The launch of the first commercially viable index fund in 1976 by John “Jack” Bogle, founder of the Vanguard Group, was a significant moment for investors. The fund, known as the Vanguard First Index Investment Trust, tracked the performance of the S&P 500 Index, a widely-used benchmark for U.S. equity funds and a barometer of the country’s stock market performance.
Michelle Louie, senior portfolio manager at Vanguard’s Equity Index Group, explains that the S&P 500 offers diversified exposure to various sectors like technology, healthcare, and financials, as well as different styles such as growth and value.
Initially considered “Bogle’s folly,” more and more fund managers eventually recognized the value of index funds and followed suit by launching their own S&P 500 index funds. These funds have become highly popular investment choices in the U.S. due to their low costs, simplicity, minimal turnover rate, and impressive performance.
To select the best S&P 500 index funds, we applied specific criteria, including a 10-year annualized tracking error of 0.25% or less, a net expense ratio below 0.2%, at least $1 billion in assets under management (AUM), a 4-star minimum Morningstar rating, and a track record of at least 10 years.
Why other S&P 500 index funds didn’t make the cut
S&P 500 index funds are all designed to track the same benchmark. Among these funds, a critical factor to consider is the expense ratio, as it plays a significant role in the fund’s overall performance. Generally, higher fees lead to a higher tracking error relative to the benchmark, especially over extended periods.
Our focus here is on passively managed S&P 500 index funds. It’s important to note that actively managed funds using the S&P 500 index as an underlying asset are not included in this list. These actively managed funds might utilize strategies like leverage, inverse positions, or derivatives to achieve higher yields or provide protection against market crashes.
By selecting funds with lower expense ratios and a passive management approach, investors can aim to maximize their returns and align their investments with the overall performance of the S&P 500 index. This strategy can be particularly appealing for long-term investors seeking stable and reliable growth in their portfolios.
While actively managed funds might promise higher returns in certain market conditions, they also introduce additional risks and costs. Passive S&P 500 index funds, on the other hand, offer a straightforward and cost-effective way to participate in the overall performance of the U.S. stock market.
Why S&P 500 funds are a popular investment
S&P 500 funds have gained popularity among investors due to several key factors. One significant advantage is their low cost, making them an attractive option for those seeking to invest in a diversified portfolio of 500 leading U.S. companies. Instead of purchasing 500 individual U.S. stocks, investors can access these companies through a single ticker for a small fee, which offers greater affordability and cost-efficiency.
A major reason behind the popularity of S&P 500 index funds is their strong historical performance. The index has served as a benchmark, and many active funds have found it challenging to outperform or beat its returns consistently. As a result, numerous investors opt for S&P 500 index funds for passive investing, aligning their investment strategy with the market’s long-term average return.
Passive investing, in this context, refers to the approach of matching the overall market’s performance rather than attempting to outperform it actively. By choosing S&P 500 index funds, investors embrace a strategy that mirrors the market’s ups and downs, aiming for steady growth over time. This simplicity and straightforwardness appeal to many investors who prefer a hands-off and less complex investment approach.
Overall, the appeal of S&P 500 funds lies in their low cost, historical performance, and simplicity, making them a favored choice for both seasoned and novice investors seeking a diversified and cost-effective investment option.
Our curated ranking of the top S&P 500 index funds is based on a thorough screening process that considers essential metrics for optimal performance.
One critical factor we consider is the Morningstar rating, which ensures that all selected funds have at least a 4-star rating. This rating reflects the fund’s historical performance and helps investors make informed decisions.
Tracking error is another crucial aspect. We meticulously assess how much a fund’s 10-year annualized performance deviates from the S&P 500 index’s 10-year annualized return of 12.26%. Only funds with a tracking error of 0.25% or less make it to our list, as lower tracking errors indicate better performance alignment.
Additionally, we take into account the asset under management (AUM) for each fund. All funds on our list have accrued at least $1 billion in AUM, which signals greater popularity among investors and strengthens their position in the market.
Expense ratio is a vital consideration, and we give it significant weight in our ranking process. For a fund to be considered, it must have a net expense ratio of 0.2% or less. This ensures that investors can benefit from lower fees, ultimately positively affecting the fund’s tracking error and performance.
Lastly, we focus on the management style of the funds. All the funds on our list are passively managed, aiming to replicate the exact holdings and returns of the S&P 500 index, net of fees. We exclude actively managed funds that deviate from the index’s objectives or returns, such as leveraged, inverse, or income-oriented exposure.
By applying these strict criteria, our curated list helps investors find S&P 500 index funds that are passively managed, charge low fees, closely track their benchmark index, and are managed by reputable fund managers with a proven track record of performance.
What to think about when choosing an S&P 500 index fund
When choosing an S&P 500 index fund, expense ratios are of paramount importance. Lower fees lead to reduced tracking error, enhancing the fund’s ability to mirror its benchmark effectively. Therefore, it’s essential to prioritize funds with competitive expense ratios.
Aside from expense ratios, investors should also consider other factors. These include minimum initial investment requirements, transaction fees, and deferred sales charges. These costs can impact the overall performance of the fund and should be carefully evaluated.
Moreover, it’s crucial to analyze the track record of the fund and the reputation of its manager. Examining the fund’s tenure and assets under management (AUM) can provide insights into its historical performance and management expertise.