By 
Warren Buffett once made a famous bet that a low-cost S&P 500 index fund would outperform five hedge fund funds-of-funds over a 10-year period. The index fund gained 125.8% cumulatively, while the five competing funds averaged roughly 36%.
The bet did not prove that an index fund will outperform every professional investor. It did illustrate two reasons index funds are so widely used: keeping costs low matters, and consistently beating a broad market benchmark is difficult.
For a beginner, an S&P 500 index fund can be a simple way to own a large group of major U.S. companies in one investment. But choosing the fund itself is only one decision. Your account type, time horizon, overall diversification, and tolerance for market declines matter too.
Key takeaways
- The S&P 500 tracks 500 leading large-cap U.S. companies selected under S&P Dow Jones Indices’ methodology.
- An S&P 500 index fund seeks to replicate the index at very low cost rather than having a manager choose stocks expected to outperform.
- VOO, IVV, FXAIX, and SWPPX provide very similar S&P 500 exposure, but ETF and mutual fund structures work differently.
- Long-run historical returns have been strong, but historical averages are not a forecast of future returns.
- The S&P 500 is diversified across hundreds of companies, but it does not include the entire U.S. stock market or international stocks.
What is the S&P 500?
The S&P 500 is a stock market index designed to measure the large-cap segment of the U.S. equity market. It is maintained by S&P Dow Jones Indices and covers roughly 80% of available U.S. market capitalization.
The companies are not simply the 500 largest businesses ranked by market value. S&P DJI applies eligibility requirements covering factors such as market capitalization, liquidity, public float, profitability, and U.S. domicile, with an index committee overseeing constituent changes.
The index is market-cap weighted, so the largest companies have more influence than smaller constituents. That matters because owning 500 companies does not mean your money is split evenly among 500 companies. As of August 2026, the 10 largest constituents represented roughly 38% of the index.
The S&P 500 also is not the entire U.S. stock market. It focuses primarily on large-cap companies and excludes much of the small- and mid-cap market. It also does not directly hold foreign companies.
What is an S&P 500 index fund?
You cannot invest directly in an index. Instead, mutual funds and ETFs can be built to track it.
An S&P 500 index fund seeks to produce returns close to the index, before accounting for expenses and small tracking differences. Most do this by holding the constituent stocks in similar weights, although some funds may use sampling, cash, derivatives, or other techniques rather than maintaining a mathematically identical portfolio at every moment.
This differs from an actively managed fund. An active manager chooses securities based on which investments the manager expects to perform well. An S&P 500 index fund instead follows the composition of the index as it changes.
That passive approach allows many S&P 500 funds to charge very low expense ratios.
Common low-cost S&P 500 funds
Several funds provide nearly the same underlying large-cap U.S. exposure. The more useful comparison is usually fund structure, cost, and account availability, rather than trying to identify one universal winner.
| Fund | Type | Expense ratio | May fit best when |
|---|---|---|---|
| Vanguard S&P 500 ETF (VOO) | ETF | 0.03% | You want a widely available low-cost ETF |
| iShares Core S&P 500 ETF (IVV) | ETF | 0.03% | You want another low-cost ETF option |
| Fidelity 500 Index Fund (FXAIX) | Mutual fund | 0.015% | You invest through Fidelity and prefer a mutual fund |
| Schwab S&P 500 Index Fund (SWPPX) | Mutual fund | 0.02% | You invest through Schwab and prefer a mutual fund |
| SPDR S&P 500 ETF Trust (SPY) | ETF | 0.0945% | Trading liquidity matters more than minimizing expenses |
Expense ratios are current as of August 2026 and can change.
VOO and IVV are ETFs, so they trade throughout the market day. FXAIX and SWPPX are mutual funds, which transact once per day at the fund’s net asset value.
For a long-term investor, those structural differences can matter alongside the very small fee differences between low-cost S&P 500 funds.
SPY also tracks the S&P 500, but its higher expense ratio makes it less compelling when the goal is simply low-cost long-term exposure. Its very high trading volume can be useful for traders and institutions whose priorities differ from those of a typical buy-and-hold investor.
A simple fund-selection framework
If you already use Fidelity, FXAIX is a low-cost mutual fund option.
If you already use Schwab, SWPPX offers similar exposure in mutual fund form.
If you want an ETF that can be held at many brokerages, VOO and IVV are both straightforward low-cost choices.
If you use Vanguard and prefer a mutual fund, VFIAX also tracks the S&P 500. Its current expense ratio is 0.04%, and Vanguard lists a $3,000 minimum investment.
