S&P 500 Index Funds: The Complete Guide
Buy one S&P 500 index fund and you own a slice of Apple, Microsoft, and 498 other large U.S. companies. Here's how the cheapest options compare and what the index leaves out.
Don't have time? Here's what you need to know:
- 1The S&P 500 holds about 500 large U.S. companies (~80% of U.S. market value), weighted by size and dominated by the biggest names.
- 2VFIAX, FXAIX, SWPPX, VOO and IVV all track the same index at roughly 0.015%-0.04% — the choice is wrapper and brokerage, not returns.
- 3The index excludes U.S. small/mid-caps, international stocks, and bonds, so it's an excellent core but not a complete portfolio.
- 4Long-run returns have averaged ~10% nominal, but with single years from +30% to -35% and two ~50% drawdowns since 2000.
What You Actually Own in an S&P 500 Fund
The S&P 500 tracks about 500 of the largest publicly traded U.S. companies, selected by a committee and weighted by market value. Together those companies represent roughly 80% of the total value of the U.S. stock market, which is why a single S&P 500 fund is often used as shorthand for "the U.S. stock market." Buy one share and you own a proportional sliver of Apple, Microsoft, Amazon, and hundreds of other established firms.
Because it is capitalization-weighted, the index is top-heavy: the largest handful of companies can make up a sizable share of the whole fund, so technology and a few mega-cap names carry outsized influence. That concentration has powered strong returns in tech-led markets and stung in years when those giants stumbled. It is the defining feature of the index, and worth understanding before you assume an S&P 500 fund is evenly spread across 500 names.
The Cheapest Ways to Buy It
Several funds track the exact same S&P 500 index, so the practical decision is mostly about cost, wrapper, and which brokerage you use. Among index mutual funds, Vanguard's VFIAX and Fidelity's FXAIX run around 0.015% to 0.02%, and Schwab's SWPPX is similarly cheap. Among ETFs, VOO and IVV each charge 0.03%. At these levels the fee is almost an afterthought — all of them are a fraction of what active funds cost.
The mutual funds and ETFs hold the identical 500 stocks, so their gross returns are virtually the same. Choose the ETF wrapper if you want intraday trading, fractional-share flexibility at most brokers, or slightly better tax efficiency in a taxable account. Choose the mutual fund if you prefer to invest a precise dollar amount automatically each month. You are not choosing between better and worse — you are choosing the form that fits your habits.
| Fund | Type | Provider | Expense ratio |
|---|---|---|---|
| VFIAX | Mutual fund | Vanguard | ~0.04% |
| FXAIX | Mutual fund | Fidelity | ~0.015% |
| SWPPX | Mutual fund | Schwab | ~0.02% |
| VOO | ETF | Vanguard | 0.03% |
| IVV | ETF | iShares | 0.03% |
Tip: Inside a 401(k) you usually can't pick the ticker — but the menu almost always includes an S&P 500 or large-cap index option. Find it, check the fee, and it's often the best core holding available to you.
What the S&P 500 Leaves Out
An S&P 500 fund is large-cap U.S. stocks and nothing else. It excludes small and mid-sized U.S. companies, which a total-market fund like VTI captures. It excludes international stocks entirely, so the roughly half of global market value that sits outside the United States is missing — a gap you would fill with a fund such as VXUS. And it holds no bonds, so it offers no cushion when stocks fall.
None of this makes the S&P 500 a bad core holding — it is an excellent one. But it is not, by itself, a complete portfolio. Many investors pair it with international and bond exposure to round out the gaps, or simply use a total-market fund to capture small and mid-caps automatically. Knowing what the index omits is how you decide what, if anything, to add around it.
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What Returns to Expect
Over the long run, the S&P 500 has returned roughly 10% a year nominally before inflation, or closer to 7% after inflation, with dividends reinvested. That long-run average is the headline most people remember, but it hides enormous year-to-year swings. The index has had single years up more than 30% and down more than 35%, and it has endured multi-year stretches of going nowhere.
The practical lesson is that the ~10% figure is an average earned by investors who stayed invested through the bad years, not a steady annual paycheck. The index lost roughly half its value in 2000-2002 and again in 2007-2009, and recovered both times for those who held on. An S&P 500 fund rewards a long time horizon and the discipline to keep buying when headlines are frightening.
Important: Don't treat 10% as a number you can count on in any given year. Plan around volatility — the average only shows up for investors who don't sell during the drops.
Frequently Asked Questions
Which S&P 500 fund is best — VFIAX, FXAIX, VOO or IVV?
They all track the identical index, so none is meaningfully 'best' on returns. FXAIX, SWPPX, VFIAX, VOO and IVV all charge between roughly 0.015% and 0.04%. Pick based on your account: an ETF like VOO or IVV for intraday trading and taxable-account tax efficiency, or a mutual fund like FXAIX or VFIAX for automatic dollar-amount investing. Within your existing brokerage, choose its in-house option to avoid friction.
Is the S&P 500 diversified enough on its own?
It's well diversified within large-cap U.S. stocks — about 500 companies across every sector. But it excludes U.S. small and mid-caps, all international stocks, and bonds. For a more complete portfolio, many investors add an international fund like VXUS and a bond fund like BND, or use a total-market fund such as VTI to capture smaller U.S. companies.
Why is the S&P 500 so concentrated in a few big companies?
Because it's capitalization-weighted — each company's share of the fund matches its share of total market value. The largest companies are worth the most, so they dominate the index, and a handful of mega-cap technology names can make up a large slice of the whole. That concentration boosts returns when those giants do well and hurts when they don't.
What return should I expect from an S&P 500 index fund?
Historically, around 10% a year nominally over the long run with dividends reinvested, or roughly 7% after inflation. But that's a long-term average, not a yearly promise — the index has swung from up 30%+ to down 35%+ in single years and lost about half its value twice since 2000. The average rewards investors who stay invested through the downturns.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.