Key takeout
-
Investing in an S&P 500 index fund is an easy way to instantly expose hundreds of large US companies with just one investment vehicle.
-
All S&P 500 funds are fundamentally invested in the same stock, so choosing the “cheapest” (cheapest) is best.
-
To invest in index funds, you need a free securities account.
Standard & Poor’s 500 index fund is one of the most popular investments. The S&P 500 index on which these funds are based, averages around 10% annually over time, representing hundreds of America’s best companies. With S&P 500 index funds, you own the market rather than trying to beat it.
In fact, legendary investor Warren Buffett has long advised investors to buy and hold S&P 500 index funds. So, if you’re considering something for your portfolio, here’s what you need to know to get started.
What is an S&P 500 index fund?
An index mutual fund or ETF is an investment that includes a collection of all stocks that are part of a particular index. When you purchase an S&P 500 index fund, you purchase a small portion of your shares from all the companies in that index.
The sole purpose of the S&P 500 index fund is to mimic the composition and performance of the index. Helm does not have a fund manager to select the stocks to buy or sell. Reconciliation of holdings occurs only when the underlying index changes. And because they are passively managed investments, investors save a lot of money on management fees and other fees.
How to invest in S&P 500 index funds
Buying an S&P 500 fund is surprisingly easy. You can set up an account and purchase index funds with Autopilot. So you don’t have to monitor your account, and you can enter your transactions manually.
1. Find the S&P 500 index fund
Even if you’re just starting to invest, finding an S&P 500 index fund is easy.
Part of the beauty of index funds is that they have the exact same stocks and weights as another fund based on the same index. In that sense, it’s like choosing from five McDonald’s restaurants that serve the exact same food. Which do you go? You’ll probably choose a restaurant at the lowest price. It is usually the same as an index fund.
Below are two important criteria for choosing a fund:
- Cost Ratio: To determine whether a fund is cheap, you’ll want to look at its expense ratio. This is the cost that a fund manager charges customers throughout the year to manage the fund as a percentage of their investment in the fund.
- Sales Load: If you are investing in mutual funds, you will need to check if the fund manager will charge you for sales load. This is a flashy name for the Sales Committee. This type of expense should be avoided entirely, especially when purchasing index funds. ETFs do not charge sales loads.
The S&P 500 index fund has the lowest cost ratio on the market. Index investments are already cheaper than most other types of investments without choosing the cheapest fund. Many S&P 500 index funds charge less than 0.10% per year. In other words, at that rate, you’ll only pay $10 a year for every $10,000 you invest in the fund.
Some funds are even cheaper than that. This presents four of the best S&P 500 index funds, including the fully paid ones.
| Fund | Expense rate | Annual revenue for 5 years (as of 5/1/25) |
|---|---|---|
| Fidelity Zero Large Cap Index (fnilx) | 0% | 15.3% |
| Vanguard S&P 500 ETF (VOO) | 0.03% | 15.3% |
| SPDR S&P 500 ETF Trust (SPY) | 0.095% | 15.3% |
| Schwab S&P 500 Index Fund (SWPPX) | 0.02% | 15.3% |
With investments, more payments don’t always lead to better returns. In fact, the relationship between fees and returns is often reversed. The choice is not a “maker or break” decision, as these funds are roughly the same. Whatever that is, you can expect to get the performance of the index. Therefore, cost is an important consideration here.
Select the fund and note the ticker symbol, which is a 3-5 letter alphabet code.
2. Go to an investment account or open a new account
After selecting an index fund, you will need to access your investment account, such as a 401(k), IRA, or a regular taxable brokerage account. These accounts allow you to purchase mutual funds or ETFs. You can also buy stocks and bonds later if you choose to do so.
If you don’t have an account, you will need to open an account that can be done within 15 minutes. There are four steps to doing this.
- Choose your provider (see Bankrate’s best online brokers for mutual fund investment for choice including account minimums and many people including many no-commissioned mutual funds and ETFs).
- It provides some basic information (name, Social Security number, or tax).
- Select your account type (usually taxable brokerage account or IRA).
- Provide funds to your account (transfers directly from your bank account to your securities account).
3. Decide if you can afford to invest
You don’t have to be wealthy to start investing, but you should plan. And the plan starts with understanding how much you can invest. You aim to add money regularly to your account and hold it for at least 3-5 years, leaving enough time for the market to rise and recover from a major recession.
