What the S&P 500 is and why people invest in it

The S&P 500 is a list of 500 large U.S. companies chosen and maintained by Standard & Poor's, a financial data company. When you invest in the S&P 500, you own a small piece of all 500 companies at once — not individual shares of each one, but a fund that tracks them together. The index includes household names like Apple, Microsoft, and Coca-Cola, but also thousands of smaller large-cap firms most people have never heard of.

People invest in S&P 500 funds because they want broad exposure to the U.S. stock market without picking individual stocks. Instead of researching and buying shares in 500 different companies, you buy one fund that does that work for you. The S&P 500 has historically returned around 10% per year over very long periods, though that varies year to year and past performance does not predict future results.

You cannot buy the S&P 500 directly — it is an index, not a tradeable security. Instead, you buy a fund that mimics it. Two main types exist: index funds and exchange-traded funds (ETFs). Both hold the same 500 stocks in the same proportions, but they trade and work slightly differently.

Key Takeaways

  • You invest in the S&P 500 by buying an index fund or ETF that tracks it, not by buying the index itself.
  • Index funds are mutual funds you buy through a brokerage and can only trade once per day at the closing price.
  • ETFs are similar to index funds but trade throughout the day like individual stocks and often have lower fees.
  • You need a brokerage account (taxable, IRA, or 401(k)) to buy either type of fund, and most brokerages offer multiple S&P 500 options.
  • The main cost difference between funds is the expense ratio — the annual fee charged as a percentage of your investment.

Index funds that track the S&P 500

An index fund is a mutual fund designed to hold the same stocks as the S&P 500 in the same weights. When you buy shares of an index fund, you own a piece of a pool of money that the fund manager invests in all 500 companies. The fund rebalances automatically to stay aligned with the index.

Index funds trade once per day. You place an order during market hours, but the price you pay is set at the market close (4 p.m. Eastern time), not at the moment you clicked buy. If you sell, the same rule applies — you get the closing price of that day, not an intraday price.

Major fund companies offer S&P 500 index funds. Vanguard's Vanguard 500 Index Fund (ticker VFIAX for the Admiral Shares version) has an expense ratio of 0.03% per year. Fidelity's Fidelity 500 Index Fund (FXAIX) charges 0.015%. Schwab's Schwab U.S. 500 ETF (SWPPX) charges 0.03%. These fees are deducted automatically from your account each year and expressed as a percentage of your balance.

ETFs that track the S&P 500

An exchange-traded fund (ETF) holds the same 500 stocks as an index fund but trades like a stock throughout the day. You can buy or sell an S&P 500 ETF at any time the market is open and see the price change in real time. The trade executes when ready at the price you see, not at a closing price hours later.

ETFs often have lower expense ratios than index funds because they are structured differently — they do not have to process daily purchases and redemptions the same way mutual funds do. The Vanguard S&P 500 ETF (VOO) charges 0.03% per year. The iShares Core S&P 500 ETF (IVV) charges 0.03%. The SPDR S&P 500 ETF Trust (SPY) charges 0.09% — higher than the others but still very low.

One practical difference: ETFs may have a bid-ask spread, a small gap between the price you pay to buy and the price you receive to sell. For popular funds like VOO or IVV, this spread is usually just a few cents per share and barely noticeable. For less popular ETFs, the spread can be wider and cost you more on small trades.

Where to buy S&P 500 funds

You buy S&P 500 funds through a brokerage account. Most major brokerages offer multiple S&P 500 index funds and ETFs with no trading commissions. Fidelity, Schwab, Vanguard, E-Trade, TD Ameritrade, and Webull all allow you to buy these funds for free.

You can open a brokerage account in three main types. A taxable brokerage account has no contribution limits and no restrictions on when you withdraw money, but you pay income tax on dividends and capital gains each year. An IRA (Individual Retirement Account) lets you invest up to $7,000 per year (or $8,000 if you are 50 or older) and defer taxes until retirement. A 401(k) through your employer works similarly but with higher contribution limits and employer matching in many cases.

