How to buy an S&P 500 index fund: Key things to know

Investing in an S&P 500 index fund is an easy way to get instant exposure to hundreds of the largest companies in the U.S. in one investment vehicle.

All S&P 500 funds are fundamentally invested in the same stocks, so choosing the “cheapest” one (the one with the lowest expense ratio) is the way to go.

You’ll need a brokerage account to invest in an index fund, which you can open for free.

Mutual funds and ETFs that track the Standard & Poor’s 500 index are among the most popular investments — and it’s little wonder why. The S&P 500 index has achieved an average total return of about 10% annually since 1960. Even adjusting for inflation, the S&P 500 has produced an average total return of more than 6% annually.

The S&P 500 is made up of the 500 largest companies in the U.S. by market capitalization. Legendary investor Warren Buffett has long advised investors to buy and hold an S&P 500 index fund, instead of trying to pick stocks. If you’re considering choosing one for your portfolio, here’s what you’ll need to know to get started.

An index mutual fund or exchange-traded fund (ETF) is an investment that contains a collection of all the stocks that are part of a particular index. When you buy an S&P 500 index fund, you’re purchasing a small portion of shares in all the companies included in that index.

The S&P 500 index is viewed as the bellwether of the U.S. stock market. It contains 500 of the largest companies in the U.S., and when investors talk about “beating the market,” the S&P 500 is often considered the benchmark.

The sole purpose of S&P 500 index funds is to mimic the composition and performance of the index. There is no fund manager at the helm choosing which shares to buy or sell; adjustments in the holdings happen only when the underlying index changes. And because they are passively managed investments, investors save a lot of money on administrative and other fees.

Learn more: Low-cost index funds: A beginner’s guide

It’s surprisingly easy to buy an S&P 500 fund. You can set up your account to buy the index fund on autopilot, so you’ll almost never have to monitor the account, or you can enter your trades manually.

It’s easy to find an S&P 500 index fund, even if you’re just starting to invest.

Part of the beauty of index funds is that they will have exactly the same stocks and weightings as another fund based on the same index. In that sense, it would be like choosing among five McDonald’s restaurants serving exactly the same food: which one would you go with? You’d probably select the restaurant with the lowest price, and it’s usually the same with index funds.

Here are three key criteria for selecting your fund:

Expense ratio: To determine whether a fund is inexpensive, you’ll want to look at its expense ratio. That’s the cost that the fund manager will charge you over the course of the year to manage the fund as a percentage of your investment in the fund.

Sales load: If you’re investing in mutual funds, you’ll also want to see if the fund manager charges you a sales load, which is a fancy name for a sales commission. You’ll want to avoid this kind of expense entirely, particularly when buying an index fund. ETFs don’t charge sales loads.

Investment location: If you’re investing in a taxable brokerage account (rather than a retirement account), keep in mind that ETFs are more tax-efficient than equivalent index mutual funds. Buying an ETF in a taxable brokerage account will offer better after-tax returns over the long-term.

S&P 500 index funds have some of the lowest expense ratios on the market. Index investing is already less expensive than almost any other kind of investing, even if you don’t select the cheapest fund. Many S&P 500 index funds charge less than 0.10% annually. At that rate, you’ll pay only $10 annually for every $10,000 you have invested in the fund.

Some funds are even less expensive than that. Here are four of the best S&P 500 index funds, including one that’s completely fee-free:

In investing, especially with passive index funds, paying more doesn’t always translate into better returns. In fact, the relationship between fees and returns is often reversed. Since these funds are largely the same, your choice is not a “make or break” decision — you can expect to get the performance of the index, whatever that is, minus the expense ratio or any fees you’re paying. So costs are an important consideration here.

Select your fund and note its ticker symbol, a code of three to five letters.

After you’ve selected your index fund, you’ll want to access your investing account, whether it’s a 401(k), an IRA or a regular taxable brokerage account.

If you don’t have an account, you’ll need to open one, which you can do in 15 minutes or less. Here are four steps to do so:

Choose a provider. See Bankrate’s list of best online brokers for mutual fund investing for a selection that includes many with no account minimums and lots of no-commission mutual funds and ETFs.

Provide some basic information (name, Social Security number or tax ID).

Choose an account type (a regular taxable brokerage account or an IRA).

Fund your account (transfer money directly from a bank account into the brokerage account).

You don’t have to be wealthy to begin investing, but you should have a plan. And that plan begins with figuring out how much you’re able to invest. You’ll want to add money regularly to the account and aim to hold it there for at least three to five years to allow the market enough time to rise and recover from any major downturns.

