Best S&P Index Funds: Top Picks For Your Portfolio

Index funds are a low-cost, easy way to build wealth. They are a group of stocks that aim to mirror the performance of an existing stock market index, such as the Standard & Poor's 500 index. Index funds are passively managed, meaning you're not paying someone to actively pick and choose investments, which results in a lower expense ratio. They are also diversified investments, meaning you don't risk losing all your money if one company collapses.

S&P 500 index funds are a type of index fund that tracks the prices of the 500 largest U.S. public companies, representing 80% of the market capitalization of the entire U.S. stock market. They are popular with investors because they are low-cost and instantly diversify a portfolio.

Some of the best S&P 500 index funds on the market in terms of costs and minimums include VFIAX, SWPPX, FXAIX, and FDFIX.

Best S&P 500 index funds for September 2024

S&P 500 index funds are a great way to invest in the S&P 500, a market index made up of about 500 large U.S. companies. Here are some of the best S&P 500 index funds for September 2024:

Fidelity 500 Index Fund (FXAIX)

Fidelity's S&P 500 index fund has the lowest expense ratio of the top funds, so its returns are slightly higher than other top S&P 500 index funds. It also has no minimum investment requirement, sales loads or transaction fees.

Vanguard 500 Index Admiral Fund (VFIAX)

Vanguard's S&P 500 index fund has a slightly higher expense ratio and a minimum investment requirement of $3,000. However, it has a long history and is backed by Vanguard, a well-known and respected company in the industry.

Schwab S&P 500 Index Fund (SWPPX)

Schwab's S&P 500 index fund offers a very low expense ratio and no minimum investment requirement, making it a great affordable option for investors.

State Street S&P 500 Index Fund Class N (SVSPX)

State Street Global Advisors, the company behind the popular SPDR S&P 500 ETF (SPY), also offers this S&P 500 index fund. It has a slightly higher expense ratio and a lower AUM than other options, but it has a long track record of performance.

Invesco S&P 500 Equal Weight ETF (RSP)

This Invesco S&P 500 index fund is unique because it holds a bit of each company in the S&P 500, rather than weighting the holdings by market value. This results in a higher expense ratio, but also provides true diversification.

IShares Core S&P 500 ETF (IVV)

This iShares S&P 500 index fund has the lowest expense ratio of the four ETFs discussed here, making it a more likely choice for investors despite having a more liquid options market than SPY.

SPDR S&P 500 ETF (SPY)

SPY is the first-ever U.S. ETF and remains the most popular. It has been traded on the market for 30 years and has a very liquid options market. However, it has a higher expense ratio than some other options.

S&P 500 index funds vs. S&P 500 ETFs

S&P 500 index funds and S&P 500 ETFs are both passive investment vehicles that track the performance of the S&P 500 index, which is a stock market index composed of 500 large US companies. The main difference between the two is that ETFs are traded on an exchange like stocks, while index funds are not. This makes ETFs more liquid and allows them to be bought and sold throughout the trading day, whereas index funds can only be bought and sold at the end of the trading day. ETFs also tend to have lower buy-ins and are more tax-efficient than index funds, but they may have higher management fees.

When choosing between an S&P 500 index fund and an S&P 500 ETF, it is important to consider factors such as expense ratios, minimum investment requirements, dividend yields, and inception dates. Expense ratios represent the fees associated with the fund's upkeep, and since all S&P 500 index funds perform very similarly, the amount you pay in fees becomes a key factor in your decision. Minimum investment requirements vary between funds and should be considered in relation to your budget. Dividend yields can boost returns in down markets, so comparing dividend yields between funds is also important. Finally, looking at the inception date of a fund can give you insight into how it has performed over time and how it has navigated bull and bear markets.

S&P 500 Index Funds:

• Vanguard 500 Index Fund - Admiral Shares (VFIAX)
• Schwab S&P 500 Index Fund (SWPPX)
• Fidelity Zero Large Cap Index (FNILX)
• Fidelity 500 Index Fund (FXAIX)
• T. Rowe Price Equity Index 500 Fund (PREIX)

S&P 500 ETFs:

• Vanguard S&P 500 ETF (VOO)
• SPDR S&P 500 ETF Trust (SPY)
• IShares Core S&P 500 ETF (IVV)

How to choose an S&P 500 index fund

There are a few key things to consider when choosing an S&P 500 index fund. Here are some essential criteria to help you make an informed decision:

