By 
The S&P 500 index fund is the most recommended investment in history. Warren Buffett bets on it. Financial advisors default to it. Here is what it actually is, how to buy it, and why it works.
In 2007, Warren Buffett made a million-dollar bet: an S&P 500 index fund would outperform a collection of hedge funds over 10 years. He won by a landslide. The index fund returned 125.8% over the decade. The hedge funds returned 36%. The best investors on Wall Street, with all their resources and expertise, could not beat a fund that simply buys 500 stocks and holds them.
That bet captures everything you need to know about S&P 500 index funds. They are simple, cheap, and over long periods, they beat most professional investors. If you are wondering what to invest your first $1,000 in, wondering what to hold in your Roth IRA or 401(k), or just trying to understand what “the market” means when people say “the market went up today,” this guide is for you.
What is the S&P 500?
The S&P 500 (Standard and Poor’s 500) is a stock market index that tracks 500 of the largest publicly traded companies in the United States. It is maintained by S&P Dow Jones Indices and is widely considered the best single measure of the US stock market.
The index includes companies across every sector: technology (Apple, Microsoft, Nvidia), healthcare (UnitedHealth, Johnson and Johnson), finance (JPMorgan, Berkshire Hathaway), consumer goods (Amazon, Procter and Gamble), energy (ExxonMobil), and more.
It is market-cap weighted, meaning larger companies have a bigger influence on the index. Apple, with a market cap over $3 trillion, affects the index more than a smaller company worth $20 billion. The top 10 holdings typically represent 30 to 35% of the total index weight.
What the S&P 500 is NOT: It is not the entire stock market. It excludes small-cap and mid-cap companies (roughly 3,000+ US stocks). It excludes all international stocks. It is a large-cap US stock index. For total market exposure, see our index funds vs ETFs guide where we discuss total stock market funds like VTI.
What is an S&P 500 index fund?
An S&P 500 index fund is a mutual fund or ETF that buys all 500 stocks in the S&P 500 index, in the same proportions as the index. When you buy one share of an S&P 500 index fund, you instantly own a tiny piece of all 500 companies.
The fund does not try to pick winners or time the market. It simply mirrors the index. If Apple is 7% of the S&P 500, the fund holds 7% in Apple. If a company gets added to or removed from the index, the fund adjusts accordingly.
This passive approach means extremely low fees (0.03% or less for the best funds), zero active management decisions, and returns that match the index minus the tiny expense ratio.
The best S&P 500 index funds in 2026
| Fund | Type | Expense ratio | Minimum | Best for |
|---|---|---|---|---|
| Vanguard S&P 500 ETF (VOO) | ETF | 0.03% | $1 (fractional) | Most investors |
| Fidelity 500 Index (FXAIX) | Mutual fund | 0.015% | $0 | Fidelity account holders |
| Schwab S&P 500 Index (SWPPX) | Mutual fund | 0.02% | $0 | Schwab account holders |
| SPDR S&P 500 ETF (SPY) | ETF | 0.0945% | $1 (fractional) | Active traders |
| iShares Core S&P 500 (IVV) | ETF | 0.03% | $1 (fractional) | BlackRock preference |
VOO, FXAIX, SWPPX, and IVV are essentially identical products with negligible fee differences. They all track the same 500 stocks with the same weighting. Pick whichever is available in your brokerage account.
SPY is the oldest and most heavily traded S&P 500 ETF, but its expense ratio (0.0945%) is roughly 3x higher than VOO or IVV. For long-term buy-and-hold investors, VOO or IVV is the better choice.
FXAIX at 0.015% is technically the cheapest, and Fidelity has no minimums. If you have a Fidelity account, it is hard to beat.
Historical performance: what to expect
According to data from NYU Stern School of Business, the S&P 500 has delivered the following average annual returns:
10-year average (2016 to 2025): Roughly 12 to 13% (above average, driven by tech boom)
20-year average (2006 to 2025): Roughly 10 to 11% (includes 2008 crash and 2020 crash)
50-year average (1976 to 2025): Roughly 10.5%
Since inception (1926 to 2025): Roughly 10% annually
These are nominal returns (before inflation). Adjusted for inflation, the real return is roughly 7% annually, which is the number we use throughout our guides for compound interest calculations.
