S&P 500 Index Funds: What They Are and How to Invest

There’s a reason so many investors start with S&P 500 index funds: they offer a simple, low-cost path to owning a slice of America’s largest companies. This guide walks through the basics, the best fund options, and the exact steps to start investing today.

Average annual return (1926–2025): ~10% ·
Number of companies in S&P 500: 500 ·
Market-cap range (2025): $12.5B – $3T+ ·
Typical index fund expense ratio: 0.03% – 0.20%

Key facts about S&P 500 index funds

These five numbers capture the essentials of how S&P 500 index funds are built and what they cost investors.

The pattern: Low costs and diversification have made S&P 500 index funds the default choice for long-term investors, and these five numbers explain why.

What are S and P index funds?

What is the S&P 500 index?

The S&P 500 is a market-capitalisation-weighted index that tracks the 500 largest publicly traded companies in the United States. It is widely used as a passive equity benchmark for U.S. large-cap stocks (justETF (ETF comparison platform)). Companies like Apple, Microsoft, Amazon, and Nvidia are among its top holdings. The index’s composition is reviewed regularly by S&P Dow Jones Indices, and it represents roughly 80% of the total U.S. stock market value.

How do S&P index funds work?

An S&P 500 index fund is a type of mutual fund or exchange-traded fund (ETF) that holds the same stocks in the same proportions as the S&P 500. Instead of hiring a manager to pick stocks, the fund simply replicates the index, which keeps costs low. Vanguard UK (asset manager) explains that these funds seek to track the performance of the Standard and Poor’s 500 Index. Because they are passively managed, expense ratios typically range from 0.03% to 0.15% per year, compared to 0.50%–1.00% for actively managed funds (Fidelity Investments (brokerage)).

The implication: Low-cost passive funds beat active managers for most investors, and the structure of S&P index funds makes that advantage automatic.

What is the best S&P 500 index fund?

Top S&P 500 index funds compared

Four popular funds, one clear pattern: costs vary significantly, and the cheapest options often deliver the best long-term results for passive investors.

The iShares Core S&P 500 UCITS ETF has a total expense ratio (TER) of 0.07% per year and is described by justETF (ETF comparison platform) as the largest ETF tracking the S&P 500 index. State Street’s SPDR S&P 500 UCITS ETF (Dist) has a similar cost structure and is a distributing fund, meaning it pays dividends (State Street Global Advisors (investment firm)). For UK and EU investors, these UCITS-compliant funds are accessible through most brokerages.

Factors to consider: expense ratio, tracking error, minimum investment

• Expense ratio: Lower is better. justETF (ETF comparison platform) lists S&P 500 ETF TERs ranging from 0.03% to 0.15% per year.
• Tracking error: How closely the fund follows the index. A higher tracking error means the fund may deviate from expected returns.
• Minimum investment: Many US mutual funds require $1,000–$3,000 to start; ETFs can be bought for the price of a single share (Fidelity Investments (brokerage)).
• Distribution type: Accumulating (Acc) funds reinvest dividends automatically; distributing (Dist) funds pay cash dividends.

The catch: Choosing the very cheapest fund (Fidelity ZERO) may tie you to one brokerage, while a slightly higher-cost UCITS ETF offers flexibility across European platforms.

How should a beginner invest in the S&P 500?

Step 1: Choose a brokerage account

The first step is opening an investment account — either a retirement account (like an IRA) or a standard brokerage account. Navy Federal Credit Union (financial institution) notes that choosing the account type depends on your goals: a retirement account offers tax advantages, while a taxable brokerage gives more flexibility. For UK investors, platforms like Hargreaves Lansdown, AJ Bell, or Freetrade allow you to buy S&P 500 UCITS ETFs.

Step 2: Decide between ETF or mutual fund

ETFs trade like stocks throughout the day, while mutual funds trade once at the Net Asset Value (NAV) at market close. New York Life (insurance and investment company) says starting to invest in index funds is straightforward and beginner-friendly. For most new investors, ETFs are simpler because you can buy any dollar amount and trade at intraday prices.

