S&P 500 Index Funds: Best Options and How to Invest

Few financial products have done more to simplify long-term investing than the S&P 500 index fund. Instead of picking individual stocks or paying high fees for active management, you can own a slice of 500 of the largest U.S. companies in one low-cost purchase. This guide walks through how these funds work, what returns to expect, which fund to choose, and how to make your first investment — without the jargon.

Average annual return (since 1957): ~10% before inflation · 10‑year annualized return (2024): ~12.5% · Number of companies tracked: 500 · Lowest expense ratio among top ETFs: 0.03% · Largest sector weight: Technology (~28%)

Here are the essential facts about the S&P 500 index, including its composition and historical return profile.

What Is an S&P 500 Index Fund and How Does It Work?

How index funds track the S&P 500

• An index fund is a type of mutual fund or ETF that aims to replicate the performance of a specific index (Investor.gov (U.S. securities regulator)).
• The S&P 500 index includes 500 of the largest publicly traded U.S. companies.
• Index funds typically have lower expense ratios than actively managed funds (Fidelity (brokerage giant)).
• Investors buy shares of the fund, which in turn holds the underlying stocks in the same proportion as the index.

Key features of an S&P 500 index fund

• You cannot buy the S&P 500 index directly; investors buy a fund that mirrors it (State Street Global Advisors (index creator)).
• Funds are generally used as a passive investment strategy (Vanguard (leading fund provider)).
• The S&P 500 represents the U.S. large-cap stock universe and captures roughly 80% of total U.S. market capitalization (Morningstar (investment research firm)).

Bottom line: An S&P 500 index fund is the simplest way to own a broadly diversified basket of America’s largest companies. For beginners, it removes stock-picking guesswork and keeps costs near zero.

The implication: the core mechanism is straightforward — buy the fund, own the market — and the real work is simply deciding to start.

Are S&P 500 Index Funds a Good Investment?

Historical performance and long‑term returns

• Over long periods (15+ years) the S&P 500 has returned ~10% annually (Investor.gov (U.S. securities regulator)).
• They are considered a core holding for many retirement portfolios.

Risks and lost decades

• There have been periods of negative returns over 10 years (U.S. News (financial publisher)).
• Index funds are diversified and reduce individual stock risk.

The trade-off: you ride every market downturn alongside the upswings. The 2000‑2009 lost decade saw the S&P 500 deliver a negative total return of about -9.1% over the full period (Navy Federal Credit Union (military-focused institution)). That means investors who bought at the peak in 2000 had to wait until 2013 just to break even.

What Is the 10‑Year Return on the S&P 500 and Has It Ever Lost Money Over a Decade?

Recent 10‑year annualized return

• As of mid‑2024, the 10‑year annualized return is approximately 12.5% (U.S. News (financial publisher)).
• Dollar‑cost averaging can mitigate timing risk.

The 2000‑2009 lost decade example

• From 2000 to 2009 the S&P 500 had a negative cumulative total return of about -9.1% (Navy Federal Credit Union (military-focused institution)).
• Investing at market peaks can lead to lower returns over the next decade.

What this means: a 10-year holding period does not guarantee a positive return. The index has historically always recovered and gone on to new highs, but patience is essential. For anyone investing with a horizon shorter than 15 years, a mix of bonds may be wiser.

Which Is the Best S&P 500 Index Fund?

Criteria for best: fees, tracking error, liquidity

• For many beginners, low expense ratios, several years of operation, and substantial assets under management are recommended selection criteria (NerdWallet (personal finance resource)).
• Morningstar says the cheapest fund is usually the best-performing fund when funds are otherwise identical (Morningstar (investment research firm)).

Top low‑cost options: VOO, IVV, SPY, SWPPX

Four funds dominate the market. The table below shows the key differences.

The pattern: expense ratios cluster near 0.03%, but SPY is slightly pricier because it is the oldest and most heavily traded. For a long-term buy-and-hold investor, VOO or IVV are nearly indistinguishable. SWPPX, offered by Schwab, is a mutual fund with an even lower fee of 0.02% (Charles Schwab (discount broker)).

The catch: picking the absolute cheapest fund matters less than simply choosing any low-cost option and sticking with it.

How to Invest in S&P 500 for Beginners

1. Choose a brokerage account
   • Open a brokerage account with Vanguard, Fidelity, Schwab, or a robo‑advisor (State Street Global Advisors (index creator)).
   • Many retirement accounts, including 401(k)s and IRAs, may already offer access to S&P 500 funds (Navy Federal Credit Union).
2. Select an S&P 500 index fund
   • ETFs trade like stocks; mutual funds can be purchased directly (Fidelity (brokerage giant)).
   • Many brokers allow fractional shares, making it easy to start with small amounts.
3. Place your first order
   • Set up automatic recurring investments to dollar‑cost average (Navy Federal Credit Union (military-focused institution)).
   • You can start with as little as $1 through fractional shares at most major brokers.

The catch: buying an ETF requires a brokerage account; mutual funds may have minimums (often $0–$1,000). Check the fund’s prospectus before committing.

The pattern: the tradeoffs are real but manageable for anyone with a long enough horizon and the discipline to hold steady.

Timeline Signal

Key moments in the history of the S&P 500 index highlight its resilience and the occasional severe downturn.

What this means: even severe downturns have been followed by full recoveries, reinforcing the case for a long-term holding strategy. For those looking to enhance their living space, a TV stand with fireplace can offer both functionality and ambiance.

What’s Confirmed and What’s Unclear

Confirmed facts

• S&P 500 has historically returned ~10% annually over long holding periods (Investor.gov (U.S. securities regulator)).
• Index funds track the index with very low fees (Fidelity).
• There have been 10‑year periods with negative total returns (Navy Federal Credit Union).

What’s unclear

• Whether future 10‑year returns will match historical averages.
• Whether current high valuations signal a coming period of lower returns.
• Impact of future economic or geopolitical events on the index.

The implication: the historical record is well established, but the future always carries real uncertainty that no data set can eliminate.

Expert Perspectives

“A low-cost S&P 500 index fund is the best investment for most people who don’t have the time or expertise to pick individual stocks.”

— Warren Buffett, annual shareholder letter

“Index funds are a type of investment company that aims to match the performance of a specific market benchmark — like the S&P 500 — as closely as possible.”

— U.S. Securities and Exchange Commission (Investor.gov)

The evidence is clear: S&P 500 index funds offer the most reliable path to long-term wealth for ordinary investors. But the discipline to hold through downturns is the real test. For a beginner in the U.S. market with a 20-year horizon, the choice is simple: pick VOO or SWPPX, set up automatic contributions, and stay the course. Anything else is just noise.

Frequently asked questions