Important context: “Average 10% per year” does not mean 10% every year. The S&P 500 has had calendar years of +30%, +20%, -38% (2008), -18%, +26%, and everything in between. In any given year, your portfolio might be up 25% or down 30%. Over 20+ year periods, it has always produced positive returns. This is why a long time horizon is essential.
S&P 500 vs. total stock market: which is better?
In our index funds guide, we recommended VTI (Vanguard Total Stock Market ETF), which holds roughly 3,600 stocks including all 500 S&P 500 companies plus mid-cap and small-cap stocks. How does it compare?
Overlap: The S&P 500 represents roughly 80% of the total US stock market by market cap. VTI and VOO are roughly 80% identical. The remaining 20% of VTI is mid-cap and small-cap companies.
Performance: Over the past 20 years, VTI and VOO have performed nearly identically (within 0.1 to 0.3% annually). Sometimes small-caps outperform, sometimes they lag. The difference is minimal.
Which to choose:
- If your 401(k) only offers an S&P 500 index fund, that is perfectly fine. You are getting 80% of the total market.
- If you have a choice (in your Roth IRA), VTI is slightly more diversified.
- If you already own VOO, adding small-cap exposure is unnecessary for most people.
Bottom line: VOO (S&P 500) and VTI (total market) are both excellent. Do not agonize over the difference. Either one held for 30 years will build significant wealth.
How to buy an S&P 500 index fund
In your 401(k)
Look for funds named “S&P 500 Index,” “Large Cap Index,” “Stock Market Index,” or similar. Check the expense ratio. If it is under 0.10%, it is a good option. If your plan charges 0.50%+ for the S&P 500 fund, check if there is a cheaper alternative or consider whether a target-date fund in the plan has a better overall fee.
In your Roth IRA or taxable brokerage
- Open an account at Fidelity, Schwab, or Vanguard (all three are excellent, zero-commission brokerages)
- Transfer money from your bank account
- Search for the fund: VOO (ETF), FXAIX (Fidelity mutual fund), or SWPPX (Schwab mutual fund)
- Buy. If using an ETF, you can buy fractional shares (invest $50 even if one share costs $500)
- Enable automatic investing if your brokerage supports it (Fidelity and Schwab do)
The entire process takes under 15 minutes.
Dollar-cost averaging into the S&P 500
Rather than investing a lump sum, most people invest a fixed amount each month. This is dollar-cost averaging: you buy more shares when prices are low and fewer when prices are high. It removes the stress of timing and is how most 401(k) contributions work naturally.
$500/month into VOO for 30 years at 10% average returns grows to roughly $1.1 million. That is the S&P 500 index fund doing what it has done for nearly a century.
Why the S&P 500 beats most professional investors
According to the SPIVA Scorecard published by S&P Dow Jones Indices, over a 20-year period, roughly 90% of actively managed US large-cap funds underperform the S&P 500 index after fees.
Why? Several reasons:
Fees eat returns. The average actively managed fund charges 0.50 to 1.00% in fees. The S&P 500 index fund charges 0.03%. That 0.50 to 0.97% difference compounds over decades. On $500,000 invested for 30 years, a 0.50% fee difference costs roughly $200,000 in lost growth.
Managers are human. Even brilliant fund managers make emotional decisions, chase trends, and have cold streaks. The index has no emotions. It simply holds the 500 largest companies.
The market is efficient. Public information about companies is instantly reflected in stock prices. It is extremely difficult to consistently find mispriced stocks when millions of analysts, algorithms, and investors are all looking at the same data.
This is why we recommend index funds over actively managed funds throughout our guides, and why Jack Bogle (founder of Vanguard and inventor of the index fund) is considered one of the most important figures in personal finance history.
Risks of the S&P 500
No investment is risk-free. Here is what can happen:
Short-term losses. The S&P 500 dropped 37% in 2008, 34% in March 2020 (recovered in 5 months), and 18% in 2022. If you invest $50,000 and the market drops 30%, your portfolio is worth $35,000. If you sell at that point, you lock in the loss. If you hold (and keep investing), history shows the market recovers.
Concentration in US large-caps. The S&P 500 is entirely US companies and skewed toward the largest ones. The top 10 stocks can represent 30%+ of the index. If US large-caps underperform (as they did from 2000 to 2010 relative to international stocks), your returns lag. Diversifying with international stocks (VXUS) reduces this risk.
