If you want your portfolio ‘s value to grow with the U.S. economy and do n’t want to choose person stocks, an S & P 500 index fund could be a ache choice. In fact, fabled investor Warren Buffett has said that investing in low-cost S & P 500 index funds is a count on the future of U.S. economic growth and the best room for most people to build wealth .
What are S&P 500 index funds, and why are they popular?
An index fund is designed to mirror the performance of a stock index. An S & P 500 exponent fund invests in each of the 500 companies in the S&P 500 ( SNPINDEX : ^GSPC ). It does n’t try to outperform the index ; alternatively, it uses the index as its benchmark and aims to replicate its performance deoxyadenosine monophosphate close as possible .
S & P 500 funds are by far the most popular type of index fund. But index funds can be based on much any fiscal market, investing scheme, or stock marketplace sector .
index funds are popular with investors for a number of reasons. They offer easy portfolio diversification, with some funds enabling portfolio exposure to hundreds or even thousands of stocks and bonds. You do n’t risk losing all your money if one company performs ailing or collapses, as you would with individual investments. however, you besides do n’t get exposure to the potentially astronomic returns that can result from picking a single huge winner.
index funds are passively managed, which means you ‘re not paying for person to actively pick and choose investments. This results in a lower expense ratio, for example, lower investment management fees as compared to actively managed funds .
- Your money will track the market’s performance.
Historically, the S&P 500’s annual returns have been in the 9% to 10% range. Some years, the index will lose value, of course. During the Great Recession, the S&P 500 lost about half of its value. As of March 15, 2022, the S&P 500 was down about 10% year to date. But, over the long term, it’s always recovered. Never in the S&P 500’s history has a 20-year investment resulted in a loss.
- You keep more of your investment profits in your pocket.
Buffett’s case for low-cost S&P 500 index funds centers on their low fees. While active managers are likely to match the market’s performance over time, their fees eat away at your returns. Buffett famously won a $1 million bet against investment manager Ted Seides that a low-cost S&P 500 index fund could beat a hand-selected hedge fund portfolio over 10 years.
- You’re investing in 500 of the most profitable companies in the U.S.
The corporations represented in the S&P 500 are subject to stringent listing criteria. To join the index, a company must have an $11.8 billion market capitalization, and the sum of its past four quarters’ earnings must be positive. Each company must also get approval from an index committee. Some of the S&P 500’s largest holdings include Apple NASDAQ:AAPL)Amazon NASDAQ:AMZN)Microsoft NASDAQ:MSFT)Johnson & Johnson NYSE:JNJ)
- You can put your investment decisions on autopilot.
The S&P 500 has a flawless track record of delivering profits over long holding periods, so you can invest without worrying about stock market fluctuations or having to research individual companies. You can simply budget a certain amount and automatically invest it on a regular schedule. This practice is known as dollar-cost averaging. Even if you do pick individual stocks, S&P 500 funds are a good foundation for your investment portfolio since you’re guaranteed the returns of the stock market.
3 best S&P 500 index funds
These three major S & P 500 funds are extremely alike in composing since they all track the lapp index :
- Vanguard S&P 500 ETF NYSEMKT:VOO)
- iShares Core S&P 500 ETF NYSEMKT:IVV)
- SPDR S&P 500 ETF Trust NYSEMKT:SPY)
All three exchange-traded funds ( ETFs ) — a character of index fund — invest in the 500 companies that make up the S & P 500 index. Each has very close replicated the index ‘s performance :
|Fund Name||Expense Ratio||Total Fund Assets|
|Vanguard S&P 500 ETF||0.03 %||$ 808.8 billion|
|iShares Core S&P 500 ETF||0.03 %||$ 313 billion|
|SPDR S&P 500 ETF Trust||0.0945 %||$ 383.6 billion|
There are negligible differences between the performances of the S & P 500 index and each of these three funds that track it. The S & P 500 outperformed each fund slenderly, as would be expected when accounting for each fund ‘s expense ratio .
At the S & P 500 ‘s rate of return, a $ 10,000 investment made at the startle of 2017 would have grown to $ 23,340 by the end of 2021. As the board under shows, even the worst-performing index fund of the three would have increased that $ 10,000 investment to $ 23,230 over the same five-year holding menstruation .
|Index or Fund||1-Year Total Return||3-Year Annualized Return||5-Year Annualized Return|
|S&P 500 Index||31.46 %||26.29 %||18.63 %|
|Vanguard S&P 500 ETF||31.35 %||26.24 %||18.54 %|
|iShares Core S&P 500 ETF||31.33 %||26.24 %||18.54 %|
|SPDR S&P 500 ETF Trust||31.28 %||18.04 %||18.49 %|
With any of these three funds, you can expect your investment to deliver performance that ‘s about identical to the S & P 500. The Vanguard and iShares options have the lowest expense ratio. however, if you ‘re a winnow of SPDR products, a 0.0945 % expense ratio is n’t high by any means. A 0.0945 % expense proportion means that $ 9.45 of every $ 10,000 invested is per annum collected as a management fee .
Beware of leveraged S&P 500 index funds
Be leery of leverage funds that are advertised as S & P 500 ETFs. Leveraged ETFs use borrowed money and/or derived function securities to amplify investing returns or to bet against the index. For example, a 2x-leveraged S & P 500 ETF aims to return twice the index ‘s performance each day. so, if the exponent rises by 2 %, the ETF ‘s rate rises by 4 %. If the index falls by 3 %, the ETF loses 6 % .
These leverage products are intended to be day-trading instruments and have an implicit in downside bias over the long terminus. In early words, a 2x-leveraged S & P 500 ETF, over the long terminus, will not return doubly the index ‘s operation.
Investing in S & P 500 index funds is one of the safest ways to build wealth over time. But leverage ETFs, tied those that track the S & P 500, are highly bad and do n’t belong in a long-run portfolio .