What an S&P 500 index fund is and why people buy it

An S&P 500 index fund is a collection of stocks that mirrors the 500 largest publicly traded companies in the United States. When you buy a share of the fund, you own a tiny piece of all 500 companies at once — Apple, Microsoft, Coca-Cola, and hundreds of others. The fund's value rises and falls with the overall market, but you do not have to pick individual stocks or time your trades.

People buy index funds because they are simple, low-cost, and historically have returned about 10 percent per year over long periods, though past performance does not may provide future results. You pay a small annual fee (often between 0.03 and 0.20 percent) instead of paying a broker to pick stocks for you. The fund automatically rebalances when companies enter or leave the S&P 500, so you do not have to manage it.

Key Takeaways

  • You can buy S&P 500 index funds through a brokerage account — either a regular taxable account or a tax-advantaged account like a 401(k) or IRA.
  • The three largest fund providers are Vanguard, Fidelity, and Charles Schwab, each offering low-cost versions of the same index.
  • Opening an account takes 10 to 20 minutes online and requires your Social Security number, income information, and a bank account to fund it.
  • You can invest a lump sum or set up automatic monthly transfers, and you can hold the fund for decades without selling.
  • Fees vary by fund and brokerage, so comparing the annual expense ratio before you buy saves money over time.

Choosing a brokerage and account type

Your first decision is where to open an account. Vanguard, Fidelity, and Charles Schwab are the three largest brokerages and all offer S&P 500 index funds with expense ratios below 0.10 percent per year. Smaller brokerages like E*TRADE, TD Ameritrade, and Robinhood also offer index funds, though some charge higher fees or have account minimums.

Next, decide what type of account to use. A taxable brokerage account has no contribution limits and no rules about when you can withdraw money, but you pay taxes on dividends and gains each year. A 401(k) through your employer lets you contribute up to $23,500 per year (as of 2024) with pre-tax money, and you do not pay taxes until you withdraw in retirement. An IRA (Individual Retirement Account) lets you contribute up to $7,000 per year and offers tax breaks, but you cannot withdraw before age 59½ without a penalty. If your employer offers a 401(k) match, contribute enough to get the full match before opening an IRA — that is assistance programs.

Opening an account and funding it

Go to the brokerage website and click "Open an Account." You will enter your name, address, Social Security number, employment status, and annual income. The process takes 10 to 20 minutes. Most brokerages approve you instantly or within one business day.

Once approved, link a bank account to fund your brokerage account. You can transfer money by ACH (Automated Clearing House), which usually takes three to five business days. Some brokerages let you wire money for faster funding, though wire transfers may cost $10 to $25. Start with whatever amount you can afford — there is no minimum to buy most index funds, though some funds have $1,000 or $3,000 minimums.

Finding and buying the specific index fund

Once your account is funded, search for the S&P 500 index fund by its ticker symbol. The three most common are VOO (Vanguard S&P 500 ETF), FXAIX (Fidelity S&P 500 Index Fund), and SWPPX (Schwab S&P 500 Index Fund). All three track the same index and have expense ratios around 0.03 percent. If you are using a 401(k), your plan will offer one or two S&P 500 options — just pick the one with the lowest expense ratio.

Click the fund name in your brokerage account, enter the dollar amount or number of shares you want to buy, and confirm the order. The purchase settles the next business day. You now own a piece of the fund and will receive dividends (usually quarterly) that you can reinvest automatically or take as cash.

Understanding fees and expense ratios

The expense ratio is the annual percentage you pay to hold the fund. For S&P 500 index funds, this ranges from 0.03 percent (Vanguard, Fidelity, Schwab) to 0.20 percent or higher at some smaller brokerages. On a $10,000 investment, a 0.03 percent fee costs $3 per year, while a 0.20 percent fee costs $20. Over 30 years, that difference compounds significantly.

Some brokerages charge trading commissions (usually $5 to $10 per trade), though most major brokerages have eliminated these fees. Check the fund's prospectus or fact sheet on the brokerage website to confirm the expense ratio before you buy. Do not pay for financial advice or premium accounts unless you specifically want them — index funds do not require active management.

Holding the fund long-term and rebalancing

The core strategy with index funds is to buy and hold. Market downturns happen — sometimes the S&P 500 falls 20, 30, or even 50 percent — but historically it has recovered and reached new highs within a few years. Selling during a downturn locks in losses and means you miss the recovery. Most people who succeed with index funds do not check their balance more than once or twice a year.

If you have money in multiple types of accounts (a 401(k), an IRA, and a taxable account), rebalancing means adjusting how much you have in stocks versus bonds or other investments to match your target allocation. You do not need to rebalance an S&P 500 fund itself — the fund does that automatically. But if you are 60 percent stocks and 40 percent bonds and want to stay at that split, you might shift new contributions toward bonds until the ratio is right again.

What happens to dividends and when to sell

S&P 500 companies pay dividends (usually quarterly), and the fund distributes them to you. In a taxable account, you pay taxes on these dividends each year. In a 401(k) or IRA, you do not pay taxes until you withdraw. Most people set dividends to reinvest automatically, which means the cash buys more shares of the fund instead of sitting in your account.

You do not have to sell the fund unless you need the money. If you do sell, you will owe capital gains tax on the profit (the difference between what you paid and what it is worth now). In a taxable account, long-term gains (held more than one year) are taxed at a lower rate than short-term gains. In a 401(k) or traditional IRA, you do not pay tax when you sell — you pay tax when you withdraw the money in retirement.

Frequently Asked Questions

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

Theoretically, yes — if all 500 companies went bankrupt at once. Practically, no. The S&P 500 has existed since 1926 and has never gone to zero. It has fallen 50 percent or more in severe recessions, but it has always recovered. Holding for 20+ years significantly reduces the risk of ending with a loss.

How much money do I need to start?

Most S&P 500 index funds have no minimum, so you can start with $100 or $1,000. Some mutual fund versions have $1,000 or $3,000 minimums, but ETF versions (like VOO or FXAIX) let you buy one share at a time. Start with whatever you can afford and add more over time.

Should I buy an ETF or a mutual fund version of the S&P 500?

Both track the same index and have similar fees. ETFs (like VOO) trade like stocks and settle instantly. Mutual funds (like FXAIX) settle the next business day. For most people, the difference does not matter. Pick whichever your brokerage makes easiest to buy.

What if the market crashes right after I invest?

Market crashes are normal and happen roughly every 5 to 10 years. If you have a long time horizon (10+ years), a crash is actually an opportunity to buy more shares at lower prices. If you need the money within five years, index funds may not be the right choice — consider keeping that money in a savings account instead.

Do I need a financial advisor to buy an index fund?

No. Index funds are designed to be simple enough to buy and hold on your own. A financial advisor can help if you have complex tax situations, multiple accounts, or want help with overall financial planning, but you will pay fees for that service. For a straightforward index fund purchase, you do not need one.