Tech concentration. As of 2026, technology and tech-adjacent companies represent roughly 30 to 35% of the S&P 500. If the tech sector has a prolonged downturn, the entire index suffers disproportionately.
Inflation risk. While stocks have historically outpaced inflation, there are periods (like the 1970s) where inflation was high and real stock returns were low or negative. Diversifying with bonds, REITs, and I bonds helps hedge against inflation.
These risks are real but manageable with a long time horizon (20+ years), diversification (add international and bonds), and consistent investing (dollar-cost averaging).
S&P 500 index fund vs. other investments
vs. Individual stocks: The S&P 500 gives you 500 stocks at once. Individual stock picking is riskier (one company can go bankrupt), more time-consuming, and statistically less likely to beat the index. Start with the index fund. Add individual stocks only with money you can afford to lose, after your core portfolio is established.
vs. Target-date funds: A target-date fund holds an S&P 500-like fund plus international stocks and bonds, all in one. It is more diversified and automatically adjusts over time. For total beginners, a target-date fund is even simpler than an S&P 500 fund.
vs. Dividend ETFs: Dividend ETFs like SCHD hold a subset of dividend-paying stocks with higher yield but potentially lower total return. The S&P 500 includes dividend payers and growth stocks for balanced exposure.
vs. Bonds: Bonds are lower risk, lower return. A portfolio of 100% S&P 500 has the highest expected long-term return but the most volatility. Adding 10 to 20% bonds smooths the ride. See our portfolio construction advice.
vs. Real estate: REITs provide real estate exposure with different risk/return characteristics. Adding 5 to 10% REITs to an S&P 500 portfolio adds diversification. Both asset classes have delivered roughly 10% long-term returns.
How to use the S&P 500 in your portfolio
Beginner (just getting started): 100% S&P 500 index fund (VOO or equivalent) in your Roth IRA or 401(k). Simple, effective, and better than waiting to build the “perfect” portfolio.
Intermediate (building out): 60% S&P 500 (or total market), 30% international stocks (VXUS), 10% bonds (BND). This is the classic 3-fund portfolio we describe in our index funds guide.
Advanced (multiple accounts): S&P 500 in your taxable account (tax-efficient, low turnover), bonds in your 401(k) (tax-deferred growth), REITs and international in your Roth IRA (tax-free growth on higher-yielding assets). This asset location strategy optimizes tax efficiency across accounts.
Frequently asked questions
Can I lose all my money in an S&P 500 index fund? For the S&P 500 to go to zero, all 500 of the largest US companies would have to become worthless simultaneously. That has never happened and is essentially impossible without the complete collapse of the US economy. You can lose 30 to 50% temporarily in a severe crash, but total loss is not a realistic risk.
Is VOO or SPY better? VOO charges 0.03% vs. SPY’s 0.0945%. For long-term investors, VOO saves you money. SPY has more trading volume, which matters for day traders (not for you). Buy VOO.
Should I invest in the S&P 500 or a total stock market fund? Either is excellent. The S&P 500 covers 80% of the total US stock market. The difference in long-term returns is minimal. If both are available, total stock market is slightly more diversified. If only the S&P 500 is available (common in 401(k) plans), it is perfectly sufficient.
How much should I invest in the S&P 500? Follow the priority stack from our paycheck savings guide: emergency fund first, then 401(k) match, then high-interest debt, then Roth IRA, then max 401(k). Whatever you invest goes into the S&P 500 (or total market) fund within those accounts.
Is now a good time to invest in the S&P 500? The best time to invest was 20 years ago. The second best time is today. Trying to time the market costs more than it saves. Dollar-cost average and let time do the work.
What about international diversification? The S&P 500 companies generate roughly 40% of their revenue internationally, so you have some global exposure. But for true diversification, add 20 to 30% international stocks (VXUS). When US stocks lag, international stocks sometimes outperform, and vice versa.
The bottom line
The S&P 500 index fund is not exciting. It will never 10x in a year. No one brags about owning VOO at a dinner party. But over 20, 30, or 40 years, it quietly and reliably builds more wealth than almost any alternative investment strategy, including most professional fund managers.
Buy VOO (or FXAIX or SWPPX). Set up automatic monthly investments. Reinvest dividends. Do not sell when the market drops. Check in once a quarter. In 30 years, you will have more money than 90% of people who tried to be clever.
That is the entire strategy. It fits in one sentence. It works.