Key Takeaways
- The S&P 500 has delivered an average annual return of approximately 10.3% since 1957, making it the benchmark most active managers fail to beat
- The best S&P 500 index funds charge expense ratios of just 0.015% to 0.03% — meaning you keep over 99.97% of your returns
- VOO, IVV, FXAIX, and SWPPX are all excellent choices with near-identical performance — the differences are in minimums and tax efficiency
- For most FI seekers, the choice between an S&P 500 fund and a total stock market fund matters less than simply investing consistently in either one
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What Is the S&P 500 and How Do Index Funds Work?
The S&P 500 is an index that tracks the 500 largest publicly traded companies in the United States, weighted by market capitalization. It includes Apple, Microsoft, Amazon, Nvidia, Alphabet (Google), Meta, Berkshire Hathaway, and approximately 493 other companies that collectively represent about 80% of the total U.S. stock market value.
The index is maintained by S&P Dow Jones Indices, which periodically adds and removes companies based on criteria including market cap (must exceed ~$18 billion), profitability, liquidity, and domicile. When a company is added to the S&P 500, every index fund tracking it automatically buys shares — and vice versa when companies are removed.
An S&P 500 index fund is a mutual fund or exchange-traded fund (ETF) that holds all 500 stocks in the same proportions as the index. Instead of picking individual stocks, you buy one fund and instantly own a piece of every major U.S. company. The fund mechanically replicates the index — no stock picking, no market timing, no overpaid fund managers.
Why Index Funds Win
The data is overwhelming. Over any 15-year period, approximately 92% of actively managed large-cap funds underperform the S&P 500 after fees, according to the SPIVA scorecard. Over 20 years, that number exceeds 95%. The reasons are simple: active fund managers charge 0.50% to 1.50% in annual fees, they generate taxable trading activity, and they cannot consistently pick winners.
| Time Period | % of Active Funds Underperforming S&P 500 |
|---|---|
| 1 Year | ~60% |
| 5 Years | ~75% |
| 10 Years | ~85% |
| 15 Years | ~92% |
| 20 Years | ~95% |
Warren Buffett bet $1 million that an S&P 500 index fund would beat a selection of hedge funds over 10 years. He won decisively — the index fund returned 125.8% vs 36.0% for the hedge fund basket. As Buffett has said: "By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals."
Best S&P 500 Index Funds Compared
The top S&P 500 index funds deliver nearly identical performance because they all track the same index. The differences come down to expense ratio, minimum investment, fund structure (ETF vs mutual fund), and tax efficiency. Here is a detailed comparison of the five most popular options.
| Fund | Ticker | Expense Ratio | Minimum Investment | Fund Type | Assets Under Management |
|---|---|---|---|---|---|
| Vanguard S&P 500 ETF | VOO | 0.03% | $1 (1 share) | ETF | ~$1.1 trillion |
| iShares Core S&P 500 ETF | IVV | 0.03% | $1 (1 share) | ETF | ~$560 billion |
| SPDR S&P 500 ETF Trust | SPY | 0.0945% | $1 (1 share) | ETF | ~$570 billion |
| Fidelity 500 Index Fund | FXAIX | 0.015% | $0 | Mutual Fund | ~$580 billion |
| Schwab S&P 500 Index Fund | SWPPX | 0.02% | $0 | Mutual Fund | ~$100 billion |
VOO — Vanguard S&P 500 ETF
The most popular S&P 500 ETF and the default recommendation for most FI seekers. At 0.03% expense ratio, a $500,000 investment costs just $150 per year in fees. VOO is tax-efficient due to the ETF structure and Vanguard's patented heartbeat trade process, which minimizes capital gains distributions. Fractional shares are available at most brokerages.
FXAIX — Fidelity 500 Index Fund
The lowest-cost S&P 500 fund available at 0.015% — half the cost of VOO. No minimum investment requirement makes it ideal for beginners. As a mutual fund, you can set up automatic investments in exact dollar amounts (e.g., $500/month). FXAIX is an excellent choice if your brokerage is Fidelity.