Once you’ve figured out how much you can invest, move that money to your account. Then set up your account to regularly transfer a desired amount each week or month from your bank or a paycheck direct deposit.

Once you know the S&P index fund you want to buy and how much you’re able to invest, buying an index fund is relatively straightforward.

Here’s how it works:

Search for your index fund: Find the S&P 500 index fund you want to buy on your broker’s website. We discussed several popular options earlier.

Place an order: Choose the number of shares or dollar amount you want to purchase. If buying an ETF, you may be able to choose between market orders and limit orders.

Hold and monitor: Periodically check your fund’s performance, such as on a monthly or quarterly basis

If you’re able to move money into the brokerage account regularly, many brokers allow you to set up an investing schedule to buy an index fund on a recurring basis. This is a great option for investors who don’t want to remember to place a regular trade. You can set it and forget it.

As a result, you’ll be able to take advantage of the benefits of dollar-cost averaging, which can help you reduce risk and increase your returns.

There are a few key differences between an S&P 500 index fund and the underlying index. There is no way to invest in the underlying index, only the funds that mirror it. This can lead to slight differences in performance due to the following:

Expense ratio: Funds have management fees that will reduce returns.

Tracking error: Small discrepancies in performance due to exact holdings and trading of the individual companies.

Cash drag: Funds (particularly mutual funds) hold cash to accommodate investors who sell shares.

Tax inefficiencies: Index mutual funds will pass on any annual capital gains from other investors’ sales, which may be taxable regardless of whether a given investor has made a sale or not.

S&P 500 index funds have become incredibly popular with investors, and the reasons are simple:

Ownership of many companies: These funds allow you to hold a stake in hundreds of stocks, even if you own just one share of the index fund.

Diversification: This broad collection of companies means you lower your risk through diversification. The poor performance of one company won’t hurt you as much when you own many companies.

Low cost: Index funds tend to be low cost (meaning they have low expense ratios) because they’re passively managed, rather than actively managed. As a result, more of your hard-earned dollars are invested instead of paid to fund managers as fees.

Solid performance: Your returns will effectively equal the performance of the S&P 500, which has historically been about 10% annually on average over long periods.

Easy to buy: It’s much simpler to invest in index funds than it is to buy individual stocks, because it requires little time and no investing expertise.

S&P 500 index funds have several advantages that will appeal to most long-term investors; however, it’s important to acknowledge the potential downsides.

Here’s one disadvantage: S&P 500 index funds, by design, are limited to large-cap companies. This means you won’t have exposure to other market segments, such as small-cap and mid-cap stocks, bonds and real estate.

For investors who want to keep their investments simple, “total stock market” index mutual funds and ETFs offer exposure to the breadth of the U.S. stock market, including smaller capitalization stocks. All-world indices will include international stocks alongside U.S. stocks. Finally, target-date or target-allocation funds, while usually not passive indices, are built to be single-fund solutions for investors who want a total portfolio in one neat package. These funds are more costly but truly offer a hands-off approach.

Learn more: The 10 best investments of 2026

What is the best S&P 500 index fund?

There is no single best S&P 500 index fund. Each invests in the 500 largest U.S. companies, making all S&P 500 index funds quite similar in performance. Because performance is similar, investors should look for a fund with minimal fees at one of their preferred brokers.

What if I had invested $1,000 in the S&P 500 10 years ago?

The amount you would have in this scenario depends on a few variables, such as whether you chose to reinvest dividends and which fund you selected, but $1,000 invested over the 10-year period from 2016 through 2025, with dividends reinvested, would have grown to roughly $4,200, a 15.6% nominal annual return. (But don’t forget that past performance isn’t a guarantee of future returns.)

Should I invest all my 401(k) in the S&P 500?

It’s generally not advisable to invest your 401(k) entirely in the S&P 500. Financial advisors recommend diversifying your portfolio with other investments, such as small-cap stocks, international stocks and bonds.

The majority of 401(k) plans will include various index mutual funds on the investment menu, but there is no knowing what, specifically, will be available to you in your workplace retirement plan. Many plans these days do offer access to target-date funds, which are an all-inclusive diversified retirement portfolio (the “target date” is the year you plan to retire). But if you’re unsure how to invest, the best bet, if possible, is to discuss your investment choices with a financial advisor who understands your finances and investment goals.

Buying an S&P 500 index fund can be a wise decision for your portfolio, and that’s one reason that Warren Buffett has consistently recommended it to investors. It’s easy to find a low-cost fund and set up a brokerage account, even if you only have basic knowledge of what to do. Then you’ll be able to enjoy the solid performance of the S&P 500 over time.

— Bob Haegele contributed to this article.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.