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Investing in an S&P 500 index fund is an excellent way to put your money to work and gain diversified exposure to the top 500 companies in the United States.
In today’s post, we will take a look at what index funds exactly are and which S&P 500 index funds you should invest in.
What exactly are index funds?
An index fund is a type of mutual fund that is passively managed. Instead of actively managed mutual funds that try to outperform the total market, an index fund is passively managed only to replicate their benchmark. As the name implies, an S&P 500 index fund’s benchmark is just the S&P 500.
Because you cannot buy stock or invest in the S&P 500 itself, there are index funds ran by fund managers in which you can. The fund managers compile the same stocks as the S&P 500 to create their index fund, which results very similar performance.
Also, because index funds are passively managed, their expense ratios are extremely low.
You can find more about the S&P 500 by clicking here.
What are the pros of investing in an S&P 500 Index Fund?
- You gain exposure to the top 500 companies in the United States. Since its introduction in 1957, the nominal annual return rate has been around 9.8%. Nominal means excluding inflation.
- Minimal to no effort is required on your behalf. Because you are not stock picking or attempting to outperform the market, you can simply dollar cost average (DCA) by investing every time you get spare cash. Many brokerages these days even have a function that automatically withdraws and invests cash from your checking account.
- Less expenses/loss equals more money for you. If you were to buy and hold any S&P 500 index fund for 15-20 years, you would have come out profitable. As long as the U.S. economy continues to grow, buying and holding index funds is a winning strategy. In addition to this, expense ratios range anywhere from 0.015% to 0.09%, which is dirt cheap.
So what are the best S&P 500 Index Funds to invest in?
FXAIX – Fidelity 500 Index Fund
| Expense Ratio | 0.015% |
| Total Assets Under Management | 358 Billion Dollars |
| Fund Inception | 1988 |
| Minimum to Invest | $0 |
The first index fund I would like to recommend is from Fidelity. This fund is for everyone with a Fidelity account.
Fidelity is one of the most trusted brokerages with more than 4.5 assets under management. Throughout the past several years, they have drastically cut on fees and commissions, and have showed initiative to put customers first. Their index fund has the lowest expense ratio out of the three: 0.015%. This means that for every $10,000 you invest, you would only pay $1.50 per year. They also offer zero expense ratio funds, which have ZERO expense ratios.
This fund was incepted back in 1988 which gives it the longest track record out of the three.
As you can see from the image above, FXAIX has pretty much been spot on when it comes to tracking the S&P 500. You can barely see the purple overlap.
You can purchase FXAIX with a Fidelity account with as little as $1.
| Expense Ratio | 0.04% |
| Total Assets Under Management | 780 Billion Dollars |
| Fund Inception | 2000 |
| Minimum to Invest | $3,000 |
The second index fund we would like to recommend is from Vanguard and it’s for anyone with a Vanguard account.
Vanguard is one of the most recommended brokerages. They were the first to introduce low expense ratio funds which allowed retail investors to easily join the investing game. They have a unique company structure where the owners of the company are actually its investors. This allows the company to cut costs as much as possible and maximize profits for its investors.
They have had an amazing track record since 2000 with an extremely low expense ratio as well of 0.03%. It would only cost you $4 a year for every $10,000 you invest!
The only drawback to Vanguard’s index fund is its steep minimum investment of $3,000. Many don’t have $3,000 just lying around to invest, which would make this a dealbreaker. I would like to recommend Vanguard’s S&P 500 ETF which anyone can start investing for just $1.
As you can see from the image above, Vanguard’s performance has been spot on with its benchmark.
SWPPX – Schwab S&P 500 Index Fund
| Expense Ratio | 0.02% |
| Total Assets Under Management | 64 Billion Dollars |
| Fund Inception | 1997 |
| Minimum to Invest | $1 |
Last but certainly not least is the index fund from Schwab.
Schwab is another large brokerage in the financial industry. They have nearly 8 trillion assets under management and they’re the nation’s largest discount broker.
Their index fund was first incepted in 1997, which gives them over two decades of track history. Their expense ratio is also cheap at 0.02%. You would only have to pay $2 for every $10,000 you invested per year.
Needless to say, Schwab’s index fund performance has been spot on throughout the years. You can barely see the green and dark blue overlap (Please ignore the “Large Blend” lighter blue line as this is for a different category).
Conclusion
No matter which fund you choose to invest in, hold it for the long run and you will come out profitable.
It is worth mentioning that in order to avoid a transaction fee, you need to invest in the index fund of the company you already have a brokerage with. For example, if I have a Fidelity account but choose to invest in VFAIX, I will be charged a $75 transaction fee.
All three index funds are great, and you’ll be fine whichever one you choose to invest in.
Make sure you are also investing in international index funds and understand the reason you need to invest internationally.
Do you own any S&P 500 index funds? Which one do you think is the best?