How to buy an S&P 500 index fund: Key things to know

Standard & Poor’s 500 index funds are among the most popular investments — and it’s little wonder why. The S&P 500 index, on which these funds are based, has returned an average of about 10 percent annually over time and represents hundreds of America’s best companies. With an S&P 500 index fund, you own the market instead of trying to beat it.

In fact, legendary investor Warren Buffett has long advised investors to buy and hold an S&P 500 index fund. So if you’re considering one for your portfolio, here’s what you’ll need to know to get started.

What are S&P 500 index funds?

An index mutual fund or ETF is an investment that contains a collection of all the stocks that are part of a particular index. When you buy an S&P 500 index fund, you’re purchasing a small portion of shares in all the companies included in that index. 

The sole purpose of S&P 500 index funds is to mimic the composition and performance of the index. There is no fund manager at the helm choosing which shares to buy or sell; adjustments in the holdings happen only when the underlying index changes. And because they are ively managed investments, investors save a lot of money on istrative and other fees.

How to invest in an S&P 500 index fund

It’s surprisingly easy to buy an S&P 500 fund. You can set up your to buy the index fund on autopilot, so you’ll almost never have to monitor the , or you can enter your trades manually.

1. Find your S&P 500 index fund

It’s easy to find an S&P 500 index fund, even if you’re just starting to invest.

Part of the beauty of index funds is that they will have exactly the same stocks and weightings as another fund based on the same index. In that sense, it would be like choosing among five McDonald’s restaurants serving exactly the same food: which one would you go with? You’d probably select the restaurant with the lowest price, and it’s usually the same with index funds.

Here are two key criteria for selecting your fund:

• Expense ratio: To determine whether a fund is inexpensive, you’ll want to look at its expense ratio. That’s the cost that the fund manager will charge you over the course of the year to manage the fund as a percentage of your investment in the fund.
• Sales load: If you’re investing in mutual funds, you’ll also want to see if the fund manager charges you a sales load, which is a fancy name for a sales commission. You’ll want to avoid this kind of expense entirely, particularly when buying an index fund. ETFs don’t charge a sales load.

S&P 500 index funds have some of the lowest expense ratios on the market. Index investing is already less expensive than almost any other kind of investing, even if you don’t select the cheapest fund. Many S&P 500 index funds charge less than 0.10 percent annually. In other words, at that rate, you’ll pay only $10 annually for every $10,000 you have invested in the fund.

Some funds are even less expensive than that. Here are four of the best S&P 500 index funds, including one that’s completely fee-free:

Fund	Expense ratio	5-year annualized return (as of 5/1/25)
Fidelity ZERO Large Cap Index (FNILX)	0 percent	15.3 percent
Vanguard S&P 500 ETF (VOO)	0.03 percent	15.3 percent
SPDR S&P 500 ETF Trust (SPY)	0.095 percent	15.3 percent
Schwab S&P 500 Index Fund (SWPPX)	0.02 percent	15.3 percent

In investing, paying more doesn’t always translate into better returns. In fact, the relationship between fees and returns is often reversed. Since these funds are largely the same, your choice is not a “make or break” decision – you can expect to get the performance of the index, whatever that is, minus the expense ratio or any fees you’re paying. So costs are an important consideration here.

Select your fund and note its ticker symbol, an alphabetical code of three to five letters.

2. Go to your investing or open a new one

After you’ve selected your index fund, you’ll want to access your investing , whether it’s a 401(k), an IRA or a regular taxable brokerage . These s give you the ability to purchase mutual funds or ETFs, and you may even be able to buy stocks and bonds later, if you choose to do so.

If you don’t have an , you’ll need to open one, which you can do in 15 minutes or less. Here are four steps to do so:

• Choose a provider (see Bankrate’s list of best online brokers for mutual fund investing for a selection that includes many with no minimums and lots of no-commission mutual funds and ETFs).
• Provide some basic information (name, Social Security number or tax ID).
• Choose an type (a regular taxable brokerage or an IRA).
• Fund your (transfer money directly from a bank into the brokerage ).

3. Determine how much you can afford to invest

You don’t have to be wealthy to begin investing, but you should have a plan. And that plan begins with figuring out how much you’re able to invest. You’ll want to add money regularly to the and aim to hold it there for at least three to five years to allow the market enough time to rise and recover from any major downturns.

The less you’re able to invest, the more important it is to find a broker that offers you low fees, because that’s money that could otherwise go into your investments.

Once you’ve figured out how much you can invest, move that money to your brokerage . Then set up your to regularly transfer a desired amount each week or month from your bank. Or you can set up your 401(k) to move money from each paycheck.

4. Buy the S&P 500 index fund

Once you know the S&P index fund you want to buy and how much you’re able to invest, buying an index fund is relatively straightforward.