The less you invest, the more important it is to find a broker who will offer you a low fee, as it is the money that will likely enter your investment.
Once you know how much you can invest, you can transfer the money to your brokerage account. Then set up an account and transfer the desired amount from your bank regularly every week or month. Alternatively, you can set up a 401(k) account to move money from each salary.
4. Buy S&P 500 Index Fund
Once you know the S&P index fund you want to buy and the amount of investment you want to buy, it’s relatively easy to buy an index fund.
How does this work:
- Search for index funds: Find the S&P 500 index fund to buy on the broker’s website. I’ve discussed some common options previously.
- order: Please choose the number of shares or dollar amount you want to purchase. When purchasing an ETF, you may be able to choose between market orders and restricted orders.
- Retention and monitoring: Check your fund’s performance regularly, monthly or quarterly
You can also stick to the broker’s simple transaction entry form, which is often displayed at the bottom of the screen. Enter the fund’s ticker symbol and the number of shares you want to purchase based on the amount you put in your account.
If you can move your money regularly to your base account, many brokers can set up investment schedules to purchase index funds on a repeat basis. This is a great option for investors who don’t want to remember regular trading. You can set it and forget it.
As a result, you can take advantage of dollar cost averaging. This can reduce risk and increase returns.
Why do investors like S&P 500 index funds?
The S&P 500 index fund is very popular with investors, and the reason is simple.
- Ownership of many companies: These funds allow you to hold hundreds of shares, even if you only own one share of an index fund.
- Diversification: This wide-ranging collection means reducing risk through diversification. A decline in performance in one company won’t hurt you much if you own many companies.
- Low cost: Index funds tend to be low cost (meaning low cost) because they are passively managed rather than actively managed. As a result, much of your hard-earned dollars will be invested instead of being paid to the fund manager as a fee.
- Solid performance: Returns are effectively equal to the performance of the S&P 500. Historically, the S&P 500 has been around 10% per year for a period of about 10% per year.
- Easy to buy: It is much easier to invest in an index fund than to buy individual stocks. This is because there is little time and no investment expertise.
These are the biggest reasons why investors have turned their eye to the S&P 500 in large numbers.
Cons of S&P 500 Index Fund
S&P 500 index funds have several advantages that appeal to most long-term investors. However, it is important to acknowledge potential shortcomings. For example, the S&P 500 index fund is limited to large companies by design. This means that you will not be exposed to several market segments from the fund alone, including small caps, intermediary stocks, bonds, real estate, etc.
Furthermore, S&P 500’s funds are not fully diversified, making them susceptible to market volatility. If the stock market experiences a recession, these index funds do not protect investors from potential losses. This is why financial advisors often recommend bond and cash holdings as part of a larger investment strategy.
Risk aversion investors should also consider the relatively low dividend yields of S&P 500 index funds. They often pay dividends, but the yield may be lower than the yield on funds that focus on paying dividends.
Is the S&P 500 index fund a good investment?
As long as your time horizon is over 3-5 years, the S&P 500 index fund can be a good addition to your portfolio. However, investments can reduce returns if purchased at an overvalued price. However, it has not proven to be a problem with these funds. Investors enjoy an average annual return rate of approximately 10% over the long term.
The S&P 500 index fund may be the following good investment:
- Long-term, Buy and Hold Investor
- Investors who want to minimize fees
- People who can tolerate market volatility
- Investors looking for exposure to many US companies
If you’re looking for a low-cost investment with built-in diversification, the S&P 500 index fund might be a good choice. However, they are not completely diversified and should be excluded from investments like small caps and bonds.
Investing in S&P 500 index funds is ideal for most long-term investors. When you touch on the widely diversified portfolio of large US companies, you pay close to zero fees.
– Brian Baker, senior writer for CFA and Bankrate
Consider purchasing into the fund over a period of time using a method known as dollar cost averaging. By doing this, you are expanding your purchase points and avoiding the practice of “market timing.” This approach helps to take advantage of the occasional market recession.
FAQ
Conclusion
Buying an S&P 500 index fund can be a wise decision for your portfolio. This is one of the reasons Warren Buffett has consistently recommended it to investors. Even if you only have basic knowledge of what to do, it’s easy to find a low-cost fund and set up a securities account. Then, over time you can enjoy the solid performance of the S&P 500.
– Bankrate contributor Bob Hegele contributed to this article update.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Furthermore, investors recommend that past investment products performance is not a guarantee of future price increases.