Standard & Poor’s 500 index funds are among today’s most popular investments — and it’s little wonder why. The S&P 500 index on which these funds are based has returned an average of about 10 percent annually over time and represents hundreds of America’s best companies. With an S&P 500 index fund you own the market, instead of trying to beat it.
In fact, legendary investor Warren Buffett has long advised investors . So if you’re considering one for your portfolio, here’s what you’ll need to know to get started.
Index funds explained
An index fund is a type of investment fund – either a mutual fund or an ETF – that is based on an index. An index is a preset collection of stocks, and an index fund merely mimics the composition of the stocks in the index, rather than trying to pick which stocks will outperform. So an index fund is a passively managed investment, only adjusting its holdings when the underlying index changes.
An index fund is typically created around a specific theme. For example, there are indexes for companies based on their geographic location (such as the U.S.), their size (large companies, as in the S&P 500), their sector (such as semiconductors or healthcare), or whether they pay dividends. An index might also consist of only bonds, or only bonds of a certain quality and duration.
How to invest in an S&P 500 index fund
It’s surprisingly easy to buy an S&P 500 fund. You can set up your account to buy the index fund on autopilot, so you’ll almost never have to monitor the account, or you can enter your trades manually.
1. Find your S&P 500 index fund
It’s actually easy to find an S&P 500 index fund, even if you’re just starting to invest.
Part of the beauty of index funds is that an index fund will have exactly the same stocks and weightings as another fund based on the same index. In that sense, it would be like choosing among five McDonald’s restaurants serving exactly the same food: which one would you go with? You’d probably select the restaurant with the lowest price, and it’s usually the same with index funds.
Here are two key criteria for selecting your fund:
- Expense ratio: To determine whether a fund is inexpensive, you’ll want to look at its expense ratio. That’s the cost that the fund manager will charge you over the course of the year to manage the fund.
- Sales load: If you’re investing in mutual funds, you’ll also want to see if the fund manager charges you a sales load, which is a fancy name for a sales commission. You’ll want to avoid this kind of expense entirely, particularly when buying an index fund. ETFs don’t charge a sales load.
S&P 500 index funds have some of the lowest expense ratios on the market. Index investing is already less expensive than almost any other kind of investing, even if you don’t select the cheapest fund. Many S&P 500 index funds charge less than 0.10 percent annually. In other words, at that rate you’ll pay only $10 annually for every $10,000 you have invested in the fund.
Some funds are even less expensive than that. Here are , including one that’s completely free, as well as some other top index funds.
In investing, paying more doesn’t always translate into better returns. In fact, the relationship between fees and returns is often reversed. Since these funds are largely the same, your choice is not a “make or break” decision – you can expect to get the performance of the index, whatever that is, minus the expense ratio or any fees you’re paying. So costs are an important consideration here.
Select your fund and note its ticker symbol, an alphabetical code of three to five letters.
2. Go to your investing account or open a new one
After you’ve selected your index fund, you’ll want to access your investing account, whether it’s a 401(k), an IRA or a regular taxable brokerage account. These accounts give you the ability to purchase mutual funds or ETFs, and you may even be able to buy stocks and bonds later, if you choose to do so.
If you don’t have an account, you’ll need to open one, which you can do in 15 minutes or less. You’ll want one that matches the kind of investments you’re planning to make. If you’re buying a mutual fund, then try to find a broker that allows you to trade your mutual fund without a transaction fee. If you’re buying an ETF, look for a broker that offers ETFs without commissions, a practice that has become the norm.
The best brokers offer thousands of ETFs and mutual funds without a trading fee. Here is Bankrate’s list of best brokers for beginners.
3. Determine how much you can afford to invest
You don’t have to be wealthy to begin investing, but you should have a plan. And that plan begins with figuring out how much you’re able to invest. You’ll want to add money regularly to the account and aim to hold it there for at least three to five years to allow the market enough time to rise and recover from any major downturns.
The less you’re able to invest, the more important it is to find a broker that offers you low fees, because that’s money that could otherwise go into your investments.
Once you’ve figured out how much you can invest, move that money to your brokerage account. Then set up your account to regularly transfer a desired amount each week or month from your bank. Or you can set up your 401(k) account to move money from each paycheck.
4. Buy the index fund
Once you know the S&P index fund you want to buy and how much you’re able to invest, go to your broker’s website and set up the trade.
Stick to the broker’s easy trade entry form, which often appears at the bottom of the screen. Input the fund’s ticker symbol and how many shares you’d like to buy, based on how much money you’ve put into the account.
If you’re able to move money into the brokerage account regularly, many brokers allow you to set up an investing schedule to buy an index fund on a recurring basis. This is a great option for investors who don’t want to remember to place a regular trade. You can set it and forget it.