Here’s how it works:

1. Search for your index fund: Find the S&P 500 index fund you want to buy on your broker’s website. We discussed several popular options earlier.
2. Place an order: Choose the number of shares or dollar amount you want to purchase. If buying an ETF, you may be able to choose between market orders and limit orders.
3. Hold and monitor: Periodically check your fund’s performance, such as on a monthly or quarterly basis

You can also stick to the broker’s easy trade entry form, which often appears at the bottom of the screen. Input the fund’s ticker symbol and how many shares you’d like to buy, based on how much money you’ve put into the .

If you’re able to move money into the brokerage regularly, many brokers allow you to set up an investing schedule to buy an index fund on a recurring basis. This is a great option for investors who don’t want to to place a regular trade. You can set it and forget it.

As a result, you’ll be able to take advantage of the benefits of dollar-cost averaging, which can help you reduce risk and increase your returns.

Why do investors like S&P 500 index funds?

S&P 500 index funds have become incredibly popular with investors, and the reasons are simple:

• Ownership of many companies: These funds allow you to hold a stake in hundreds of stocks, even if you own just one share of the index fund.
• Diversification: This broad collection of companies means you lower your risk through diversification. The poor performance of one company won’t hurt you as much when you own many companies.
• Low cost: Index funds tend to be low cost (meaning they have low expense ratios) because they’re ively managed, rather than actively managed. As a result, more of your hard-earned dollars are invested instead of paid to fund managers as fees.
• Solid performance: Your returns will effectively equal the performance of the S&P 500, which has historically been about 10 percent annually on average over long periods.
• Easy to buy: It’s much simpler to invest in index funds than it is to buy individual stocks, because it requires little time and no investing expertise.

These are the biggest reasons that investors have turned to the S&P 500 in droves.

Cons of S&P 500 index funds

S&P 500 index funds have several advantages that will appeal to most long-term investors; however, it’s important to acknowledge the potential downsides. For example, S&P 500 index funds, by design, are limited to large-cap companies. This means you won’t have exposure to several market segments, such as small-cap and mid-cap stocks, bonds and real estate, from the fund alone.

In addition, because S&P 500 funds are not fully diversified, they are susceptible to some market volatility. If the stock market experiences a downturn, these index funds won’t protect investors against potential losses. This is why financial advisors often recommend bonds and cash holdings as part of a larger investment strategy.

Risk-averse investors should also consider the relatively low dividend yield of S&P 500 index funds. While they often pay dividends, the yields may be lower than those of funds focusing on dividend payouts.

Is an S&P 500 index fund a good investment?

As long as your time horizon is three to five years or longer, an S&P 500 index fund could be a good addition to your portfolio. However, any investment can produce poor returns if it’s purchased at overvalued prices. But that hasn’t proven to be an issue for these funds, with investors enjoying about 10 percent annual returns on average over long time periods.

An S&P 500 index fund may be a good investment for:

• Long-term, buy-and-hold investors
• Investors who want to minimize fees
• Those who can tolerate some market volatility
• Investors looking for exposure to a large number of U.S. companies

If you prefer low-cost investments with built-in diversification, S&P 500 index funds may be a good choice. However, that they aren’t fully diversified, leaving out investments like small-cap stocks and bonds.

Consider buying into the fund over a period of time using a method known as dollar-cost averaging. By doing this, you’re spreading out buy points and avoiding the practice of “timing the market.” This approach can help you take advantage of any market downturns that happen on occasion.

FAQs

• What is the best S&P 500 index fund?
  There is no single best S&P 500 index fund. Each invests in the 500 largest U.S. companies, making all S&P 500 index funds quite similar in performance. Because performance is similar, investors should look for a fund with minimal fees at one of their preferred brokers.
• What if I had invested $1,000 in the S&P 500 10 years ago?
  The amount you would have in this scenario depends on a few variables, such as whether you chose to reinvest dividends and which fund you selected. However, using VOO as an example, your investment would have grown to roughly $3,000.
• Should I invest all my 401(k) in the S&P 500?

  It is typically not advisable to invest your 401(k) entirely in the S&P 500. Financial advisors recommend diversifying your portfolio with other investments, such as small-cap stocks, international stocks and bonds.

  In addition, investing in an S&P 500 fund in your 401(k) may not even be possible. 401(k) plans typically limit your investment options to certain mutual funds, which may not include S&P 500 funds. Discussing your investment choices with a financial advisor who understands your finances and investment goals is best.

Bottom line

Buying an S&P 500 index fund can be a wise decision for your portfolio, and that’s one reason that Warren Buffett has consistently recommended it to investors. It’s easy to find a low-cost fund and set up a brokerage , even if you only have basic knowledge of what to do. Then you’ll be able to enjoy the solid performance of the S&P 500 over time.

— Bankrate contributor Bob Haegele contributed to an update of this article.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.