The Best S&P 500 Index Funds | The Best Index Funds for the S&P 500

An S&P 500 index fund can be a wise decision if you want your portfolio's value to increase along with the U.S. economy but don't want to choose particular stocks. In fact, renowned investor Warren Buffett has stated that the greatest method for the majority of people to accumulate wealth is through low-cost S&P 500 index funds. This is a bet on the future of U.S. economic development.

What are S&P 500 index funds and why are they popular?

A stock index's performance is replicated by an index fund. Each of the 500 S&P 500 firms are represented by an index fund (SNPINDEX: GSPC). Instead of attempting to outperform the index, it utilises it as a benchmark and strives to closely mimic its performance.

By far, S&P 500 funds are the most well-liked class of index fund. On virtually any financial market, investment strategy, or stock market sector, however, index funds can be based.

Investors favour index funds for a variety of reasons. With some funds offering portfolio exposure to hundreds or even thousands of equities and bonds, they provide simple portfolio diversification. Like with individual investments, you don't run the danger of losing all your money if one firm performs poorly or fails. You also don't have access to the potentially enormous gains that might come from selecting a single big winner, though.

Since index funds are passively managed, you won't be paying someone to actively select investments. Compared to actively managed funds, this leads to cheaper investment management expenses, which in turn lowers the expense ratio.

• Your funds will follow the market's progress. The S&P 500's yearly returns have typically ranged from 9% to 10%. Naturally, the index will see some years of decline. The value of the S&P 500 decreased by nearly 50% during the Great Recession. The S&P 500 had lost more than 20% of its value as of May 10, 2022. However, in the long run, it has always bounced back. A 20-year investment in the S&P 500 has never produced a loss.

• You keep more of the returns on your investments. The low costs of S&P 500 index funds are the main argument made by Buffett in favour of them. Over time, active managers are likely to perform in line with the market, but their costs will reduce your returns. Buffett famously prevailed in a $1 million wager against investment manager Ted Seides that, over the course of ten years, a low-cost S&P 500 index fund would outperform a portfolio of hand-selected hedge funds.

• You are making investments in 500 of the most successful American businesses. Strict listing requirements apply to the companies that make up the S&P 500. A firm must have a market value of $11.8 billion and positive cumulative earnings over the previous four quarters in order to be included in the index. An index committee must also approve each firm. Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Johnson & Johnson are the biggest holdings in the S&P 500. (NYSE:JNJ).

• Your financial choices can be automated. You may invest without being concerned about stock market swings or needing to investigate specific firms because the S&P 500 has a perfect track record of producing returns over extended holding periods. You may easily set aside a particular amount in your budget and invest it automatically on a regular basis. Dollar-cost averaging is the term for this method. S&P 500 funds are a good foundation for your investment portfolio even if you choose individual stocks because you are guaranteed the returns of the stock market.

3 best S&P 500 index funds

Since each of these three significant S&P 500 funds follows the performance of the same index, their compositions are quite similar:

1. Vanguard S&P 500 ETF (NYSEMKT:VOO)
2. iShares Core S&P 500 ETF (NYSEMKT:IVV)
3. SPDR S&P 500 ETF Trust (NYSEMKT:SPY)

All three exchange-traded funds (ETFs) invest in the 500 firms that make up the S&P 500 index. ETFs are a sort of index fund. Each has closely resembled the performance of the index: 

The S&P 500 index's performance and that of each of these three funds that follow it differ by very little. When the expense ratio of each fund is taken into consideration, the S&P 500 marginally beat each fund. ---

A $10,000 investment made at the start of 2017 would have increased to $23,340 by the end of 2021 if it earned the S&P 500's rate of return. Even the least successful of the three index funds, as shown in the table below, would have turned that $10,000 investment into $23,230 over the same five-year period.

You may anticipate results from your investment in any of these three funds to be nearly comparable to the S&P 500. The alternatives with the lowest expense ratios are Vanguard and iShares. Nevertheless, if you enjoy SPDR goods, a 0.0945% expenditure ratio is by no means excessive. With an expense ratio of 0.0945%, management fees total $9.45 for every $10,000 invested yearly.

One thing to be aware of is that all three of the above-mentioned funds are weighted according to market capitalization, much like the S&P 500 index. This indicates that a large portion of your money is concentrated in the largest corporations. The top 10 companies make up about 30% of each of the top three S&P 500 index funds' holdings.

Choose the Invesco S&P 500 Equal Weight ETF if you want to invest in the reputable large-cap firms in the S&P 500 while reducing your risk a little bit (NYSEMKT:RSP). It tries to invest the same dollar amount in each stock in the S&P 500 index since it is an equal-weighted fund. Therefore, you would anticipate that the top 10 holdings would only ever represent 2.5% of the whole portfolio.

Beware of leveraged S&P 500 index funds

Leveraged vehicles that are promoted as S&P 500 ETFs should be avoided. Leveraged ETFs are used to increase investment returns or place bets against the index by using borrowed funds and/or derivative instruments. For instance, a 2x-leveraged S&P 500 ETF seeks daily returns that are twice the performance of the index. Thus, the value of the ETF increases by 4% if the index increases by 2%. The ETF loses 6% if the index drops by 3%.

These leveraged products have a long-term inherent downside bias and are designed to be day trading instruments. In other words, a 2x-leveraged S&P 500 ETF won't produce returns that are twice as high as the index's over the long term.

One of the safest methods to accumulate money over time is to invest in S&P 500 index funds. Leveraged ETFs, however, are very dangerous and have no place in a long-term portfolio, not even ones that follow the S&P 500.