Fractional ETF availability and minimum purchase amounts depend on the brokerage rather than the S&P 500 ETF itself, so check your broker’s trading rules before assuming you can invest a particular dollar amount.
See how different return assumptions affect growth
Compound Interest Calculator
Historical returns can help provide context, but they should not be treated as a promise.
Try several hypothetical annual return assumptions, such as 6%, 8%, and 10%, rather than relying on one number. Then change the monthly contribution and time horizon to see which assumptions have the biggest effect on the result.
The calculator shows scenarios based on the inputs you provide. It does not predict what the S&P 500 will return in the future.
Historical S&P 500 returns
The modern S&P 500 in its current 500-stock format launched in March 1957. Longer historical datasets sometimes extend further back using predecessor indexes or reconstructed U.S. large-cap market data, so a chart beginning in the 1920s should not be described as a continuous live history of today’s S&P 500.
According to S&P Dow Jones Indices, the S&P 500 has delivered an annualized total return of about 10% since its March 1957 launch. That is a historical result, not a forecast for future returns.
The important distinction is between a historical average and an expected annual result.
A long-run average near 10% does not mean:
- the market earns 10% every year;
- the next 10 years will earn 10%;
- a 10% assumption is appropriate for every financial plan.
Individual years can be sharply positive or negative, and future returns may differ substantially from historical averages.
That is why projections are better treated as scenarios. If a plan only works when stocks return exactly 10% every year, the assumptions may be too fragile.
Why low-cost index funds are difficult to beat
S&P Dow Jones Indices publishes its SPIVA U.S. Scorecard, which compares actively managed funds with relevant benchmarks.
The results repeatedly show that a large share of active U.S. large-cap funds fail to outperform the S&P 500 over longer periods. In the 2025 scorecard, 79% of active large-cap U.S. equity funds underperformed the S&P 500 during that year.
One reason is cost. An active fund must overcome its additional expenses before it can deliver higher returns to investors.
Fees that look small can compound into meaningful differences over long periods, but the exact cost depends on the portfolio size, return, contributions, and fee level. A 1 percentage-point annual fee difference does not translate into one fixed dollar loss for every investor.
Low costs do not guarantee that an index fund will outperform an active fund. They simply reduce one hurdle the investor has to overcome.
How to buy an S&P 500 index fund
- Choose the account first. Decide whether you are investing through a workplace plan, IRA, or taxable brokerage account. The appropriate account depends on factors such as employer matching, tax eligibility, liquidity needs, and your broader financial goals.
- Choose an S&P 500 fund available in that account. If several low-cost options track the same index, focus on expense ratio, ETF versus mutual fund structure, and how easily you can automate purchases.
- Choose an amount you can invest consistently. Fractional shares at some brokerages make it possible to buy ETFs without purchasing a full share, while many index mutual funds have low or no minimums.
- Automate contributions when useful. If money becomes available from each paycheck, automatic investing can remove the need to make a new decision every month.
- Avoid changing a long-term plan because of daily market moves. Check your investments often enough to confirm contributions, review your allocation, and make intentional changes when your goals or circumstances change.
A Roth IRA can be an attractive account for eligible investors because qualified distributions can be tax-free. But it is not automatically the first account every investor should fund. Employer matching, access to cash, taxes, debt, and eligibility can change the decision.
For 2026, the IRS says the IRA contribution limit is $7,500, with a higher limit for eligible investors age 50 or older. Income limits also affect whether you can contribute directly to a Roth IRA.
S&P 500 vs. total stock market: VOO vs. VTI
VOO tracks the S&P 500, while VTI tracks a much broader U.S. stock market index.
| Feature | VOO | VTI |
|---|---|---|
| Market exposure | Large-cap U.S. stocks | Broad U.S. stock market |
| Number of holdings | About 500 | Thousands |
| Small- and mid-cap exposure | Limited | Yes |
| Expense ratio | 0.03% | 0.03% |
| Useful when | You intentionally want S&P 500 exposure | You want broader U.S. stock coverage |
The two funds overlap heavily because the largest U.S. companies dominate the total market by value. That helps explain why their long-term performance can look similar.
But the choice is not meaningless.
Choose VTI if you want small- and mid-cap companies included alongside large caps.
Choose VOO if you specifically want the S&P 500 and are comfortable focusing on large-cap U.S. companies.
Either can serve as a low-cost U.S. equity core for many long-term portfolios. Neither provides complete global diversification.
