The three main ways to own a piece of the S&P 500
You can own the S&P 500 through an index fund, an exchange-traded fund (ETF), or individual stocks. Most people use index funds or ETFs because they own all 500 companies at once with a single purchase, rather than buying each stock separately. The difference between the two is mainly how you buy them: index funds are bought directly from a fund company at the end of each trading day, while ETFs trade on a stock exchange throughout the day like individual stocks do.
You do not need to pick individual stocks to own the S&P 500. In fact, most professional investors recommend against it. An index fund or ETF that tracks the S&P 500 gives you the same result — ownership of all 500 companies — for a much lower cost and with far less work.
Key Takeaways
- Index funds and ETFs both let you own all 500 S&P 500 companies with one purchase, and most people choose one of these over buying individual stocks.
- You need a brokerage account (a regular taxable account or a retirement account like an IRA) to buy any of these investments.
- Common S&P 500 index funds include Vanguard's VOO, Fidelity's FXAIX, and Schwab's SWPPX; common ETFs include VOO, SPY, and IVV.
- Costs vary by fund, but most S&P 500 index funds and ETFs charge between 0.03% and 0.20% per year, meaning you pay $3 to $20 annually on every $10,000 invested.
- You can start with as little as one share, which costs between $300 and $500 depending on the fund, or you can set up automatic monthly purchases.
Opening a brokerage account
Before you can buy an index fund or ETF, you need an account at a brokerage firm. A brokerage is a company that holds your money and lets you buy and sell investments. Major brokerages include Fidelity, Vanguard, Charles Schwab, E-Trade, and Robinhood. Many banks also offer brokerage services. You can open an account online in about 15 minutes.
You have two main choices: a regular taxable account or a retirement account. A taxable brokerage account has no contribution limits and no rules about when you can withdraw money, but you pay taxes on any gains when you sell. A retirement account like a traditional IRA or Roth IRA has annual contribution limits (for 2024, the limit is $7,000 for most people under 50) but offers tax advantages. Many people use both: they max out their IRA first, then put additional money in a taxable account.
When you open an account, the brokerage will ask for your Social Security number, address, and employment information. They will also ask what your investment experience is and what your financial goals are. Answer honestly, but know that your answers do not restrict what you can buy — they are mainly for the brokerage's records.
Choosing between index funds and ETFs
Index funds and ETFs track the same 500 companies and charge similar fees, so the choice often comes down to how you like to buy. An index fund is priced once per day after the market closes, and you buy it directly from the fund company. An ETF trades throughout the day like a stock, so its price changes minute by minute. If you plan to buy once and hold for years, the difference does not matter much. If you like to check prices during the day or sell at a specific moment, an ETF gives you that control.
Index funds often have lower minimum investments. Many fund companies let you start with $1,000 or even $100 if you set up automatic monthly deposits. ETFs typically require you to buy at least one full share, which costs between $300 and $500 depending on the fund's current price.
One practical advantage of index funds: you can set up automatic monthly investments easily. With an ETF, you have to place a new buy order each month, though most brokerages now make this simple through automatic investment plans.
Popular S&P 500 funds and their costs
| Fund Name | Ticker | Type | Annual Cost | Minimum to Start |
|---|---|---|---|---|
| Vanguard S&P 500 ETF | VOO | ETF | 0.03% | One share (~$400) |
| Fidelity S&P 500 Index Fund | FXAIX | Index Fund | 0.015% | $1 |
| Schwab S&P 500 ETF | SWPPX | ETF | 0.03% | One share (~$400) |
| SPDR S&P 500 ETF | SPY | ETF | 0.09% | One share (~$450) |
| iShares Core S&P 500 ETF | IVV | ETF | 0.03% | One share (~$450) |
The annual cost is called an expense ratio. It is the percentage of your money the fund company charges each year to run the fund. On $10,000 invested, an expense ratio of 0.03% costs you $3 per year. On $100,000, it costs $30 per year. These costs are deducted automatically from your account, so you do not see a bill.
The difference between 0.03% and 0.20% sounds small, but it compounds over decades. On $50,000 invested over 30 years, paying 0.03% instead of 0.20% saves you roughly $10,000 to $15,000 in fees. For this reason, most people choose funds with expense ratios under 0.10%.
How to place your first purchase
Once your account is open and funded with money, buying is straightforward. Log into your brokerage account and search for the fund or ETF by its ticker symbol (for example, "VOO" or "FXAIX"). Click on it, enter the dollar amount or number of shares you want to buy, and confirm the order. For index funds, the order processes after the market closes that day. For ETFs, it processes immediately during market hours.
You will see a confirmation screen showing the price you paid and the number of shares you own. Keep this confirmation for your records. Your shares now appear in your account, and you own them until you sell.
Many brokerages also let you set up automatic investments, where a fixed amount of money (say, $500 per month) buys the fund automatically on a date you choose. This removes the need to remember to buy each month and is a common way people build long-term positions.
Understanding what you own and what happens next
When you buy an S&P 500 index fund or ETF, you own a tiny piece of all 500 companies in the index. You do not own the fund itself — you own shares of the fund, and each share represents an equal slice of all 500 companies. If the S&P 500 goes up 10%, your fund goes up 10%. If it goes down 5%, your fund goes down 5%.
You do not have to do anything after you buy. The fund automatically rebalances itself to stay aligned with the S&P 500 as companies are added or removed from the index. You will receive dividends (small cash payments from the companies in the index) automatically, which are usually reinvested to buy more shares unless you choose otherwise.
Most people hold S&P 500 funds for years or decades. The longer you hold, the more time your money has to grow and the less the short-term ups and downs matter. Selling before you need the money often costs you more in taxes and lost growth than it gains you.
Frequently Asked Questions
Can I buy S&P 500 funds through my employer's 401(k)?
Yes. Many 401(k) plans offer S&P 500 index funds as one of the investment choices. If your employer matches contributions, putting money into the 401(k) first usually makes sense because the match is immediate assistance programs. After you max out the match, you can decide whether to contribute more to the 401(k) or open an IRA or taxable account.
What is the difference between VOO and SPY?
Both track the S&P 500, but VOO (Vanguard) charges 0.03% per year while SPY (SPDR) charges 0.09%. Over 30 years, that difference adds up to thousands of dollars on a large investment. VOO is the lower-cost choice for most people. SPY is older and has higher trading volume, which some traders prefer, but for buy-and-hold investors, VOO or IVV are better choices.
Do I have to buy a whole share?
No. Most brokerages now let you buy fractional shares, meaning you can invest any dollar amount even if it does not equal a whole share. If VOO costs $400 per share and you have $100 to invest, you can buy 0.25 shares. This makes it much easier to start with small amounts or set up automatic monthly investments.
Will I owe taxes on my S&P 500 fund?
In a taxable account, yes. You owe taxes on dividends each year and on any gains when you sell. In a retirement account like an IRA or 401(k), you typically owe no taxes until you withdraw money in retirement. This is one reason many people prioritize retirement accounts first.
What if the market crashes after I buy?
Market downturns are normal and happen every few years. If you sell during a crash, you lock in losses. If you hold and keep buying (through automatic investments), you buy more shares at lower prices, which usually leads to larger gains when the market recovers. History shows that staying invested through downturns produces better results than trying to time the market.