The launch of the first commercially viable index fund by the late John “Jack” Bogle, founder and chairman of the Vanguard Group in 1976, marked a watershed moment for investors.
The inaugural fund was called the Vanguard First Index Investment Trust and tracked the performance of the S&P 500 Index. This popular equity index is regarded as a barometer of U.S. stock market performance and is widely used today as a benchmark for U.S. equity funds.
“The S&P 500 provides broadly diversified exposure across both sectors — such as technology, health care and financials — and styles, such as growth and value,” says Michelle Louie, senior portfolio manager at Vanguard’s Equity Index Group.
As time went on, more and more fund managers saw the value of what was initially mocked as “Bogle’s folly” and followed suit to launch their own S&P 500 index funds. Today, S&P 500 index funds are one of the most popular investment choices in the U.S., thanks to their low costs, minimal turnover rate, simplicity and performance.
For our selection of the best S&P 500 index funds, we screened multiple options that met the following criteria: a 10-year annualized tracking error of 0.25% or less, a net expense ratio under 0.2%, at least $1 billion in assets under management (AUM), along with a 4-star minimum Morningstar rating and at least a 10-year track record.
Best S&P 500 index funds
Compare the best S&P 500 index funds
Why other S&P 500 index funds didn’t make the cut
Because S&P 500 index funds all track the same benchmark, this list focused on funds with the lowest expense ratios among their peers. All else being equal, the largest determinant of an S&P 500 index fund’s performance will be fees. Funds with higher fees tend to incur a higher tracking error relative to their benchmark, especially over long periods of time.
This list focuses on passively managed S&P 500 index funds and excludes actively managed funds that still use the S&P 500 index as an underlying asset. Examples include leveraged S&P 500 funds, inverse S&P 500 funds or S&P 500 funds that employ derivatives to produce higher yields or hedge against a crash.
Methodology
Our curated ranking of the top S&P 500 index funds was created by screening a list of all available U.S.-listed S&P 500 index funds based on the following must-have metrics:
Morningstar rating: All the funds selected hold at least a 4-star rating from Morningstar. This is a quantitative, rearward-looking measure of a fund’s historical performance.
Tracking error: To measure this, we assessed how much a fund’s 10-year annualized performance differed from that of the S&P 500 index’s 10-year annualized return of 12.26%. All the funds on this list had a tracking error of 0.25% or less, with lower being better.
AUM: All the funds on this list have accrued at least $1 billion in assets under management. We only considered AUM for the specific share class profiled. In general, a higher AUM signals greater fund popularity among investors.
Expense ratio: To be considered for this list, an S&P 500 index fund must have a net expense ratio of 0.2% or less. This factor was weighted heavily as it has the greatest effect on an S&P 500 index fund’s tracking error and performance.
Management style: All the funds on this list are passively managed in that they seek to replicate the exact holdings of the S&P 500 index and its returns net of fees. Actively managed funds that use the S&P 500 as an underlying index, but target an objective or return not matching the index (such as leveraged, inverse or income-oriented exposure) were excluded.
This set of criteria enables investors to screen for S&P 500 index funds that are passively managed, charge low fees, tightly track their benchmark index and are managed by a reputable fund manager with a proven record of performance.
An experienced fund analyst selected the funds above, but they may not be right for your portfolio. Before purchasing any of these funds, do plenty of research to ensure they align with your financial goals and risk tolerance.
Final verdict
An S&P 500 index fund is an excellent core holding for U.S. investors and a great way to track the domestic stock market at a low cost with a passive approach. This type of index fund can help you build a complete, globally diversified portfolio when coupled with a U.S. small-cap fund and an international stock fund. An S&P 500 index fund can be used for a high-conviction, long-term bet on U.S. large-cap stocks.
Our recommendation for the best overall S&P 500 index fund is the Fidelity 500 Index Fund (FXAIX). With a 0.015% expense ratio, this fund is the cheapest one on our list. In addition, the fund does not have a minimum initial investment requirement, sales loads or trading fees. Over the last 10 years, the fund has returned an annualized 12.43%, close to the S&P 500 index benchmark’s return of 12.37%.
Why S&P 500 funds are a popular investment
S&P 500 funds are a popular investment primarily due to their low cost, strong historical performance and simplicity. With a single ticker, investors can access 500 of the leading U.S. companies for a small fee. This is much more affordable and cost-efficient than buying 500 U.S. stocks individually.
Because the S&P 500 index is used as a benchmark and is difficult for many active funds to beat, many investors will pick S&P 500 index funds to match the market’s long-term average return, which is called passive investing.
What to think about when choosing an S&P 500 index fund
Because all S&P 500 index funds track the same benchmark, the primary factor to think about is expense ratios. Fees directly reduce your fund’s returns, so keeping them as low as possible is crucial. All else being equal, lower fees result in a smaller tracking error, which increases how accurately your S&P 500 index fund tracks its benchmark.
After fees, other things to think about include whether the fund has any minimum initial investment requirements, transaction fees or deferred sales charges. Finally, consider assessing the fund’s track record and the fund manager’s reputation in terms of the fund’s tenure and AUM.
Frequently asked questions (FAQs)
S&P 500 index funds are investment vehicles that attempt to replicate the holdings in and the returns of the S&P 500 index. They are a great low-cost way to gain exposure to the performance of U.S. large-cap stocks from all 11 stock market sectors.