As a result, you’ll be able to take advantage of the benefits of dollar-cost averaging, which can help you reduce risk and increase your returns.
What is the S&P 500?
While there can be almost any number of indexes, the most famous ones are based on the Dow Jones Industrial Average, the Standard & Poor’s 500 and the Nasdaq 100.
Of these, the S&P 500 Index has come to be seen as the bellwether for the American stock market. It contains about 500 of the largest companies in the United States, and when investors talk about “beating the market,” the S&P 500 is often considered the benchmark.
In contrast, the Dow Jones Industrials contains just 30 companies, while the Nasdaq 100 contains about 100 companies. While the holdings of these indexes do overlap, the S&P 500 contains the widest variety of companies across industries and is the most broadly diversified of those three indexes.
Why do investors like S&P 500 index funds?
S&P 500 index funds have become incredibly popular with investors, and the reasons are simple:
- Own many companies: These funds allow you to hold a stake in hundreds of stocks, even if you own just one share of the index fund.
- Diversification: This broad collection of companies means you lower your risk through diversification. The poor performance of one company won’t hurt you as much when you own many companies.
- Low cost: Index funds tend to be low cost (low expense ratios) because they’re passively managed, rather than actively managed. As a result, more of your hard earned dollars are invested instead of paid to fund managers as fees.
- Solid performance: Your returns will effectively equal the performance of the S&P 500, which has historically been about 10 percent annually on average over long periods.
- Easy to buy: It’s much simpler to invest in index funds than it is to buy individual stocks, because it requires little time and no investing expertise.
These are the biggest reasons that investors have turned to the S&P 500 in droves.
Is an S&P 500 index fund a good investment?
As long as your time horizon is three to five years or longer, an S&P 500 index fund could be a good addition to your portfolio. However, any investment can produce poor returns if it’s purchased at overvalued prices. But that hasn’t proven to be an issue for these funds, with investors enjoying about 10 percent annual returns on average over long time periods.
Consider buying into the fund over a period of time using a method known as dollar-cost averaging. By doing this, you’re spreading out buy points and avoiding the practice of “timing the market.” This approach can help you take advantage of any market downturns that happen on occasion.
Bottom line
Buying an S&P 500 index fund can be a wise decision for your portfolio, and that’s one reason that Warren Buffett has consistently recommended it to investors. It’s easy to find a low-cost fund and set up a brokerage account, even if you only have basic knowledge of what to do. Then you’ll be able to enjoy the solid performance of the S&P 500 over time.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
FAQs
If you invested $100 in the S&P 500 at the beginning of 1930, you would have about $574,655.93 at the end of 2023, assuming you reinvested all dividends. This is a return on investment of 574,555.93%, or 9.75% per year.
How do I buy a S&P 500 index fund? ›
How to Invest in the S&P 500 Index
- Open a Brokerage Account. If you want to invest in the S&P 500, you'll first need a brokerage account. ...
- Choose Between Mutual Funds or ETFs. You can buy S&P 500 index funds as either mutual funds or ETFs. ...
- Pick Your Favorite S&P 500 Fund. ...
- Enter Your Trade. ...
- You're an Index Fund Owner!
If you invested $100 in the S&P 500 at the beginning of 1930, you would have about $574,655.93 at the end of 2023, assuming you reinvested all dividends. This is a return on investment of 574,555.93%, or 9.75% per year.
What is the minimum investment in S&P 500 index fund? ›
Schwab S&P 500 Index Fund (SWPPX)
The $0 investment minimum for all account types helps make SWPPX a top consideration for earlier-stage investors looking to access large-cap holdings without the stress of choosing individual stocks.
How many S&P 500 index funds should I own? ›
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at. Rather, you should consider the number of different sources of risk you are getting with those ETFs.
Can I buy 100 dollars of S&P 500? ›
In other words, if you invest $100 in the SPDR S&P 500 ETF Trust (SPY 0.08%), you'll own a tiny portion of all 500-plus companies that are in the S&P 500 Index. You get instant diversification and an investment with a long history of making money for anyone who can hold for a decade or longer. It's also simple to do.
How should a beginner invest in the S&P 500? ›
Let's take a look at how a new investor can start their own positions in the S&P 500 in as little as five steps:
- Come Up With A Strategy.
- Open An Account With A Brokerage.
- Research Stocks On The S&P 500.
- Invest In Individual Stocks & Funds.
- Exercise Patience.
With that, you could expect your $10,000 investment to grow to $34,000 in 20 years.
