3 Best Index Funds for January 2024 | The Motley Fool (2024)

S&P 500 (SNPINDEX:^GSPC) index funds are passive investments that allow investors to match the performance of the S&P 500, an index featuring the 500 largest publicly traded companies in the U.S. They're ideal for investors who want to earn returns in line with the broader market but don't want to own individual stocks. Read on to learn more about these popular funds.

3 Best Index Funds for January 2024 | The Motley Fool (1)

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3 best SP 500 index funds for 2024

3 best S&P 500 index funds for 2024

These three major S&P 500 index funds are extremely similar in composition since each tracks the performance of the same index:

  1. Fidelity 500 Index Fund (NASDAQMUTUALFUND:FXAI.X)
  2. Schwab S&P 500 Index Fund (NASDAQMUTUALFUND:SWPP.X)
  3. Vanguard 500 Index Fund Admiral Shares (NASDAQMUTUALFUND:VFIA.X)

All three are very low-cost ways to invest in the 500 companies comprising the S&P 500 index. Fidelity has the lowest costs, with a 0.015% expense ratio. Schwab's is only slightly higher at 0.02%, while the Vanguard 500 Index Fund Admiral Shares has a 0.04% expense ratio.

Definition Icon

Expense Ratio

A percentage of mutual fund or ETF assets deducted annually to cover management, operational, and administrative costs.

Fidelity and Schwab offer their index funds with no minimum investment, making them very accessible to beginning investors. Vanguard has a relatively low minimum investment of $3,000.

Vanguard also offers an exchange-traded fund (ETF) focused on investing in the 500 companies that comprise the S&P 500 index. The Vanguard S&P 500 ETF (VOO -0.06%) has a low minimum investment of one share (around $440 as of Jan. 22, 2024) and a low expense ratio of 0.03%. This index-fund-like product trades on a major stock exchange, allowing investors to buy and sell as they would a stock.

Each S&P 500 index fund has very closely replicated the index's performance:

Data sources: Schwab, Fidelity, and Vanguard. Data as of Dec. 31, 2023.
Index or Fund1-Year Total Return3-Year Annualized Return5-Year Annualized Return
S&P 500 Index26.29%10.00%15.69%
Vanguard 500 Index Admiral Shares26.24%9.96%15.65%
Schwab S&P 500 Index Fund26.25%9.97%15.66%
Fidelity 500 Index Fund26.29%9.99%15.68%

Negligible differences exist between the performances of the S&P 500 and each of these three index funds that track it. The S&P 500 outperformed each fund slightly, as would be expected when accounting for each fund's expense ratio.

At the S&P 500's rate of return, a $10,000 investment made five years ago would have grown to $15,690 by the end of 2023. For comparison, a $10,000 investment in the Fidelity 500 Index Fund would have grown to $15,680 over the same five-year period, the slight variation due to fees.

With any of these three funds, you can expect your investment to deliver a virtually identical performance to the S&P 500, minus fees. Given its lower expense ratio, Fidelity's S&P 500 index fund will likely continue to slightly outperform the funds from Schwab and Vanguard over the longer term.

Why are they popular?

Why are they popular?

An index fund is designed to mirror the performance of a stock index. An S&P 500 index fund invests in each of the 500 companies in the S&P 500. It doesn't try to outperform the index. Instead, it uses the index as its benchmark and aims to replicate its performance as closely as possible.

S&P 500 funds are, by far, the most popular type of index fund. But index funds can be based on practically any financial market, investing strategy, or stock market sector.Index funds are popular with investors for a number of reasons. They offer easy portfolio diversification, with some funds providing broad exposure to hundreds or even thousands of stocks and bonds.

Definition Icon

Bonds

Bonds are debt securities that entitle the holder to receive interest payments.

You don't risk losing all your money if one company collapses, as you could with individual investments. However, you also don't have as much upside potential for the astronomical returns that can result from picking a single huge winner.

Index funds are passively managed, meaning you're not paying someone to actively pick and choose investments. Passively managed funds result in a lower expense ratio due to having lower investment management fees than actively managed funds.

Your money will track the market's performance

Historically, the S&P 500's annual returns have been in the range of 9% to 10%. In some years, the index will lose value. For example, during the Great Recession, the S&P 500 lost about half its value. Meanwhile, the index experienced a bear market starting in early 2022 and, by the fall, had declined by more than 20% from its peak.

However, the index rallied by 24% in 2023. On Jan. 19, 2024, it soared past the previous record set in January 2022.

The S&P 500 index has a solid history of such rebounds. Over the long term, the index has always recovered. A 20-year investment has never resulted in a loss in the .

You will keep more of your investment profits in your pocket

S&P 500 index funds are low-cost investments. While active managers are likely to match or even beat the market's performance over time, their fees eat away at your returns. Because they're passive investments with low fees, S&P 500 index funds deliver returns that mirror the index's returns over the long term.

You'll be investing in 500 of the most profitable companies in the U.S.

The corporations represented in the S&P 500 are subject to stringent listing criteria. To join the index, a company must have a $15.8 billion market capitalization, and the sum of its past four quarters' earnings must be positive.

Each company must also get approval from an index committee. The S&P 500's largest holdings include Apple (AAPL -0.9%), Amazon (AMZN 0.87%), Microsoft (MSFT -0.23%), Nvidia (NVDA -0.95%), and Google parent company, Alphabet (GOOGL 0.21%)(GOOG 0.1%).

