Building Passive Income with ETFs and Index Funds in 2025
In 2025, passive income has never been easier to access than it is today, and two of the best ways to build long-term wealth without much effort are Exchange-Traded Funds (ETFs) and Index Funds. Such investment options let your money grow automatically at reduced costs and with better diversification than individual stock picks. No matter what level of investment experience you may have, developing passive income with ETFs and index funds is a strategy anyone can apply to begin earning today.
This guide will demonstrate how to use these powerful tools to create consistent, long-term passive income streams, with no need to keep an eye on your future investments day in and day out.
‖ What Are ETFs and Index Funds? ‖
ETFs (Exchange-Traded Funds):
A fund that invests in an assortment of assets, including, but not limited to, stocks, bonds, or commodities. ETFs are traded in the stock market as single stocks.
Index Funds:
A kind of mutual fund that attempts to mimic a specific index (such as the S&P 500). Index funds are commonly a passive investment, which allows it to mimic the market rather than picking individual stocks.
ETFs and index funds are low cost, diversified, and low maintenance investment vehicles which are great for setting up passive income.
🏆 Five Best Passive Income Benefits of ETFs and Index Funds
1. Diversification
When you invest in ETFs and index funds, you are automatically investing in a large variety of stocks or bonds, thereby eliminating individual investment risk.
2. Low Fees
Not only do both ETFs and index funds normally have lower fees than actively managed mutual funds, but it means that more of your return can stay in your pocket.
3. Automatic Reinvestment
Reinvestment of dividends, a key factor in productivity, is an option in which most ETFs and funds indulge.
4. Minimal Effort
After choosing the appropriate ETFs or index funds, the work on them is minimal. Thus, these funds are perfect for passive investing.
5. Steady, Long-Term Growth
In the past, broad-market index funds and ETFs have had a strong long-term performance track record, which has tended to match or even outperform active investment strategies.
📊 Five Biggest ETFs and Index Funds for Passive Income in 2025
1. Vanguard Total Stock Market ETF (VTI)
- Focus: U.S. stock market, small cap, medium cap, and large cap companies
- Expense Ratio: 0.03%
- Best for: U.S. equity exposure and long-term growth
2. SPDR S&P 500 ETF (SPY)
- Focus: Top 500 U.S. companies
- Expense Ratio: 0.09%
- Best for: Those who hope to trace the performance of the U.S. economy
3. Schwab U.S. Dividend Equity ETF (SCHD)
- Focus: High-yield dividend-paying U.S. stocks
- Expense Ratio: 0.06%
- Best for: Dividend seekers, looking for a steady source of income
4. Vanguard FTSE All-World ex-US ETF (VEU)
- Focus: Global stocks excluding the U.S.
- Expense Ratio: 0.08%
- Best for: U.S.-based diversification outside the country
5. iShares Core U.S. Aggregate Bond ETF (AGG)
- Focus: U.S. bonds (government, corporate, and mortgage-backed)
- Expense Ratio: 0.04%
- Best for: Those looking for stability and reduced volatility
How to Make Passive Income from ETFs and Index Funds
Start with a Diversified Portfolio
Balance your exposure across U.S. and world markets and various asset classes (stocks, bonds, real estate).
Reinvest Dividends
Reinvestment of dividends is one method for achieving compounded growth over the long term and increasing your returns with no additional effort.
Focus on Low-Cost Funds
Low-cost ETFs and index funds minimize drag on your returns. Search for funds with expense ratios under 0.10%.
Set Up Automated Contributions
Start automatic monthly deposits into your ETFs and index funds to continue to slowly increase your wealth over time.
Hold for the Long Term
Both ETFs and index funds are meant to be long-term investments. Patience is key because market fluctuations are normal in the short term.
📍 Tips from Animal Intelligence for USA & Canada
USA
- Tax Benefits: In the U.S., you can invest in ETFs and index funds in IRAs or 401(k)s, so when it comes to dividends and capital gains, you do not pay taxes on deferred taxes.
- Social Security: Passive income from investments can supplement your retirement from Social Security.
Canada
- TFSA: Use Canada’s Tax-Free Savings Account (TFSA) to hold ETFs and index funds tax-free, making it one of the best ways to maximize passive income.
- RRSP: The Registered Retirement Savings Plan (RRSP) also gives Canadians the ability to accrue wealth in these investments tax-deferred.
❓ FAQ
Q1: How to make passive income in 2025 with the best ETFs?
Some of the most desirable ETFs for passive income in 2025 are Vanguard Total Stock Market ETF (VTI), SPDR S&P 500 ETF (SPY), and Schwab U.S. Dividend Equity ETF (SCHD).
Q2: What amount of money do I need to start with ETFs and index funds?
You can invest in ETFs and index funds for as little as $50 to $500, depending on the broker and the funds.
Q3: Can I earn full-time income through ETFs and index funds?
Although you can generate significant income in the long term, ETFs and index funds are often part of a long-term plan. Relying on them for full-time income may not be realistic in the early years.
Q4: What should I invest in; ETFs or individual stocks?
ETFs offer a wider portfolio to diversify and carry less risk than individual stocks. Therefore, ETFs are ideal for beginning investors who tend to be more conservative.