How much would $1,000 invested in S&P 500? ›
Say you invest $1,000 and earn an annualized return of 4%. A year later, your investment would have grown to $1,040 which is your original $1,000 investment plus four percent. In year two, you'd earn 4% on the entire total, not just the principal balance of $1,000. By the end of the year, you'd have $1,081.60.
What is the value in 5 years of $1,000 invested today? ›
Formula and Calculation of Future Value
For example, assume a $1,000 investment is held for five years in a savings account with 10% simple interest paid annually. In this case, the FV of the $1,000 initial investment is $1,000 × [1 + (0.10 x 5)], or $1,500.
Buying an S&P 500 Fund or ETF. If you want an inexpensive way to invest in S&P 500 ETFs, you can gain exposure through discount brokers. These financial professionals offer commission-free trading on all passive ETF products. But keep in mind that some brokers may impose minimum investment requirements.
Which S&P 500 fund is best? ›
Best S&P 500 index funds
- Fidelity ZERO Large Cap Index (FNILX) ...
- Vanguard S&P 500 ETF (VOO) ...
- SPDR S&P 500 ETF Trust (SPY) ...
- iShares Core S&P 500 ETF (IVV) ...
- Schwab S&P 500 Index Fund (SWPPX) ...
- Shelton NASDAQ-100 Index Direct (NASDX) ...
- Invesco QQQ Trust ETF (QQQ) ...
- Vanguard Russell 2000 ETF (VTWO)
You can't invest in the index itself, but you can buy individual stocks from companies included in it or get an S&P 500 index fund, mutual fund, or exchange-traded fund (ETF).
How much will my money grow in S&P 500? ›
The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor's 500® (S&P 500®) for the 10 years ending December 31st 2022, had an annual compounded rate of return of 12.6%, including reinvestment of dividends.
How much would $10000 invested in the S&P 500 in 1980 be worth today? ›
Assuming an expense ratio of 0.1% on your index fund (you can find even lower costs now), this means that a $10,000 investment would have turned into just over $760,000 as of Feb.
Is S&P 500 safe long term? ›
History shows us that investing in an S&P 500 index fund -- a fund that tracks the S&P 500's performance as closely as possible -- is remarkably safe, regardless of timing. The S&P 500 has never produced a loss over a 20-year holding period.
How much would $100 invested in the S&P 500 in 1980 be worth today? ›
S&P 500: $100 in 1980 → $11,106.63 in 2023
This lump-sum investment beats inflation during this period for an inflation-adjusted return of about 2,932.07% cumulatively, or 8.24% per year. If you used dollar-cost averaging (monthly) instead of a lump-sum investment, you'd have $9,552.94.
Will the S&P 500 ever reach $10,000? ›
The S&P 500 could approach or exceed the 10,000 level by the early to mid-2030s. Many investors take it as a given that—since returns on the S&P 500 have been strong for 10-plus years—stocks are expensive and over-owned.
What is the best way to invest in the S&P 500? ›
S&P 500 funds offer broad exposure to the economy
Plenty of advisors like ETFs because of the low fees. “By far the easiest way to invest in the S&P 500 is an index ETF,” said David J. Haas, a financial advisor at Cereus Financial.
Can I invest $50 dollars in S&P 500? ›
If you are purchasing an S&P 500 index fund:
If your index fund has no minimum (more common), then you can usually purchase in any dollar amount. If your index fund has a minimum (less common), then you have to purchase at least the minimum amount.
It's never a good idea to place all your savings in any single investment, even one with as much appeal as an S&P 500 index fund.
How long should I invest in S&P 500? ›
Regardless of where you invest, it's wise to keep a long-term outlook. The market could be shaky over the coming months or even years. But if you invest in an S&P 500 ETF and hold that investment for at least a couple of decades, you're almost guaranteed to make money.
Can I live off the interest of 1 million dollars? ›
The historical S&P average annualized returns have been 9.2%. So investing $1,000,000 in the stock market will get you the equivalent of $96,352 in interest in a year. This is enough to live on for most people.
Can I retire on $300000? ›
In most cases $300,000 is simply not enough money on which to retire early. If you retire at age 60, you will have to live on your $15,000 drawdown and nothing more. This is close to the $12,760 poverty line for an individual and translates into a monthly income of about $1,250 per month.
Is it possible to save $1 million dollars in 20 years? ›
If you wait until retirement is 20 years away, you will need to save $1,382 per month to hit the million-dollar mark, assuming a 10% return. At 6% you will need to save $2,195 per month!
What if I invested $100 in S&P 500 in 1990? ›
S&P 500: $100 in 1990 → $2,391.06 in 2023
This is a return on investment of 2,291.06%, or 10.07% per year. This lump-sum investment beats inflation during this period for an inflation-adjusted return of about 935.37% cumulatively, or 7.32% per year.