IVV — iShares Core S&P 500 ETF
BlackRock's S&P 500 ETF with a 0.03% expense ratio, matching VOO. Functionally identical performance. Slightly different creation/redemption mechanics than VOO but the practical difference for individual investors is negligible. A strong alternative if you prefer iShares or trade through a brokerage that offers commission-free iShares ETFs.
SPY — SPDR S&P 500 ETF Trust
The oldest and most heavily traded S&P 500 ETF, launched in 1993. SPY is the most liquid ETF in the world, making it the preferred choice for active traders. However, its 0.0945% expense ratio is over three times higher than VOO or IVV. For long-term FI investors, VOO or IVV are better choices. SPY's structure as a unit investment trust also makes it slightly less tax-efficient than VOO.
SWPPX — Schwab S&P 500 Index Fund
Schwab's mutual fund offering at 0.02% expense ratio with no minimum investment. Like FXAIX, the mutual fund structure allows automatic dollar-amount investing. An excellent choice for Schwab customers building automated investment plans.
How to Invest, S&P 500 vs Total Market, and FI Strategy
How to Buy an S&P 500 Index Fund
Investing in an S&P 500 fund takes less than 15 minutes:
- Open a brokerage account at Vanguard, Fidelity, Schwab, or any major broker — all offer commission-free trades on their own S&P 500 funds
- Fund your account via bank transfer, typically 1-3 business days
- Search for your fund — VOO, FXAIX, SWPPX, or IVV
- Place a buy order — ETFs trade at market price during market hours; mutual funds execute at end-of-day NAV
- Set up automatic investing — schedule recurring purchases monthly or per-paycheck
For retirement accounts (401k, IRA), look for the S&P 500 index fund option within your plan. It may have a different name (e.g., "Large Cap Index Fund" or "Institutional S&P 500") but will track the same index.
S&P 500 vs Total Stock Market: Which Is Better?
The total stock market index (tracked by VTI/VTSAX/FSKAX) holds approximately 3,600 stocks compared to the S&P 500's 500. The additional 3,100 stocks are mid-cap and small-cap companies. Here is how they compare:
| Factor | S&P 500 Index Fund | Total Stock Market Fund |
|---|---|---|
| Number of Holdings | ~500 | ~3,600 |
| Market Coverage | ~80% of U.S. market | ~100% of U.S. market |
| 10-Year Annualized Return | Nearly identical | Nearly identical |
| Small/Mid-Cap Exposure | No | Yes (~20%) |
| Expense Ratio (Best) | 0.015% (FXAIX) | 0.015% (FZROX) |
Historically, the performance difference between the two is minimal — typically within 0.1-0.3% per year in either direction. The S&P 500 has outperformed in periods when large-cap growth stocks dominate. The total market has outperformed when small and mid-cap stocks lead. Over 20+ year periods, the returns converge closely.
The FI community's honest answer: it does not matter much which you choose. Investing $24,500 per year in VOO or VTI will produce nearly identical outcomes over 20 years. Consistency and contribution amount matter far more than the choice between S&P 500 and total market.
Dividends and Tax Efficiency
S&P 500 index funds typically yield 1.2% to 1.6% in annual dividends. In a tax-advantaged account (401k, IRA, Roth), dividends compound tax-free. In a taxable account, qualified dividends from S&P 500 funds are taxed at the favorable long-term capital gains rate (0%, 15%, or 20% depending on income).
ETFs (VOO, IVV) are generally more tax-efficient than mutual funds (FXAIX, SWPPX) in taxable accounts because ETFs rarely distribute capital gains. Vanguard's mutual funds are an exception — their patented ETF share class structure gives Vanguard mutual funds ETF-like tax efficiency. For taxable brokerage accounts, VOO or VFIAX (Vanguard's mutual fund version) are the most tax-efficient choices.