• Expense Ratio: Expense ratios are the annual fees charged by the fund, expressed as a percentage of your investment. Lower expense ratios mean more of your money goes towards growing your investment. When comparing funds, look for those with expense ratios of 0.1% or less, as recommended by Morningstar's Alex Bryan. Vanguard, Fidelity, and Schwab are known for their low-cost funds.
• Tracking Error: This metric indicates how closely the fund's performance mirrors the S&P 500 index. While some deviation is expected due to fees and other factors, the tracking error should ideally be close to the fund's expense ratio. You can find this information on Morningstar.com or by comparing the fund's performance to the benchmark index on Yahoo Finance or Google Finance.
• Tax Efficiency: Exchange-traded funds (ETFs) are generally considered more tax-efficient than mutual funds. This is because mutual funds tend to have taxable capital gains distributions at the end of the year, whereas ETFs do not. You can compare the pre-tax and after-tax returns of a fund on Morningstar.com under the "tax" tab.
• Parent Company: The company offering the index fund can impact the fees you pay. For example, Vanguard is known for passing on cost savings to its investors. On the other hand, for-profit companies like Fidelity need to consider their shareholders, which may result in slightly higher fees. However, a company like Fidelity may be able to offer more personalised investment advice.
• Minimum Investment: Index funds cater to different types of investors, from individual investors to institutional investors. Some funds have minimum investment requirements, while others do not. For example, the iShares Core S&P 500 Index (IVV) and the Vanguard 500 ETF (VOO) have no minimum investment requirements. In contrast, Fidelity's Spartan 500 Index (FUSEX) has a minimum investment of $2,500.
• Performance and Track Record: It is essential to evaluate the fund's long-term performance and track record. Funds with longer histories, such as those with inception dates of 2010 or earlier, can provide insight into how they have capitalised on bull markets and mitigated losses during bear markets.
• Diversification: While all S&P 500 index funds provide exposure to a diverse range of large-cap U.S. companies, some funds take a more complex approach. For example, the Invesco Equally-Weighted S&P 500 (VADAX) spreads your investment equally across all 500 components of the index, rather than weighting them by market value. This can result in greater diversification.
• Liquidity: Consider the liquidity of the fund, which refers to how easily you can buy or sell your investment. ETFs are generally more liquid than mutual funds as they trade throughout the day like stocks. Within ETFs, some have higher daily trading volumes and tighter bid-ask spreads, making them more liquid.

By screening funds based on these criteria, you can narrow down your choices and make a well-informed decision about which S&P 500 index fund best aligns with your investment goals and preferences.

Why are S&P 500 index funds popular?

S&P 500 index funds are popular investment vehicles for several reasons. Here are some key factors contributing to their popularity:

Diversification and Reduced Risk:

S&P 500 index funds offer instant diversification by providing exposure to 500 of the largest U.S. companies across various industries and sectors. This diversification helps reduce the risk associated with investing in individual stocks, as investors don't risk losing their money if a single company collapses. While the potential for astronomical returns from picking individual stocks may be lower, index funds provide a more stable and diversified investment option.

Low Costs and Passive Management:

Index funds, including S&P 500 funds, are passively managed, meaning there are no active fund managers trying to beat the market. As a result, they have lower expense ratios and investment management fees compared to actively managed funds. This passive management structure leads to reduced costs for investors, making S&P 500 index funds an attractive option for those seeking long-term investments with minimal fees.

Historical Performance and Profitability:

Historically, the S&P 500 index has delivered solid returns, with an average annual return of around 9% to 10%. Despite short-term fluctuations and losses during economic downturns, the S&P 500 has a strong track record of rebounding and delivering profits over the long term. A 20-year investment in the S&P 500 has never resulted in a loss, making it a reliable choice for investors.

Accessibility and Ease of Use:

S&P 500 index funds are easily accessible to investors, with many funds having no minimum investment requirements or relatively low minimums. This makes them attractive to beginner investors who are just starting to build their investment portfolios. Additionally, the passive nature of index funds means that investors don't need to actively pick and choose investments, simplifying the investment process.

Long-Term Wealth Building:

S&P 500 index funds are designed for long-term investing, and their performance tends to improve over time. The companies in the S&P 500 are subject to stringent listing criteria, ensuring that they are profitable and well-established. This makes S&P 500 funds a reliable option for investors seeking to build wealth over the long term, especially for retirement planning.

How to invest in an S&P 500 index fund

The S&P 500 is a stock market index composed of about 500 publicly traded companies. You cannot invest directly in the index itself, but you can buy an S&P 500 index fund or ETF. Index funds typically carry less risk than individual stocks. Here's how to invest in an S&P 500 index fund:

Open a brokerage account

Before you can start investing, you'll need to open a brokerage account. You can use the money deposited into this account to purchase S&P 500 stocks or funds, which will then be held within that account.

Choose an S&P 500 index fund

When choosing an S&P 500 index fund, consider the following:

• Expense ratio: Index funds are passively managed, so expense ratios—the fees you pay for the fund's upkeep—are generally low. However, as all S&P 500 index funds perform very similarly, it's important to opt for a fund with a low expense ratio.
• Minimum investment: Different funds have different investment minimums for taxable investment accounts and IRAs. Make sure the fund you choose aligns with the amount you have to invest initially and that you can afford to purchase more shares as needed.
• Dividend yield: Compare the dividend yield of different S&P 500 index funds, as dividends can boost returns in down markets.
• Inception date: If you want to see a track record of a fund's performance, pay attention to its inception date. Funds with longer histories can give you an idea of how the fund has performed in bull and bear markets.

Make your trades

Once you've chosen a fund, use your brokerage account to place your trades. Specify the number of shares or the dollar amount you want to invest.

Monitor and rebalance your investments

Keep an eye on your investment and review it periodically to ensure your portfolio remains diversified. The S&P 500 is a broad index, so rebalance your holdings if necessary to maintain your desired asset allocation.

Consider the alternatives

You could also choose to invest in an S&P 500 ETF or buy individual stocks from companies in the S&P 500. ETFs can be bought and sold throughout the day like stocks, whereas index funds can only be bought and sold at a set price point at the end of each trading day. Buying individual stocks will require more research and a deeper understanding of the companies involved.

Frequently asked questions