As most people in the industry would point out, buying an S&P 500 index fund used to be a very simple thing to do. Today, however, things have changed. In the past, the best funds were the ones with the lowest costs. Nowadays, apart from the low costs, you also have to navigate a pathway that is part art and part science to decide which side to choose. Add on top of that the fact that there are only a handful of mutual fund companies that will offer you the best index funds, and you can find yourself in quite the conundrum. Here is a short guide that details the best S&P 500 index funds, which will help you choose.
What Is the S&P 500 Index Fund?
The S&P 500 stands for “the Standard & Poor’s 500 index”. As the name suggests, it’s an index comprising the US’ largest 500 companies, as listed by the New York Stock Exchange or the NASDAQ. The Standard & Poor Index Committee selects them based on their market capitalization. The reason this index is so important is the fact that it’s the most famous barometer as far as the American equity market goes.
The index is supported by funds which investors use to establish core allocations in the American equity market. The equities themselves have been chosen and advised on by Warren Buffet himself, one of the biggest investors of all times in the US. The funds will also use constituents of similar weight to duplicate the benchmark index performance. This means that they will invest a great amount of their total net assets in very common stocks. These stocks need to be included in the benchmark index and have varying prices.
The S&P 500 comes with many ticker symbols, such as ^GSPC, INX, and $SPX. You can also find an interactive or logarithmic chart to show you its exact evolution.
What Does it Take to Make it into the Standard & Poor’s 500 Index?
Mutual fund companies, as previously mentioned, need to be selected to make it in the index. Therefore, they must present a series of assets so that they can be listed in the index and presented as the best choice for future users. Here are the criteria they need to meet.
- They need to keep costs low. Upon discussing with the seniors of the trade, they will tell you that, from a historical point of view, low costs are the most important criteria for a company to be successful. That happens even after it has been selected to appear on the index. The simple reason behind this is that index funds that have low ratios of expense will generate bigger profits as time goes by.
- They need to match the Index Fund Holdings. This is where the science part of the game comes in. Investment analysts compile indexes, which are lists of stocks and bonds. They use them to create benchmarks so that they can measure broad market averages. Your most famous indexes are The S&P 500, NASDAQ and Dow Jones. They need to replicate how a particular benchmark index performs. In laymen’s terms, this means that the fund needs to hold the same stocks as found in the index. Thus, the best index will always be the one that manages to match best its list of stocks as it’s found in the benchmark index.
- They need to use the proper weighting methods. When building an index, the persons responsible for creating it need to need to assess how many shares on each holding from the list they need to buy. They need to do so to match the percentage “weighting” of the index itself. For example, the S&P 500 is what they call a cap-weighted index, where cap stands for capitalization. That’s because it ranks the holdings in such a way so as the larger components can receive larger percentage weights.
- They need to size everything up. Size is indeed an important thing in this line of business. Simply put, the more assets an index has, the better it will be for keeping its portfolio properly weighted. For example, a large index, such as The S&P 500, Vanguard, or Charles Schwab will always rank higher in preferences than a small one. If they have more assets under their belt, they will be able to successfully manage their fund.
Which Are the Best S&P Index Funds?
Now that we have covered some of the basics on the topic, and you have learnt how they work, let’s take a look at some of the best-performing index funds out there:
The Vanguard 500 Index Fund
It’s also called VFINX, and that is how you are most likely to find it in field-related literature. The first thing you need to know about it is that it was the very first in the indexing world. This makes it a symbol in the history of the trade. It was founded 35 years ago, by John Bogle. He noticed that most stocks investors were unable to outrun the S&P 500 in a consistent manner and over a bigger period. His revolutionary idea was, in fact, very simple. He wanted to match the index’s holdings and keep all the costs as low as possible.
Another interesting and great thing about Vanguard is the fact that is co-owned by its investors. This translates into high-quality and low-cost mutual funds, in a market flooded by publicly-owned financial companies, who sport a culture of large profits.
Since its inception, Vanguard has generated average annual returns of 10.99%. As far as its shares go, Warren Buffet advises investors to bet on The Vanguard 500 Index Fund Admiral (Adm) Shares (VFIAX). The reason behind that is that it has very low costs.
Its main alternative and competitor is called the S&P Dividend Aristocrats Index. It’s an index constructed of S&P 500 stocks, and it plays the game by calling Vanguard “vanilla.”
The Fidelity Spartan 500 Index Fund
It’s also called FUSEX or SPTN, and it has made its goal to compete with Vanguard. They have managed to challenge Vanguard many times, and they came very close, landing on the second spot. They have their size and their vast experience as far as indexing goes to thank for that. They offer a similar package as Vanguard does. This is why the two titans are often indistinguishable in their expense and performance services. Apart from the fact that this “battle between giants” is interesting, it also translates into high-quality funds for the investor to work with. Therefore, whichever one you decide to choose, you can rest assured your interests will be perfectly represented.
Fidelity usually requires a minimum investment at the price of $2,500. Also, it uses a combination of equity index futures contracts and investment deals.
The Schwab S&P 500 Index Fund
The shorter name of this index fund is SWPPX. It was founded by Charles Schwab, and he made a real effort into securing discount brokerage services for its investors. Also, they took a plunge into Vanguard and Fidelity’s index fund markets. This means that Charles Schwab’s index funds are now actually higher as far as expense ratio goes than those of their main competitors.
If you happen to have already started doing business with a Schwab investor, you can very well save the transaction fee and use it for out-of-network funds. Your Schwab index funds will help you greatly in this regard.
The SPDR S&P 500 ETF Index Fund
It was issued in 1993 for the NY Stock Exchange by State Street Global Advisors. Its main trustees and distributors are State Street Bank & Trust Company and ALPS Distributors, Inc. Just like the other three index funds, SPY tries to hold a big common stock portfolio, which can mirror the benchmark index. Because of this endeavor, it has managed to become one of the most trusted liquid securities funds tracking the S&P 500 index in the world.
The T. Rowe Price Equity Index 500 Fund
As far as options go, you also have the PREFIX. It too tracks the large stocks coming from the S&P 500 index. It has a fascinating and large portfolio. It includes companies such as Apple, Exxon Mobile, Johnson & Johnson, and Microsoft. This means that the fund specializes in technology. Class performance is unpredictable. However, research data coming from the signal services shows that its assets come to $25 billion year to date.
As far as deciding which the best performing S&P Index Fund is, one should always refer to a specialist. Choosing a particular fund to buy can be tricky. Apart from that, keeping track of your investments on a monthly basis, to say the least, is difficult. Having a broker on your side is always the smart thing to do, even when you choose one of the big funds presented here as your primary target.