Where to buy an S&P 500 index fund

You buy S&P 500 index funds through a brokerage account — a financial institution that lets you purchase and hold investments. The most common brokerages are online platforms like Fidelity, Charles Schwab, Vanguard, E*TRADE, and TD Ameritrade, though your bank may also offer brokerage services. Each brokerage holds the actual fund shares for you and handles the buying and selling.

You do not buy directly from the S&P 500 itself or from the companies in it. Instead, you buy shares of a fund that tracks the index — meaning the fund manager buys and holds the 500 stocks in the same proportions as the index, so your fund's value moves with theirs. Different brokerages offer different S&P 500 index funds (Vanguard's VOO, Fidelity's FXAIX, and Schwab's SWPPX are three examples), but they all track the same 500 companies.

Key Takeaways

  • You open a brokerage account with a firm like Fidelity, Vanguard, or Charles Schwab, then use that account to buy shares of an S&P 500 index fund.
  • Different brokerages offer different S&P 500 index funds with different expense ratios, so comparing costs before you open an account can save money over time.
  • You can buy index fund shares through a regular taxable brokerage account, or through a retirement account like an IRA or 401(k) if your employer or bank offers one.
  • Once you own shares, you can set up automatic monthly purchases so new money goes into the fund without you having to place an order each time.

Steps to open a brokerage account and make your first purchase

Start by choosing a brokerage. Visit the website of one you are considering — Fidelity, Vanguard, Charles Schwab, and E*TRADE all have straightforward account-opening pages. You will need your Social Security number, date of birth, address, and employment information. The brokerage will verify your identity, usually by checking your credit report or asking you to confirm details from your financial history.

Once your account is open, you link a bank account so money can move from your bank to the brokerage. This takes one to three business days. After the link is confirmed, you transfer the amount you want to invest. Then you search for the S&P 500 index fund you want — by its ticker symbol (VOO, FXAIX, SWPPX) or by name — and place a buy order for a dollar amount or a number of shares. The order executes during market hours, usually within seconds.

If you are buying through a retirement account like an IRA, the steps are the same, but you choose "IRA" when you open the account instead of "taxable brokerage." The brokerage will ask whether you want a Traditional IRA (contributions may be tax-deductible) or a Roth IRA (withdrawals in retirement are tax-free). You then buy the index fund inside that IRA the same way you would in a regular account.

Comparing costs across brokerages

The main cost difference between brokerages is the expense ratio — the annual percentage the fund charges to cover management and operating costs. For S&P 500 index funds, expense ratios typically range from 0.03% to 0.20% per year. On a $10,000 investment, that is $3 to $20 per year. Over decades, a difference of 0.10% compounds into thousands of dollars.

Most major brokerages now charge zero commission to buy index funds, so you are not paying a per-trade fee. Some brokerages offer their own index funds with lower expense ratios than competitors — Vanguard's VOO has an expense ratio of 0.03%, while some other firms charge 0.04% or higher for similar funds. Before you open an account, look up the expense ratio of the specific fund you plan to buy.

A few brokerages also offer fractional shares, meaning you can buy a partial share if you do not have enough money for a whole one. This matters if the fund price is high and your first investment is small. Most brokerages now support fractional shares, but it is worth confirming before you open an account.

Tax treatment in taxable versus retirement accounts

If you buy an S&P 500 index fund in a regular taxable brokerage account, you owe capital gains tax when you sell shares at a profit. You also owe tax on any dividends the fund distributes (the 500 companies pay dividends, which the fund passes to you). These taxes are due each year, even if you do not sell.

If you buy the same fund inside a Traditional IRA, you do not owe tax on dividends or gains while the money sits in the account. You owe tax only when you withdraw money in retirement, and only on the amount you withdraw. If you buy inside a Roth IRA, you do not owe tax on dividends or gains ever — withdrawals in retirement are tax-free, as long as the account has been open for at least five years and you are at least 59½ years old.

For this reason, most people buy index funds inside retirement accounts first (up to the annual contribution limit), then buy additional shares in a taxable account if they have more money to invest. Contribution limits for 2024 are $7,000 per year for a Traditional or Roth IRA (or $8,000 if you are 50 or older), and limits for 401(k)s vary by employer but are typically $23,500 per year.

Setting up automatic monthly investments

After your first purchase, most brokerages let you set up automatic monthly transfers and purchases. You tell the brokerage to move a set amount from your bank account each month and automatically buy shares of your chosen index fund. This is called dollar-cost averaging — you buy more shares when the price is low and fewer when it is high, which can reduce the impact of market swings over time.

To set this up, log into your brokerage account, find the automatic investment or recurring order section, and enter the amount and frequency. You can usually change or stop the automatic purchase at any time. Many people set up automatic investments of $100 to $500 per month and then forget about it, letting the account grow over years.

What happens after you buy

Once you own shares, you do not have to do anything. The fund automatically rebalances itself to stay aligned with the S&P 500 — if one of the 500 companies grows much larger than the others, the fund sells some of its shares and buys others to keep the proportions correct. You will receive a statement from your brokerage each month or quarter showing your account balance and any dividends paid.

You can check your account balance anytime by logging into the brokerage website or app. The value will change daily as the stock market moves. If you want to add more money, you can transfer it from your bank and buy more shares whenever you choose. If you want to sell, you can place a sell order and the money will return to your brokerage account, then you can transfer it back to your bank.

Frequently Asked Questions

Do I need a lot of money to start?

No. Most brokerages have no minimum investment. You can open an account and buy a single share or a fraction of a share with as little as $1 to $100. Many people start small and add money over time through automatic monthly purchases.

Can I buy an S&P 500 index fund through my employer's 401(k)?

Many employers offer S&P 500 index funds as one of the investment options in their 401(k) plan. Check your plan's investment menu or ask your benefits department. If your employer offers one, buying through the 401(k) is often simpler because the money comes directly from your paycheck and you may get an employer match.

What is the difference between VOO, FXAIX, and SWPPX?

All three track the S&P 500, but they are offered by different companies: VOO is Vanguard's fund, FXAIX is Fidelity's, and SWPPX is Charles Schwab's. The main difference is the expense ratio — VOO charges 0.03%, FXAIX charges 0.015%, and SWPPX charges 0.03%. You can only buy VOO through Vanguard, FXAIX through Fidelity, and SWPPX through Schwab, so your choice of brokerage determines which fund you get.

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

The value can fall significantly during market downturns — the S&P 500 has dropped 30% to 50% in past recessions. But it has recovered and reached new highs each time. You lose money only if you sell during a downturn. If you hold for decades, historical data shows the index has always recovered and grown.

How often should I check my account?

If you are buying automatically and holding long-term, checking once or twice a year is enough. Checking daily or weekly often leads to panic selling during downturns. Most successful long-term investors set up automatic purchases and then check their balance only occasionally.