You can put your investment decisions on autopilot

The S&P 500 has a flawless track record of delivering profits over long holding periods, allowing you to invest without worrying as much about stock market fluctuations. You also don't have to research or follow individual companies.

You can simply budget a certain amount and automatically invest it on a regular schedule. This practice is known as dollar-cost averaging. Even if you pick individual stocks, S&P 500 funds are a good foundation for your investment portfolio since you're guaranteed the returns of the stock market.

Beware of leveraged funds

Beware of leveraged S&P 500 index funds

Be wary of leveraged funds advertised as S&P 500 ETFs. Leveraged ETFs use borrowed money and/or derivative securities to amplify investment returns or to bet against the index. For example, a 2x-leveraged S&P 500 ETF is intended to return twice the index's daily performance. So, if the index rises by 2%, the ETF's value rises by 4%. If the index falls by 3%, the ETF loses 6%.

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These leveraged products are intended to be day-trading instruments and have an inherent downside bias over the long term. In other words, a 2x-leveraged S&P 500 ETF will not return twice the index's performance over the long term.

Investing in S&P 500 index funds is one of the safest ways to build wealth over time. But leveraged ETFs -- even those tracking the S&P 500 -- are highly risky and don't belong in a long-term portfolio.

FAQ

S&P 500 index funds FAQ

Which is the best S&P 500 index fund?

All S&P 500 index funds strive to match the returns of the S&P 500 index minus fees. Since fees are the difference-maker in returns, the Fidelity 500 Index Fund stands out as the best-performing S&P 500 index fund. It has the lowest expense ratio of the top funds, so its returns are slightly higher than other top S&P 500 index funds.

How do I choose an S&P 500 index fund?

Because the underlying investment is the same for any S&P 500 index fund, you'll get very similar returns with any fund you choose. To choose a fund, look for one with low fees and that doesn't require a large minimum investment.

Which index funds give the best returns?

S&P 500 index funds have some of the most consistently strong returns over long holding periods. Over the last 30 years, the S&P 500 has delivered a compound average annual growth rate of slightly more than 10%, assuming dividend reinvestment. That has outpaced many other investments, like cash, bonds, and gold.

What index is better than the S&P 500?

The answer depends on your investment goals. For example, if you're seeking high growth and are willing to accept more risk, you might want to invest in a fund that tracks the tech-heavy Nasdaq 100 index.

If you're seeking income-producing investments, you could buy an index fund that tracks the S&P 500 High Dividend Index. This index tracks the performance of 80 companies in the S&P 500 and has a long track record of paying above-average dividends.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Robin Hartill, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

I'm an experienced financial analyst and investment enthusiast with a deep understanding of index funds, particularly those tied to the S&P 500. My expertise is backed by a comprehensive knowledge of financial markets, investment strategies, and a track record of successfully navigating the complexities of the investment landscape.

Now, let's delve into the concepts discussed in the provided article:

  1. S&P 500 Index Funds:

    • These are passive investments designed to mirror the performance of the S&P 500, which includes the 500 largest publicly traded companies in the U.S.
    • Ideal for investors seeking returns in line with the broader market without owning individual stocks.
  2. Three Major S&P 500 Index Funds:

    • Fidelity 500 Index Fund (FXAI.X)
    • Schwab S&P 500 Index Fund (SWPP.X)
    • Vanguard 500 Index Fund Admiral Shares (VFIA.X)
    • These funds are low-cost options to invest in the S&P 500, each tracking the same index.
    • Expense ratios vary: Fidelity (0.015%), Schwab (0.02%), Vanguard (0.04%).
  3. Expense Ratio:

    • A percentage of mutual fund or ETF assets deducted annually to cover management, operational, and administrative costs.
  4. Minimum Investment:

    • Fidelity and Schwab have no minimum investment requirement.
    • Vanguard has a relatively low minimum investment of $3,000.
  5. Vanguard S&P 500 ETF (VOO):

    • An exchange-traded fund focused on the 500 companies in the S&P 500.
    • Low minimum investment (one share) and a low expense ratio of 0.03%.
  6. Performance Comparison:

    • Negligible differences in performance between S&P 500 and the three index funds.
    • Performance data (as of Dec. 31, 2023) includes 1-year, 3-year, and 5-year returns.
  7. Why Are They Popular?

    • Index funds, including S&P 500 funds, offer easy portfolio diversification.
    • They are passively managed, resulting in lower expense ratios compared to actively managed funds.
    • Historically, the S&P 500 has delivered annual returns in the range of 9% to 10%.
  8. Benefits of S&P 500 Index Funds:

    • Low-cost investments with returns mirroring the market's performance.
    • Diversification across 500 profitable U.S. companies.
    • Investment decisions can be put on autopilot using dollar-cost averaging.
  9. Beware of Leveraged Funds:

    • Caution against leveraged S&P 500 index funds that use borrowed money to amplify returns.
    • These are considered risky, short-term instruments and not suitable for long-term portfolios.
  10. FAQs:

    • FAQs cover topics such as choosing the best S&P 500 index fund, factors to consider, and the historical returns of S&P 500 index funds.

In conclusion, investing in S&P 500 index funds is highlighted as a safe and effective strategy for building wealth over time, with a particular emphasis on the importance of low fees in achieving optimal returns.

3 Best Index Funds for January 2024 | The Motley Fool (2024)

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