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How to Get Started
Choose Your Brokerage
Open an account at Vanguard (for VOO/VFIAX), Fidelity (for FXAIX), or Schwab (for SWPPX). All three offer commission-free trading on their own index funds, excellent customer service, and robust retirement account options. You can also buy any of these funds at most brokerages.
Decide Between ETF and Mutual Fund
ETFs (VOO, IVV) trade like stocks at real-time prices and are more tax-efficient in taxable accounts. Mutual funds (FXAIX, SWPPX) allow automatic dollar-amount investing and are better for set-it-and-forget-it contribution schedules. For retirement accounts, either works equally well.
Make Your First Investment
Transfer cash to your brokerage account and buy your chosen fund. Start with whatever you have — there is no minimum too small. FXAIX and SWPPX have $0 minimums, and VOO can be purchased in fractional shares at most brokerages for as little as $1.
Set Up Automatic Recurring Investments
Automate monthly or per-paycheck contributions. This removes emotion from the process and ensures consistent dollar-cost averaging. Most brokerages let you schedule recurring purchases of mutual funds. For ETFs, some brokerages offer automatic ETF purchases as well.
Rebalance Annually and Stay the Course
If you hold other asset classes (bonds, international), rebalance once per year to maintain your target allocation. Otherwise, do nothing — do not check daily prices, do not sell during downturns, and do not chase performance. The S&P 500 has recovered from every crash in history. Time in the market beats timing the market.
Frequently Asked Questions
Fidelity 500 Index Fund (FXAIX) has the lowest expense ratio at 0.015%. Schwab S&P 500 Index Fund (SWPPX) is next at 0.02%. VOO and IVV tie at 0.03%. All four are excellent — the fee difference between FXAIX (0.015%) and VOO (0.03%) on a $500,000 portfolio is just $75 per year. Choose the fund offered by your preferred brokerage.
VOO is better for long-term investors. It charges 0.03% vs SPY's 0.0945%, saving you about $325 per year on a $500,000 portfolio. VOO is also more tax-efficient due to its ETF share class structure. SPY's advantage is liquidity for active trading, which long-term index investors do not need. For buy-and-hold FI investing, VOO is the clear winner.
Either is an excellent choice. The S&P 500 covers approximately 80% of the U.S. stock market by value. A total market fund adds mid-cap and small-cap stocks for fuller diversification. Over long periods, performance is nearly identical — typically within 0.1-0.3% per year. The FI community consensus is that the best fund is the one you will consistently invest in without overthinking the decision.
As little as $1. FXAIX and SWPPX have zero minimum investments. VOO and IVV can be purchased as fractional shares at most brokerages. There is no minimum too small — starting with $50 or $100 per month and increasing contributions as your income grows is exactly how most people on the FI path begin.
The S&P 500 has returned approximately 10.3% per year on average since 1957 (including dividends). Adjusted for inflation, the real return is approximately 7.0% per year. These are long-term averages — individual years range from -38% (2008) to +38% (1995). The key is staying invested through the down years to capture the recovery gains that follow.
S&P 500 index funds carry market risk — they can lose significant value in the short term (the index dropped 34% in early 2020 and 38% in 2008). However, the S&P 500 has recovered from every decline in its history and has never lost money over any 20-year period. For investors with a 10+ year time horizon, the risk of not investing (missing out on 10% average annual returns) is far greater than the risk of temporary market declines.
The Bottom Line
S&P 500 index funds are the single most important building block for long-term wealth. With expense ratios as low as 0.015%, you keep virtually all of your returns while owning a piece of the 500 largest U.S. companies. VOO, FXAIX, IVV, and SWPPX all deliver near-identical performance — choose the fund offered by your preferred brokerage and automate your contributions. The FI community has proven through thousands of real-world examples that consistent investing in a low-cost S&P 500 index fund, held for decades without panic selling, is the most reliable path to building wealth and reaching financial independence.