For a broader look at these choices, see our index funds for beginners guide.
What about international stocks?
The S&P 500 holds U.S. companies. Many of those businesses earn revenue around the world, but that is not the same as directly owning companies based outside the United States.
An international stock fund can add exposure to companies in developed and emerging markets that are not included in the S&P 500.
How much international exposure to hold is a separate portfolio decision. There is no universal percentage that every S&P 500 investor needs.
If you want to combine U.S. stocks, international stocks, and bonds in one framework, our 3-fund portfolio guide explains how those pieces can fit together.
How risky is an S&P 500 index fund?
An S&P 500 fund is diversified across hundreds of large companies, but it is still a 100% stock investment. Its value can fall sharply.
Large market declines have happened repeatedly, sometimes exceeding 30% from prior highs. A long investment horizon gives a portfolio more time to recover from downturns, but it does not eliminate risk or guarantee a positive outcome by a particular date.
That means your time horizon matters.
Money you may need soon generally should not depend entirely on stock-market performance. A long-term retirement investor can usually tolerate more short-term volatility than someone saving for a home purchase in two years.
If the market falls while you are contributing, the same contribution buys more shares at lower market prices. That does not mean stocks are automatically undervalued or available at a guaranteed “discount.” It simply means the market price is lower than it was before the decline.
The appropriate response to a market crash should come from your existing investment plan, liquidity needs, and risk tolerance rather than from a blanket rule to always buy, sell, or do nothing.
Lump sum vs. dollar-cost averaging
This question needs an important distinction.
If you already have a lump sum of cash available to invest today, the decision is whether to invest it immediately or deliberately spread the investment over time. Vanguard research found that investing a lump sum immediately historically outperformed common cost-averaging approaches roughly two-thirds of the time because more of the money spends more time in the market.
However, gradual investing may still be easier for some highly loss-averse investors to follow if the alternative is leaving the money in cash indefinitely.
That is different from investing $500 from each paycheck. If the future money does not exist yet, investing each month’s available cash is not the same decision as delaying a lump sum you already have.
The more useful question is whether your investing schedule matches when the money actually becomes available and whether you can stick with the plan.
Frequently asked questions
What is the difference between VOO and SPY?
Both track the S&P 500, but they are separate ETFs with different structures, trading characteristics, and costs.
VOO currently charges 0.03% annually, while SPY charges 0.0945%. For a long-term investor primarily concerned with minimizing expenses, VOO or another lower-cost S&P 500 ETF may be more attractive.
SPY’s much higher trading volume can matter to institutional investors and active traders, so it is not accurate to say there is never a reason to choose it.
How much money do I need to start?
It depends on the fund and brokerage.
FXAIX and SWPPX have no investment minimum at their home brokerages. ETFs such as VOO and IVV trade by the share, but some brokerages allow fractional-share purchases.
Check your brokerage’s rules rather than assuming every S&P 500 ETF has a $1 minimum.
Should I hold an S&P 500 fund in a Roth IRA or taxable account?
Both can be reasonable.
A Roth IRA can provide valuable tax advantages if you are eligible, while a taxable brokerage has no annual contribution limit and generally offers easier access to your money. Workplace retirement accounts can add another option, especially when an employer match is available.
Choose the account based on taxes, employer benefits, liquidity, eligibility, and the rest of your financial plan rather than assuming one account should always come first.
How does an S&P 500 index fund make money?
Returns come from two main sources: changes in the market value of the underlying companies and dividends distributed by those companies.
Dividends have historically been a meaningful component of long-term stock returns, particularly when reinvested. Their contribution varies over time, so it is better not to assume a fixed number of percentage points each year.
The bottom line
An S&P 500 index fund is a simple, low-cost way to own a large group of major U.S. companies. Its appeal comes from broad large-cap exposure, low fees, and the difficulty active managers have historically faced in consistently beating the index.
That does not make it a guaranteed 10% return or a complete portfolio by itself. It remains a stock investment, it can fall sharply, and it does not directly include smaller U.S. companies, international stocks, or bonds.
For many beginners, the fund choice itself can be straightforward. VOO, IVV, FXAIX, and SWPPX all provide similar S&P 500 exposure at low cost. The bigger decisions are how much stock risk fits your goal, which account you use, whether you want broader U.S. or international exposure, and whether you can stay with the plan during difficult markets.
Use the calculator above to test several return scenarios rather than relying on one historical average. Then choose a low-cost fund that fits the account and portfolio strategy you have already decided to use.