Step 3: Place your order

Search for the fund ticker symbol (e.g., VOO for Vanguard S&P 500 ETF, CSPX for iShares Core S&P 500 UCITS ETF) and place a market or limit order. Many brokerages let you buy fractional shares, so even with a small budget you can own a piece of the index.

Step 4: Set up recurring investments

Automate your investing to benefit from dollar-cost averaging. Fidelity Investments (brokerage) recommends setting up a regular transfer from your bank account to your investment account. Even £50 a month into an S&P 500 fund can grow substantially over decades.

What this means: A beginner who opens a brokerage, picks a UCITS ETF, and automates monthly contributions is set up to capture long-term market returns with minimal effort.

What if I invested $10,000 in the S&P 500 20 years ago?

Calculating the growth: assumptions and method

If you had invested $10,000 in an S&P 500 index fund in early 2004 and reinvested all dividends, that investment would have grown to approximately $45,000 by early 2024. This calculation uses the S&P 500 total return index, which includes dividend reinvestment. The average annual return over that period was about 10% (Forbes (business magazine)). By comparison, $10,000 in a typical savings account earning 2% would have grown to only about $14,800.

The pattern: Even a lump-sum investment in a low-cost index fund, held through the 2008 crash and 2020 pandemic, turned into more than four times its original value — and that’s before accounting for any additional contributions.

Comparison to other investments

• US Treasury bonds (20-year): approximately $22,000
• Gold: approximately $32,000
• International stocks (MSCI EAFE): approximately $32,000
• S&P 500 total return: approximately $45,000

These figures are based on historical index returns and assume no taxes or fees. Past performance does not guarantee future results.

The implication: Over two decades, the S&P 500 outperformed bonds, gold, and international stocks — reinforcing why passive equity exposure remains the core of most long-term portfolios.

Does the S&P 500 double every 7 years?

Understanding the Rule of 72

The Rule of 72 is a simple formula: divide 72 by the annual return rate to estimate how many years it takes for an investment to double. With the S&P 500’s historical average return of ~10%, 72 ÷ 10 = 7.2 years (justETF (ETF comparison platform)). So yes, over the long term the index has approximately doubled every seven years.

Historical performance and volatility

However, this pattern is not guaranteed. The S&P 500 lost 49% during the dot-com crash (2000–2002) and 57% in the global financial crisis (2007–2009). The New York Life (insurance and investment company) notes that while index fund investing is straightforward, the long-term return averages hide periods of severe drawdowns. For the index to double every seven years going forward, future returns would need to match historical averages — something no one can guarantee.

What this means: The Rule of 72 is a useful approximation, but investors should expect volatility and plan for lower returns than the historical average.

Timeline: Key events in S&P 500 history

The major downturns are worth noting because they test investor patience — and historically, those who stayed invested through them came out ahead.

• 1957: S&P 500 index introduced (S&P Dow Jones Indices (index provider))
• 2000–2002: Dot-com crash; S&P 500 lost ~49% (Forbes (business magazine))
• 2007–2009: Global financial crisis; S&P 500 fell ~57% (justETF (ETF comparison platform))
• 2020: COVID-19 pandemic crash; rapid recovery (Vanguard UK (asset manager))
• 2021–2025: Strong bull market with periodic corrections

The pattern: Each crash was followed by a new high. Investors who sold during the 2008 crisis missed the subsequent bull run that started in March 2009.

What’s clarified and what remains uncertain

The implication: The historical case for S&P 500 index funds is strong, but investors must accept uncertainty about future returns and plan accordingly.

Expert perspectives

“Index funds are a low-cost way to track the market and are suitable for long-term investors.”

Fidelity Investments (brokerage)

“Choosing an S&P 500 fund requires looking at expense ratios, tracking error, and fund size.”

justETF (ETF comparison platform)

Summary

S&P 500 index funds remain one of the simplest, most cost-effective ways to build long-term wealth through the stock market. A UK investor starting today should open a brokerage account that offers UCITS-compliant ETFs, pick the fund with the lowest expense ratio that fits their dividend preference, and set up automatic monthly contributions — or risk letting inflation erode the cash sitting in a savings account.

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