund screener. The platform also offers three web-based platforms and two mobile apps. However, E*TRADE might be desirable for the most hands-off investors thanks to its pre-built core ETF portfolios. 

Investors keen on staying as passive as possible can pick one of these to invest in based on their risk tolerance or by theme—sector, market caps, or value or growth styles, for example.

Low-cost brokerage + Index fund = Success

Remember the good ole days when you had to call your broker to place a trade and get charged $6.95 or some ungodly sum for the privilege of buying a few shares? Me neither.

Low-cost brokerages have greatly democratized investing, allowing “dumb money”—like me—to buy and sell thousands of different securities at a low cost. Over the long run, eliminating controllable sources of risk, like high fees and under-diversification, will help boost your returns. Remember, investing should be boring! If you want excitement, liquidate your 401(k) and head to Vegas.