An S&P 500 index fund tracks 500 of the largest U.S. companies

An S&P 500 index fund is an investment fund that mirrors the S&P 500, a list of 500 large U.S. companies maintained by Standard & Poor's. When you own shares in the fund, you own a small piece of all 500 companies at once, rather than picking individual stocks. The fund's value rises and falls with the overall performance of those 500 companies combined.

The S&P 500 includes well-known names like Apple, Microsoft, Amazon, and Coca-Cola, but also thousands of smaller large-cap companies most people have never heard of. These are not small businesses—every company on the list has a market value of at least several billion dollars. The index is weighted by company size, so larger companies have more influence on the fund's performance than smaller ones.

Index funds charge lower fees than actively managed funds because they simply copy the index rather than paying managers to pick stocks. You can buy S&P 500 index funds through most brokerages, retirement accounts like 401(k)s and IRAs, or robo-advisors. Different providers offer their own versions—Vanguard, Fidelity, and Schwab all run S&P 500 index funds with slightly different expense ratios and minimum investments.

Key Takeaways

  • An S&P 500 index fund holds shares in 500 large U.S. companies and moves with their combined performance, giving you broad exposure to the U.S. stock market in one purchase.
  • The fund is weighted by company size, so Apple or Microsoft movements affect the fund more than smaller companies on the list.
  • Index funds charge lower fees than actively managed funds because they track a fixed list rather than requiring paid stock pickers.
  • You can hold S&P 500 index funds in taxable brokerage accounts, 401(k)s, IRAs, and other retirement accounts depending on your brokerage.

How the fund's value changes day to day

The S&P 500 index fund's price moves whenever the stock market opens. Each of the 500 companies has a stock price that changes based on buying and selling throughout the trading day. The fund's value is the combined value of all 500 holdings divided by the number of shares outstanding.

You do not need to do anything to keep the fund "up to date." The fund provider automatically holds the current 500 companies. When a company leaves the S&P 500 (because it has shrunk or been acquired), the fund provider removes it and adds the replacement company. This rebalancing happens a few times per year and is handled behind the scenes.

If you own the fund in a regular brokerage account, you may receive dividends—small cash payments that some of the 500 companies pay to shareholders. The fund can either send you the dividend or reinvest it to buy more shares. Most people choose reinvestment so the money stays in the fund and compounds over time.

Fees and costs you will encounter

Every S&P 500 index fund charges an expense ratio—an annual fee expressed as a percentage of your investment. A fund with a 0.03% expense ratio costs $3 per year for every $10,000 you invest. Vanguard and Fidelity typically charge between 0.03% and 0.04%. Some funds charge more; a few charge less. Over decades, even small differences in fees add up because the money saved on fees stays invested and compounds.

You may also pay a transaction fee when you buy or sell shares, though most major brokerages have eliminated these for index funds. Some brokerages charge a minimum investment to open an account, though many now allow you to start with $1 or $100. Check your specific brokerage's fee schedule before you invest.

Tax consequences depend on where you hold the fund. In a taxable brokerage account, you owe capital gains tax when you sell shares at a profit, and you owe tax on dividends each year. In a 401(k) or traditional IRA, you do not pay tax until you withdraw money in retirement. In a Roth IRA, you pay no tax on gains or withdrawals at all.

Why people use S&P 500 index funds instead of picking stocks

Most professional stock pickers do not beat the S&P 500 over long periods. Studies show that 80% to 90% of actively managed funds underperform the index after accounting for fees. An S&P 500 index fund guarantees you will match the index's performance minus a small fee, rather than betting on a manager to beat it.

Index funds also require far less time and knowledge than stock picking. You do not need to read financial statements, follow earnings reports, or make buy-and-sell decisions. You buy once and hold, which is simpler and less stressful for most people.

The diversification is automatic. Owning 500 companies means that if one company performs poorly, it has a small effect on your overall investment. If you owned five individual stocks and one crashed, you would lose much more.

How to buy an S&P 500 index fund

Open a brokerage account with a major provider like Vanguard, Fidelity, Charles Schwab, or a robo-advisor like Betterment or Wealthfront. You will need to provide your name, address, Social Security number, and banking information. The process usually takes 10 to 15 minutes online.

Once your account is open and funded, search for S&P 500 index funds by name or ticker symbol. Common tickers include VOO (Vanguard), FXAIX (Fidelity), and SPLG (Schwab). Compare the expense ratios and minimum investments, then place an order to buy shares. The order executes at the market close that day or the next trading day, depending on when you place it.

If you are investing through a 401(k) at work, your employer's plan likely offers one or more S&P 500 index funds as an investment choice. You select it during enrollment or through your plan's website. If you have an IRA, you can buy an S&P 500 index fund through any brokerage that offers IRAs.

The difference between S&P 500 index funds and other index funds

The S&P 500 tracks only large U.S. companies. A total stock market index fund includes large, mid-size, and small U.S. companies—roughly 3,500 stocks instead of 500. A total international index fund holds companies outside the U.S. An S&P 500 index fund is narrower than a total market fund but more focused on the most established companies.

Many people build a portfolio by combining an S&P 500 index fund with a total international index fund and a bond index fund. This spreads risk across U.S. stocks, foreign stocks, and bonds. Others simply hold a total stock market index fund, which includes the S&P 500 companies plus smaller ones.

The choice depends on your goals and risk tolerance. If you want simplicity and broad U.S. exposure, an S&P 500 index fund works well. If you want to include smaller companies or international stocks, you may combine it with other funds or choose a total market fund instead.

Frequently Asked Questions

Can I lose money in an S&P 500 index fund?

Yes. If the overall stock market declines, the fund's value falls. During the 2008 financial crisis, the S&P 500 lost about 37% of its value. However, historically it has recovered and reached new highs within a few years. The longer you hold the fund, the lower the risk of ending with a loss.

Do I get dividends from an S&P 500 index fund?

Yes, many of the 500 companies pay dividends. The fund collects these and either distributes them to you or reinvests them automatically. You can usually choose which option you prefer when you set up the fund. Reinvestment is common because it lets dividends compound over time.

What is the difference between an S&P 500 index fund and an S&P 500 ETF?

Both track the same 500 companies and charge similar fees. The main difference is how they trade. An index fund is priced once per day at market close. An ETF trades throughout the day like a stock, so the price changes minute by minute. For most long-term investors, this difference does not matter.

How much should I invest in an S&P 500 index fund?

That depends on your financial situation, goals, and time horizon. If you are saving for retirement decades away, you might invest heavily. If you need the money within five years, stocks are riskier. Consider speaking with a financial advisor about how much stock exposure fits your situation.

Can I hold an S&P 500 index fund in a retirement account?

Yes. Most 401(k)s, IRAs, and Roth IRAs offer S&P 500 index funds as an investment choice. Holding the fund in a retirement account means you do not pay capital gains tax each year, which lets your money compound faster than in a taxable account.