An S&P 500 index fund tracks 500 of the largest US companies in a single investment. It’s the most popular way Americans invest in the stock market — Warren Buffett has repeatedly recommended it as the best choice for most people. Here’s how it works and how to get started.
What Is the S&P 500?
The S&P 500 (Standard & Poor’s 500) is a stock market index that tracks the performance of 500 large US companies listed on the New York Stock Exchange or Nasdaq. It’s the benchmark most investment professionals use to measure the stock market’s performance.
Companies in the S&P 500 include Apple, Microsoft, Amazon, Nvidia, Meta, Tesla, Berkshire Hathaway, and hundreds more across every major industry. Together they represent roughly 80% of the total US stock market value.
The index is market-cap weighted — bigger companies make up a larger portion. As of 2026, the top 10 holdings represent approximately 30–35% of the index.
S&P 500 Historical Returns
| Period | Average Annual Return |
|---|---|
| 1 year (2025) | Varies |
| 10 years (2016–2025) | ~13% |
| 20 years (2006–2025) | ~10% |
| 30 years (1996–2025) | ~10.5% |
| Since 1926 (long-run avg) | ~10% |
Returns are approximate and pre-tax. Past performance does not guarantee future results.
Key fact: $10,000 invested in an S&P 500 index fund in 2006 would have grown to approximately $67,000 by 2025, assuming dividends reinvested.
Best S&P 500 Index Funds in 2026
| Fund | Ticker | Expense Ratio | Type | Min Investment |
|---|---|---|---|---|
| Fidelity 500 Index Fund | FXAIX | 0.015% | Mutual fund | $0 |
| Schwab S&P 500 Index Fund | SWPPX | 0.02% | Mutual fund | $0 |
| Vanguard S&P 500 ETF | VOO | 0.03% | ETF | ~$1 (fractional) |
| iShares Core S&P 500 ETF | IVV | 0.03% | ETF | ~$1 (fractional) |
| SPDR S&P 500 ETF Trust | SPY | 0.0945% | ETF | ~$1 (fractional) |
SPY is the oldest and most liquid S&P 500 ETF and is preferred for options trading. For long-term buy-and-hold, FXAIX, VOO, or IVV offer lower costs.
ETF vs. Mutual Fund: Which Should You Choose?
Both track the same index and deliver near-identical performance. The differences are operational:
S&P 500 ETFs (VOO, IVV, SPY):
- Trade on the stock exchange throughout the day like a stock
- Available at any brokerage
- May offer fractional shares
- More tax-efficient in taxable accounts
S&P 500 Mutual Funds (FXAIX, SWPPX):
- Priced once per day at market close
- Sometimes brokerage-specific (FXAIX is Fidelity-only)
- Automatic dividend reinvestment is seamless
- Easier for automatic investing
For most investors, the choice comes down to brokerage. If you’re at Fidelity, FXAIX is the cheapest option. If you’re at Schwab, SWPPX. If you want brokerage flexibility, VOO or IVV work anywhere.
How to Buy an S&P 500 Index Fund — Step by Step
Step 1 — Open a brokerage account Use a taxable brokerage account for general investing, or a Roth IRA or traditional IRA for retirement savings (tax advantages apply). Fidelity, Schwab, and Vanguard are the top picks.
Step 2 — Fund your account Transfer money from your bank account. Most brokerages take 2–5 business days for ACH transfers to settle.
Step 3 — Search for the fund Enter the ticker symbol (VOO, IVV, FXAIX) in the search bar. Review the fund details, expense ratio, and recent performance.
Step 4 — Place your order For ETFs, select “Buy” and enter the number of shares or a dollar amount (if fractional shares are available). For mutual funds, enter the dollar amount. Confirm the order.
Step 5 — Set up automatic investing (optional but recommended) Most brokerages allow recurring purchases — for example, $200 automatically invested on the 1st of every month. This is called dollar-cost averaging and removes the temptation to time the market.
Worked Example: What $500/Month Buys Over Time
| Years | Total Invested | Value at 10% avg annual return |
|---|---|---|
| 5 | $30,000 | ~$38,600 |
| 10 | $60,000 | ~$95,600 |
| 20 | $120,000 | ~$343,000 |
| 30 | $180,000 | ~$987,000 |
Illustrative only. Actual returns vary. Assumes dividends reinvested.
Taxes on S&P 500 Index Funds
In a Roth IRA or traditional IRA: No taxes on dividends or capital gains while the money stays in the account. Roth IRA withdrawals in retirement are tax-free. Traditional IRA withdrawals are taxed as ordinary income.
In a taxable brokerage account:
- Dividends: S&P 500 funds typically yield 1.2–1.5% in dividends. These are taxed as qualified dividends (0%, 15%, or 20% depending on your income).
- Capital gains: When you sell for more than you paid, you owe capital gains tax — 0%, 15%, or 20% for long-term gains (held 1+ year); ordinary income rates for short-term gains.
Holding in a tax-advantaged account first (Roth IRA → 401(k) → taxable) is generally the most efficient approach.
Common Mistakes
Trying to time the market. Most investors who try to buy low and sell high underperform a simple buy-and-hold strategy. Missing just the 10 best trading days in a decade can cut your returns nearly in half.
Paying high fees. A 1% expense ratio costs you roughly $100,000 over 30 years on a $100,000 portfolio vs. a 0.03% fund. Always compare expense ratios.
Selling during downturns. The S&P 500 has recovered from every major crash in history. Selling when markets fall locks in losses. Investors who held through 2008–2009 saw full recovery by 2013.
Investing short-term money. S&P 500 funds are for money you won’t need for 5+ years. Don’t invest your emergency fund or down payment savings here.
Related Articles
- Vanguard ETFs: Best Funds for 2026
- How to Start Investing: Beginner’s Guide
- Roth IRA vs. 401(k): Which Should You Prioritize?
- Dollar-Cost Averaging Explained
- Taxes on Stocks and Capital Gains
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy