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

Core Insights - The S&P 500 index funds are designed to replicate the performance and composition of the S&P 500 index, which includes 500 of the largest U.S. companies, making them a popular choice for investors seeking market exposure [4][5][6]. Group 1: Investment Characteristics - S&P 500 index funds are passively managed, meaning they do not have a fund manager actively selecting stocks; adjustments occur only when the underlying index changes [3][4]. - The average total return of the S&P 500 index has been approximately 10% annually since 1960, with over 6% annual returns when adjusted for inflation [6]. - These funds typically have low expense ratios, often below 0.10%, which translates to minimal costs for investors [7][9]. Group 2: Fund Selection Criteria - When selecting an S&P 500 index fund, investors should prioritize funds with the lowest expense ratios, as all funds fundamentally invest in the same stocks [7][9]. - Key factors to consider include the expense ratio, potential sales loads for mutual funds, and tax efficiency, particularly when investing in taxable brokerage accounts [8][21]. - A comparison of several S&P 500 index funds shows that some, like the Fidelity ZERO Large Cap Index Fund, have an expense ratio of 0% and a 5-year annualized return of 13.69% [9]. Group 3: Investment Process - Investors can easily set up accounts to invest in S&P 500 index funds, with options for automatic contributions to simplify the investment process [2][11]. - The investment process involves selecting a fund, funding a brokerage account, and placing orders to buy shares, which can often be automated [10][13][14]. - Regular contributions and a long-term investment horizon are recommended to maximize returns and mitigate risks [12][16]. Group 4: Limitations and Alternatives - S&P 500 index funds are limited to large-cap companies, which means they do not provide exposure to small-cap or mid-cap stocks, bonds, or real estate [18][19]. - For broader market exposure, investors may consider total stock market index funds or target-date funds, which include a wider range of asset classes [19][24]. - While S&P 500 index funds are a solid investment choice, diversification across different asset classes is generally advised for a balanced portfolio [23][24].