Best S&P 500 Index Funds And Exchange Traded Funds (ETFs)

The Best S&P 500 Index Funds And Exchange Traded Funds

What are the best stock funds to invest in 401ks and IRAs? I explain what to look for.

One of the best investors, Warren Buffett, said that 99% of people should invest in a low cost index fund, namely an S&P 500 index fund. The S&P 500 index contains the 500 largest companies in America.

I share my three main criteria if I were to invest in an S&P 500 index fund or exchange traded fund (ETF). My criteria include:
1) Low expense ratios
2) Zero minimums to invest
3) Performance rates

I’ve gathered four index mutual funds and four ETFs that cover the S&P 500 to show you how they measure up to my criteria of the best S&P 500 index funds/ETFs.

You can also compare different brokerage offerings to see which brokerage you might like to have because the user experience is different across brokerages. Depending on which brokerage you already have or might want to open, this can influence your potential decision in which S&P 500 fund to invest in.

The three brokerages I looked at include Fidelity, Vanguard, and Schwab because they are pretty reputable and a lot of people use these. I am not favoring any particular one over the other, and none of this is sponsored. I point out the data and facts that I’d like to have if I were in your shoes and considering these funds and brokerages.

What you want to avoid is paying unnecessary fees, such as transaction fees or “load fees” which used to be more common with mutual funds in the past.

For example, ideally you would not want to buy into Vanguard’s S&P 500 index fund in a Fidelity brokerage account because you’ll pay a $75 transaction fee and there is a minimum to invest.

Both Vanguard and Fidelity have their own low cost S&P 500 index funds that have comparable performance levels that track well with the actual S&P 500 index.

What is a good low expense ratio? In my opinion, it’s anything below 0.2% which is $20 per $10,000 invested.

I learned that in 2021, the average stock index mutual fund charged 0.06% which is $6 per $10K invested, and the average ETF charged 0.16%, which is $16 per $10K invested. So anything in that ballpark is pretty acceptable.

I would avoid investing in mutual funds or ETFs that charge high expense ratios, such as above 0.5% ($50 per $10K invested) unless you really trust the manager of those funds.

Back in the day like in the 1990s and 2000s, many mutual funds charged people between 1-2%, which was equal to $100-$200 per $10K invested. This is a lot of money and it could mean the difference of having a few hundred thousand dollars LESS during retirement. You could end up with below a million dollars if you are constantly giving up 1-2% in fees.

If you’d like to learn more about how high expense ratios destroy your returns, check out this video.

As an example, one index fund that meets all of my criteria is Fidelity’s 500 Index Fund (ticker FXAIX).

FXAIX’s expense ratio is only 0.015%, which is $1.50 per $10K invested, or the equivalent of Costco’s hot dog & soda combo. This fund also has zero minimums to invest, which is great because 10-15 years ago Fidelity used to have minimums to invest in many of their index/mutual funds.

The performance of FXAIX is pretty close to the S&P 500, where I look at the 5 year and 10 year average returns the most. Its return rates are pretty acceptable with the 5 year averaging 9.23% and the 10 year averaging 11.69% because they not only almost match the S&P 500 benchmark, but also because their returns have been above the stock market’s overall average return of 7%. FXAIX is a good example of a low cost index fund.

In the video, I evaluated my criteria of expense ratios, minimums to invest, and performance rates across these four index funds and four ETFs that track the S&P 500:
Fidelity 500 Index Fund (FXAIX)
Schwab S&P 500 Index Fund (SWPPX)
Vanguard 500 Index Fund Admiral Shares (VFIAX)
Fidelity ZERO Large Cap Index Fund (FNILX)
Vanguard S&P 500 ETF (VOO)

You probably can’t go too wrong with most of these, except the SPY ETF has the lowest return averages and the highest expense ratio in this list.

In contrast to SPY, Fidelity’s FNILX based on its large cap index has the lowest barriers to entry with a zero expense ratio and zero minimums to invest, but this fund has only been around since 2018 and doesn’t have the 5 year and 10 year performance data yet.

FNILX is not officially based on the S&P 500 but is pretty close if you inspect its prospectus’s 514 holdings (FXAIX has 506 holdings mirroring the S&P 500 the most). Definitely read the prospectus before investing in any of these funds.

However, FNILX’s 1 year return performance of -17% has been trailing the S&P 500’s -15.5% so far. But maybe it’s more “on sale” if the equities it holds are at even more of a discount, who knows, but it’s something to consider.

As far as minimums to invest, FXAIX, SWPPX, and FNILX have zero minimums to invest, while Vanguard’s VFIAX has $3,000 minimum to invest.

For the ETFs, you would have to buy at least one ETF share of Vanguard’s VOO, but for the other ETFs IVV, SPY, and SPLG — it depends on your brokerage if they might offer fractional share versions of these ETFs.

And you may be wondering about alternatives to these S&P 500 index funds. One might be Invesco’s S&P 500 Equal Weight ETF (ticker RSP) that aims for equal weighting instead of the typical largest market cap weighting of the funds I discussed above. However, its 5 year and 10 year performance averages are trailing the normal benchmark and its expense ratio is at 0.2%.

Another alternative might be Fidelity’s Total Market Index Fund (ticker FSKAX), which has around 4000 holdings — eight times as diversified as the S&P 500!

While FSKAX has the low expense ratio of 0.015%, its performance is also trailing the S&P 500 so I don’t think these two options are delivering as good performance as the regular S&P 500 index funds/ETFs.

You may be wondering if there is a good time to invest in the stock market, and the answer is highly subjective. One pattern you might want to consider looking at is Buffett’s yardstick comparing the overall stock market value to US GDP. The market is still highly valued at 151% of GDP. Yet, the S&P 500 has come down a lot this year and maybe its current 25% discount to its all time high could be good enough.

So maybe it could be an opportunity to dollar cost average down in an S&P 500 index fund, which you’re hoping will eventually go up again when these American businesses recover. After all, you’re betting on high quality American companies when you invest in an S&P 500 index fund or ETF.

If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.

I look forward to making more investor friends! Add me on Insta: michellemarki