The three ways to own S&P 500 stocks

You can own the S&P 500 through an index fund, an exchange-traded fund (ETF), or by buying individual stocks that make up the index. Most people choose a fund or ETF because they own all 500 companies with a single purchase, which costs less and requires less work than picking stocks one at a time.

An index fund is a mutual fund that holds the same stocks as the S&P 500 in the same proportions. You buy shares through a brokerage account, and the fund manager rebalances it automatically. An ETF does the same thing but trades like a stock — you can buy and sell it during market hours at a price that changes throughout the day. Both track the index closely, though ETFs often have lower fees.

Individual stock picking means researching and buying 500 separate companies yourself, which takes time and carries more risk if you miss major players or overweight your portfolio toward a few names. Most beginners and long-term investors skip this route.

Key Takeaways

  • Index funds and ETFs let you own all 500 S&P 500 companies with one purchase, and most charge less than 0.1% per year in fees.
  • You need a brokerage account (through a bank, investment firm, or online broker) to buy any S&P 500 fund or ETF.
  • Popular S&P 500 index funds include Vanguard's VOO, Fidelity's FXAIX, and Schwab's SWTSX; popular ETFs include VOO, IVV, and SPY.
  • You can invest a lump sum or set up automatic monthly contributions, and most brokerages have no minimum investment for index funds or ETFs.
  • The S&P 500 has historically returned about 10% per year on average over long periods, but past performance does not may provide future results.

Opening a brokerage account

Before you can buy an S&P 500 fund or ETF, you need a brokerage account. This is a holding place for your money and investments, similar to a checking account but designed for buying and selling securities. Most banks offer brokerage services, and many online brokers (Fidelity, Charles Schwab, E-Trade, Interactive Brokers, Webull) let you open an account in minutes with no minimum balance.

You will provide your name, address, Social Security number, and employment information. The broker will ask whether you want a regular taxable account or a tax-advantaged account like an IRA. For most people starting out, a regular taxable account is simpler; an IRA has contribution limits and withdrawal rules but offers tax breaks on gains.

Once your account is open and you have transferred money into it, you are ready to buy. The whole process usually takes one to three business days.

Choosing between index funds and ETFs

Index funds and ETFs track the same index and charge similar fees, but they work differently in practice. An index fund has a fixed price set once per day after the market closes, so you always know what you are paying. An ETF's price changes throughout the trading day like a stock, which means you might pay more or less depending on when you buy.

Index funds often require a minimum investment — sometimes $1,000 or $3,000 to start — though many brokers have waived this. ETFs have no minimum because you buy them one share at a time, and a single share might cost $300 to $400. If you have a small amount to invest, an ETF may be easier. If you plan to invest regularly through automatic contributions, an index fund is often simpler because you do not have to think about share price.

Fee differences are small but matter over decades. Vanguard's VOO ETF and Fidelity's FXAIX index fund both charge around 0.03% per year, meaning you pay $3 annually on a $10,000 investment. Some funds charge 0.1% or more, which adds up over time.

Popular S&P 500 funds and ETFs to consider

The largest and cheapest options are Vanguard VOO (an ETF), Fidelity FXAIX (an index fund), and Schwab SWTSX (an index fund). All three charge 0.03% or less per year and hold all 500 companies. Vanguard also offers VTSAX, a total stock market fund that includes the S&P 500 plus smaller companies; Fidelity offers FSKAX for the same purpose.

If you want an ETF, the most common choices are VOO, IVV (iShares), and SPY (SPDR). All three track the S&P 500 closely and charge between 0.03% and 0.04% per year. The differences between them are tiny; pick whichever your broker makes easiest to buy.

Avoid funds or ETFs that charge more than 0.2% per year unless there is a specific reason — some actively managed funds claim to beat the index, but most do not over long periods, and the higher fees eat into your returns.

How to place your first trade

Log into your brokerage account and look for a "buy" or "trade" button. Enter the ticker symbol (VOO, FXAIX, SWTSX, or whichever fund you chose), the number of shares or dollar amount you want to buy, and confirm. For an index fund, you can usually specify a dollar amount like $500 and the system will calculate the shares. For an ETF, you specify the number of shares.

If you are buying during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays), the trade executes immediately at the current price. If you buy after hours or on a weekend, it will execute at the next market open. Index funds always execute at the closing price on the day you buy.

Once the trade settles (usually one to two business days), the shares appear in your account and you own them. You do not have to do anything else — the fund or ETF will hold the stocks and rebalance automatically.

Setting up automatic monthly investing

Most brokers let you set up automatic transfers from your bank account to your brokerage account on a schedule you choose — weekly, biweekly, or monthly. Once the money arrives, you can either buy manually or set up automatic purchases of your chosen fund or ETF on the same schedule.

This approach, called dollar-cost averaging, means you buy more shares when the price is low and fewer when it is high, which smooths out the effect of market swings over time. You do not have to time the market or worry about whether today is a good day to invest — you just buy on schedule.

Starting with even $50 or $100 per month compounds over decades. A $100 monthly investment at a historical 10% average annual return would grow to roughly $200,000 over 30 years, though actual results vary year to year.

Understanding costs and taxes

The main cost is the fund's expense ratio, the annual percentage you pay to hold the fund. For a low-cost S&P 500 index fund or ETF, this is typically 0.03% to 0.1% per year. You also pay a bid-ask spread when you buy or sell an ETF (the difference between what buyers will pay and what sellers ask), though this is usually small for popular funds like VOO.

In a taxable account, you owe capital gains tax when you sell shares for a profit. If you hold the fund for more than a year before selling, you pay the lower long-term capital gains rate. If you sell within a year, you pay your regular income tax rate. Index funds and ETFs are tax-efficient because they do not trade much internally, so you usually do not owe tax until you sell.

If you are investing through an IRA, you do not owe tax on gains until you withdraw money in retirement, which is why many people use an IRA for long-term investing.

Frequently Asked Questions

How much money do I need to start investing in the S&P 500?

Most brokers have no minimum for index funds or ETFs. You can start with $1, $50, $100, or whatever you have. Some index funds have a $1,000 or $3,000 minimum to open, but many brokers waive this if you set up automatic monthly contributions.

Can I lose money investing in the S&P 500?

Yes. The S&P 500 has dropped 20% or more several times in the past 70 years, and it could drop again. If you need the money within five years, the risk may be too high. If you are investing for retirement 20 or 30 years away, historical data suggests you have time to recover from downturns.

Should I buy a fund or an ETF?

For most people, the choice does not matter much — both are cheap and track the index closely. If you have a small amount to invest or want to buy with no minimum, an ETF is simpler. If you plan to invest regularly through automatic contributions, an index fund is often easier because you do not have to think about share price.

What is the difference between the S&P 500 and a total stock market fund?

The S&P 500 holds 500 large U.S. companies. A total stock market fund holds those 500 plus thousands of smaller companies. Total market funds are slightly more diversified, but both have performed similarly over long periods. Either is a solid choice for a beginner.

Do I have to pick just one fund?

No. Many people own multiple funds or ETFs to diversify across U.S. stocks, international stocks, and bonds. But if you are starting out, a single S&P 500 fund is enough to build wealth over time.