How much does the S&P 500 pay out? ›
S&P 500 Dividend Yield is at 1.74%, compared to 1.82% last month and 1.27% last year.
Can you buy S&P 500 Wealth simple? ›
You can invest in multiple index funds, including the S&P 500, as easy as you can invest in a single index fund.
How much is $100 at 10% interest at the end of each year forever worth today? ›
Present value of perpetuity:
So, a $100 at the end of each year forever is worth $1,000 in today's terms.
What is the future value of $100 invested at 10 simple interest for 1 year? ›
How much will there be in one year? The answer is $110 (FV). This $110 is equal to the original principal of $100 plus $10 in interest. $110 is the future value of $100 invested for one year at 10%, meaning that $100 today is worth $110 in one year, given that the interest rate is 10%.
If you invest $10,000 today at 10% interest, how much will you have in 10 years? Summary: The future value of the investment of $10000 after 10 years at 10% will be $ 25940.
Why not put all your money in S&P 500? ›
Invest Across Asset Classes
Investing only in the S&P 500 limits your portfolio to stocks, which can be a risky decision during major market crashes. Holding bonds, cash, real estate, and other assets can help to limit your risk during these periods.
Can you live off S&P 500 returns? ›
When most people think about average market returns, those are the commonly cited numbers that they expect to achieve. At an 8% rate of return, $100,000 would turn into $1,000,000 after 30 years. If you have 30 years and $100,000, then there's a good chance that the S&P 500 can make you a millionaire retiree.
What are the cons of investing in S&P 500? ›
The main drawback to the S&P 500 is that the index gives higher weights to companies with more market capitalization. The stock prices for Apple and Microsoft have a much greater influence on the index than a company with a lower market cap.
Are target funds better than S&P 500? ›
In bull markets, index funds that track the S&P 500 tend to outperform target-date funds. However, during times of high volatility, equity index funds will generally lose more in value than target-date funds, which are more conservative.
What is the safest index fund? ›
1. Vanguard S&P 500 ETF (VOO 0.04%) Legendary investor Warren Buffett has said that the best investment the average American can make is a low-cost S&P 500 index fund like the Vanguard S&P 500 ETF.
What is the highest S&P return? ›
December 29, 2021: The S&P 500 index closed at a record high of 4793.06. As of April 19th, 2023 this record all time high still stands.
Is it still a good idea to invest in S&P 500? ›
But the good news is that historically, there's never been a bad time to invest in the S&P 500. Research and analytics firm Crestmont Research examined the rolling 20-year total returns of the S&P 500 since 1900 and found that all 103 of those years (from 1919 to 2022) produced positive returns.
What is the average return of the S&P 500? ›
Basic Info. S&P 500 1 Year Return is at -9.29%, compared to -9.23% last month and 14.03% last year. This is lower than the long term average of 6.33%. The S&P 500 1 Year Return is the investment return received for a 1 year period, excluding dividends, when holding the S&P 500 index.
Can anyone buy an S&P 500 index fund? ›
Nearly all major brokerages and fund companies now offer some type of S&P 500 fund. Investors may access these funds through financial advisors, full-service brokers, or discount brokers.
The best way to invest in the S&P 500 is to buy exchange-traded funds (ETFs) or index funds that track the index. There are differences between these two approaches that we'll examine below, but in either case, these funds offer extremely low costs and superior diversification.
How do you qualify for S&P 500? ›
Requirements to be added to the index include:
- Market capitalization must be greater than or equal to US$12.7 billion.
- Annual dollar value traded to float-adjusted market capitalization is greater than 0.75.
- Minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date.
The index is widely considered a barometer of the U.S. large-cap equity market. Investors may want to consider index funds offered by Fidelity, Schwab, Vanguard, and State Street. State Street has a viable ETF option that tracks the performance of the S&P 500.
How do I start an index fund? ›
Buy shares of that index fund.
- Pick an index. There are hundreds of different indexes you can track using index funds. ...
- Choose the right fund for your index. Once you've chosen an index, you can generally find at least one index fund that tracks it. ...
- Buy index fund shares. ...
- 4 index funds to get you started.
But it's important to note that the S&P 500 index itself does not pay dividends—the companies in the index do. An investor has to buy shares of the companies themselves or of index funds in order to receive dividends. “The S&P itself does not pay a dividend,” explains Titan investment manager Christopher Seifel.
How do I put money in an index fund? ›
In order to purchase shares of an index fund, you'll need to do so from an investment account. You can then open an investment account, such as a traditional brokerage account or a Roth IRA, through the brokerage you picked in step 3. You can then buy the fund from that account.
