The best S&P 500 Index funds are generally those that have the lowest expense ratios. However, in addition to low costs, there is a delicate balance of science and art to indexing that makes only a few mutual funds and ETFs qualify to make our list ofthe best index funds. Learn how index funds work and how to choose the best index funds for your portfolio.
Key Takeaways
- S&P 500 index funds are mutual funds or ETFs that track the Standard and Poor's index of the 500 largest U.S. companies.
- The best S&P 500 index funds have low expenses and high assets under management, and they closely track the index.
- Vanguard, iShares, and SPDR all have strong S&P 500 index funds.
- S&P 500 index funds are often good core holdings for your portfolio, but they are not always the best choice for all investors.
What Are S&P 500 Index Funds?
S&P 500 index funds are mutual funds or exchange-traded funds (ETFs) that passively track the Standard and Poor's 500 index. This index represents approximately 500 of the largest U.S. companies, as measured by market capitalization. This means that the largest companies receive the highest allocation in the index.
How To Find the Best S&P 500 Index Funds
There are three primary qualities to look for when searching for the best S&P 500 index fund to buy:
- Low expenses
- Performance that closely tracks the index
- High assets under management
Look for the Lowest Expense Ratios
Keeping investment costs low may be the most important aspect of index fund investing, especially when comparing funds that track the same index. The funds with the lowest expense ratios generally generate the best returns over time.
For example, if an index fund has an expense ratio of 0.50%, but a fund that tracks the same index has an expense ratio of 0.10%, the latter fund has 0.40% advantage over the one with the higher expense ratio.
Look for S&P 500 Index Funds with High AUM
In the indexing world, size can matter. An index fund with high assets under management (AUM) is not only an indication of quality but also an advantage, especially when it comes to liquidity in ETFs. Low AUM can translate to wider swings in the so-called bid/ask spread. This increases price volatility, which can be a disadvantage for investors.
Look for Low Index Tracking Error
The objective of an S&P 500 Index fund is not to "beat the index" but to match it, which means that the fund will attempt to replicate the performance of the index. To do that, put simply, the fund will hold the same stocks found within the S&P 500. Therefore, the best stock index funds will do a good job of matching the list of stocks (holdings) represented in the benchmark index. Stock analysts may call this "low tracking error."
The3 Best S&P 500 Index Funds
Now that you know what it takes to make the best index funds, you can select the best S&P 500 index funds for your portfolio:
- The Vanguard 500 Index (VFIAX):The first index fund available to individual investors, Vanguard's 500 Index fund is the indexing pioneer. Investors who want to use a mutual fund to invest in the S&P 500 are a good fit for using VFIAX. Fortunately, Vanguard made VFIAX, its Admiral Shares fund, available to investors. This share class has a lower expense ratio (0.04%) than the older Investor Shares fund.
- The SPDR S&P 500 (SPY): This was the first ETF listed in the United States (January 1993). At $258 billion in AUM, it's also among the largest ETFs trading on the market today. Rounding out SPY's attractive qualities, the expense ratio is low at 0.0945%.
- The iShares Core S&P 500 (IVV):This ETF combines the attractive qualities of high assets under management ($177 billion) and very low expenses (0.03%). Investors who want to focus on the low expense ratio can be a good match for IVV.
Bottom Line
The best S&P 500 index funds are generally those with the lowest expense ratios. However, investors are wise to watch for other qualities, such as assets under management, past performance, and tracking error. S&P 500 index funds can make good core holdings in a portfolio, but they might not be right for all investors.
Frequently Asked Questions (FAQs)
What is the correlation coefficient between the S&P 500 and an index mutual fund?
In theory, an S&P fund should have a perfect positive correlation of one, which means the fund and index perform identically. However, while funds have a very high correlation coefficient, it is not a perfect correlation. Dividends, expense fees, and intraday trading on exchanges are just a few of the factors that can cause a fund's performance to vary slightly from the S&P 500 index. Comparing tracking errors is the best way to find the fund with the highest correlation coefficient.
Why should I invest in an S&P 500 fund?
S&P 500 funds are popular because it is perhaps the easiest way to build a diverse U.S. equity portfolio. Historically, the S&P 500 index has offered investment returns with a consistency that is nearly impossible to beat, even among professional traders. An S&P fund offers exposure to this index with a single trade that can be filled out with just a few clicks or taps.
Note: The Balance does not provide tax, investment, or financial services and advice. The information is being presented withoutconsideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
