The quickest way to get started with investing in the U.S. stock market is through mutual funds and Exchange Traded Funds (ETFs) which track the performance of the large caps, including the S&P 500 index. Many people are introduced to these funds through their employer sponsored retirement accounts, but these are all very easily available through your friendly neighborhood brokerage. These funds try to match the performance of the S&P 500 by investing in the stocks that the index follows.
The point of this article is to discuss the different ways you can invest in the S&P 500. The important thing to note is that when a fund aims to track the index, the fund’s performance becomes “fixed” to that index, so the bigger variable here is the cost of investing in that fund.
S&P 500 Index: What Are You Investing In?
The S&P 500 Composite Stock Price Index is one of the U.S. major cap market indexes and is comprised of 500 stocks intended to be a large sample of leading companies in various industries. Considered a “guide” for the American economy, the S&P 500 includes these well-known companies:
The stocks you’ll find listed on the S&P 500 Index belong to large public companies which trade on the New York Stock Exchange and on the Nasdaq.
3 Different Ways To Invest In The S&P 500
This table lists a few different ways to invest in the S&P. The last row shows the S&P itself for comparison’s sake. We’ll dissect each fund below the chart.
* The 5 year performance is obviously variable. The purpose of this figure is to see the relative differences among the investment channels that track the index.
Let’s check each of these options in detail:
#1 The Vanguard S&P 500
If you’re going to purchase a fund that tracks the S&P 500, the Vanguard 500 Index Fund (VFINX) is probably the most popular way to go. Few funds can beat Vanguard’s low expense ratios, estimated at 85% lower than the expense ratio of funds with related assets. In addition to the VFINX, there is also Vanguard’s ETF with symbol VOO, for those who are more interested in an ETF option.
The Vanguard 500 Index Fund was the industry’s first index fund for individual investors and is a low cost way to gain diversified exposure to the market. The fund invests in roughly the same portfolio allocation as the S&P. I use the world “roughly” because the Vanguard, despite its name, invests in 502 stocks to reflect a composition that covers various market sectors: Consumer Discretionary, Consumer Staples, Telecomm Services, Information Technology, Financials, Materials, Energy, Health Care, Industrials, Utilities. The composition changes and is adjusted each year to reflect market conditions.
Currently, the biggest holdings of this fund include: Apple Inc., Exxon Mobil, IBM, Microsoft & Chevron. Most of you will recognize all of these companies. This is expected as Vanguard’s funds aim to reflect the leading industries and companies. Vanguard’s offerings are well diversified and should be considered a core part of a portfolio.
#2 Thrift Savings Plan C Fund: Common Stock Index Investment Fund
Here’s a fund that not too many are familiar with, but which also follows the S&P 500 index. The Common Stock Index Investment Fund also known as the C Fund is part of the Thrift Savings Plan available to United States civil service and uniformed service employees and retirees. By reflecting the S&P 500, the C Fund offers the potential for high investment returns over a long period of time, making it an excellent option for growing an IRA or other investment account if you work for the government.
Like any fund that follows the S&P 500, the C Fund has a risk of loss if the S&P declines, however the low administrative fees of the fund make it an attractive option. The C Fund prides itself on following a portfolio distribution identical to that of the S&P and, as such, has as its top holdings the same stocks as those in the Vanguard 500 fund.
#3 Standard & Poor’s Depositary Receipts or SPDR S&P 500 (SPY ETF)
You’ve probably heard of the SPY or Standard & Poor’s Depositary Receipts, as it’s properly known. This ETF is part of the SPDR collection managed by State Street Global Advisors. Like the other index funds mentioned here, the SPY invests in all of the S&P 500 stocks.
With the largest holdings of the SPY being pretty much identical to that of the Vanguard 500 index fund, you can expect that the returns of the SPY would come very close to those of the Vanguard fund at most significant performance milestones: the 1 year, 3 year and 5 year points. Certainly, investing in ETFs makes sense for tracking a market index. It’s cost-efficient and you can virtually “hold” a number of stocks without a lot of effort or analysis. Most ETFs that track the S&P charge low fees, leaving you with more funds to work with and to help grow your money.
More Ways To Invest In The S&P 500: The Best & Worst Funds
The funds and ETF(s) mentioned above are simply scratching the surface of the S&P 500 indexing universe. You’ll find that there are actually a ton of choices, and what primarily differentiates some from others is their cost. What you want are the lowest cost index funds, since the performance and returns metrics will be quite similar across the board (for these funds). The differentiating variable would be the underlying costs — in fact, you may find that some of these funds will even charge you 12b-1 sales fees or management fees that are close to 3%. Some will even have front loads or redemption fees. When you’re deciding on a fund, make sure you focus on the projected expenses as these will heavily influence your returns.
Here is a list of low cost and no load equity index funds that are relatively cheaper:
By contrast, here are some S&P 500 index funds that are much more expensive:
Additional Thoughts On The Index
Some interesting facts on some of these funds: the popular E*Trade Index funds have been closed and shut down since 2009, but there was a time that I had owned them. A shame, since they had some of the lowest costs in the fund universe. As for the costlier funds listed above — I noted that some of them are offered by insurance companies, which often also do business through their investment arms. The mutual funds and other investment vehicles that are recommended by insurance companies such as Prudential, AllState or State Farm are typically notoriously expensive, which is why I stay away from them and instead focus on making my own investment choices.
I personally prefer the S&P 500 index to the Dow Jones. I find the S&P to be ultimately more reliable than the Dow (though you should do your research on both). Because of this, I tend to keep part of my portfolio in S&P 500 index funds. My own portfolio is diversified amongst sectors as assorted as technology and apparel retail. If you’re interested in tracking the S&P 500 yourself, check with a broker or visit one of the websites that offer the option to buy into an index fund.
With contributions from Jeremy C Bradley.
Created November 14, 2007. Updated October 23, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.