Most people start with a taxable account if they are new to investing, then move to an IRA or 401(k) once they understand the basics. All three account types let you buy the same S&P 500 funds.

Comparing funds by expense ratio and performance

The main difference between S&P 500 funds is the expense ratio — the annual fee charged as a percentage of your balance. A fund with a 0.03% expense ratio costs $3 per year on a $10,000 investment. A fund with 0.09% costs $9 per year on the same amount. Over decades, this small difference compounds.

All S&P 500 index funds and ETFs hold nearly identical stocks in nearly identical proportions, so their performance is almost identical before fees. After fees, the fund with the lower expense ratio will return slightly more money to you. For this reason, most investors choose among the lowest-cost options: Vanguard 500 Index Fund, Fidelity 500 Index Fund, Schwab U.S. 500 ETF, Vanguard S&P 500 ETF, or iShares Core S&P 500 ETF.

Do not chase performance based on one year or five years of returns. All these funds track the same index, so their long-term returns will be nearly identical. Choose based on which brokerage you use, whether you prefer an index fund or ETF, and which has the lowest expense ratio among your options.

How to place your first trade

Once you have opened and funded a brokerage account, buying an S&P 500 fund takes a few steps. Log into your account and navigate to the "Buy" or "Trade" section. Search for the fund by its ticker symbol (VOO, VFIAX, FXAIX, SPY, IVV, or whichever you chose). Enter the number of shares you want to buy or the dollar amount you want to invest.

For an index fund, your order will execute at the market close that day. For an ETF, your order executes when ready during market hours. Review the order summary, confirm the details, and submit. The fund will appear in your account within one to three business days, depending on your brokerage's settlement time.

You do not need to do anything after you buy. The fund automatically reinvests dividends (unless you change that setting), rebalances to track the index, and holds all 500 stocks for you. Many investors set up automatic monthly or quarterly purchases through their brokerage, which is called dollar-cost averaging — investing the same amount on a regular schedule regardless of price.

Tax considerations for S&P 500 investments

In a taxable brokerage account, you owe federal income tax on dividends paid by the 500 companies each year, even if you do not sell the fund. You also owe capital gains tax when you sell shares for a profit. Long-term capital gains (shares held over one year) are taxed at a lower rate than short-term gains (under one year).

In an IRA or 401(k), you do not pay tax on dividends or gains each year. You pay tax only when you withdraw money in retirement (or never, in the case of a Roth IRA). This tax deferral is one major reason people prioritize retirement accounts over taxable accounts for long-term investing.

If you hold an S&P 500 fund in a taxable account and sell it at a loss, you can deduct that loss against other investment gains or up to $3,000 of ordinary income per year. Losses beyond that carry forward to future years. Keep records of your purchase price and sale price so you can calculate gains and losses accurately.

Frequently Asked Questions

What is the difference between VOO and VFIAX?

VOO is an ETF; VFIAX is an index fund. Both track the S&P 500 and charge 0.03% per year. VOO trades throughout the day like a stock; VFIAX trades once at the market close. Both are offered by Vanguard. Choose based on whether you prefer ETF or index fund mechanics — the long-term returns will be nearly identical.

Can I lose money investing in an S&P 500 fund?

Yes. The S&P 500 can fall in value during market downturns, and your fund will fall with it. Historically, the market has recovered from every downturn, but there is no may provide. If you need the money within five years, consider keeping it in a savings account instead.

Do I need to pick just one S&P 500 fund?

No, but there is no advantage to owning multiple S&P 500 funds. They all hold the same 500 stocks, so owning two of them is just owning the same companies twice. Most investors pick one low-cost option and stick with it.

How often should I check my S&P 500 investment?

You do not need to check it often. Daily price changes are normal and do not affect your long-term returns. Many successful investors check their accounts quarterly or annually. Frequent checking often leads to emotional decisions that hurt returns.

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

Many 401(k) plans offer S&P 500 index funds or similar large-cap stock funds. Check your plan's investment menu or ask your benefits administrator. If your plan offers an S&P 500 fund, it is often a good choice because contributions reduce your taxable income and may may have access to for employer matching.