S&P 500 Index Funds: Why They're the Default and How to Buy

Picture Warren Buffett at the 2020 Berkshire Hathaway shareholder meeting, looking into a camera and telling millions of investors: "In my view, for most people, the best thing to do is to own the S&P 500 index fund" [1].

Not a hedge fund. Not Berkshire Hathaway stock. Not a collection of hand-picked blue chips. A simple, boring index fund.

When the greatest stock picker alive tells you to stop picking stocks, that means something.

The S&P 500 delivered a total return of 17.88% in 2025 [2]. It holds roughly 500 of the largest U.S. companies, representing about $61.1 trillion in market capitalization and approximately 80% of the total U.S. stock market [3]. One fund. Eighty percent of the market. For a fraction of a penny per dollar invested.

30-Second Summary: An S&P 500 index fund tracks the 500 largest U.S. companies, giving you broad exposure to the American economy in a single investment. In 2024, 65% of active large-cap fund managers failed to beat this index. The best S&P 500 funds charge between 0.015% and 0.03%. Most investors should start here.

What Is the S&P 500?

The S&P 500 is a market-capitalization-weighted index maintained by S&P Dow Jones Indices [3]. "Market-cap weighted" means larger companies have a proportionally bigger impact on the index's performance. When Apple (the largest holding) moves 2%, it affects the index more than when company #498 moves 2%.

The composition: Despite the name, the index currently holds 503 stocks (some companies have multiple share classes). It spans all 11 sectors of the economy, from technology to utilities, though it skews heavily toward tech. As of January 2026, the 10 largest companies account for roughly 38% of the index [3].

The selection criteria: A company must have a market cap of at least $18 billion (this threshold adjusts), be profitable over the trailing four quarters, and be highly liquid. A committee at S&P makes the final inclusion decisions. This isn't a passive formula; there's judgment involved. Getting into the S&P 500 is more like getting into a selective club than passing a standardized test.

The Case for the S&P 500 (In One Table)

Over 15 years, there is no category of domestic or international equity in which the majority of active managers outperformed their passive benchmark [5]. Not one.

This is the core argument: if most professionals can't beat the index, paying them to try is usually a losing proposition. The index fund gives you the market return minus a tiny fee. The active fund gives you a coin flip (at best) minus a much larger fee.

Comparing the Top S&P 500 Funds

VOO vs. FXAIX is the most common comparison. Both track the same 500 companies. FXAIX charges 0.015% (the lowest on this list). VOO charges 0.03%. The difference on a $100,000 portfolio is about $15 per year, genuinely negligible.

The real choice is structure: VOO is an ETF (trades during the day, slightly more tax-efficient in taxable accounts). FXAIX is a mutual fund (trades once daily at NAV, easier to set up automatic investments of exact dollar amounts at Fidelity). If you use Fidelity and want simple automation, FXAIX. If you want intraday flexibility or use a non-Fidelity broker, VOO or IVV.

The Fee Difference Over a Career

Aisha, 30 years old, invests $10,000 initially and adds $500 per month. She earns a 10% average annual return (the S&P 500's long-term average is roughly 10.2% nominal).

Aisha keeps an extra $197,000 by choosing the index fund [6]. Not because she's smarter. Not because she timed the market. Because she paid less.

That number sounds impossibly large, but it's the compounding math working in reverse. Fees don't just disappear; they also lose the future returns they would have generated. A dollar lost to fees in year one costs you the 30 years of compounding that dollar would have earned.

What About the S&P 500 vs. Total Stock Market?

The Vanguard Total Stock Market ETF (VTI) holds about 3,600 stocks, including the small and mid-cap companies the S&P 500 excludes. Since the S&P 500 makes up roughly 80% of VTI's holdings, the two funds move in near lockstep. Over the past 20 years, the performance difference has been minimal.

VTI gives you slightly more diversification. The S&P 500 gives you slightly more concentration in proven large-cap winners. Both are excellent.

Don't agonize over this choice. Pick one and start investing. The cost of deliberating for three months is three months of missed returns.

The Concentration Risk Nobody Mentions

Here's the honest caveat: the S&P 500 is more concentrated than people realize. The top 10 holdings (Nvidia, Apple, Microsoft, Amazon, and a few others) make up about 38% of the entire index [3]. The Technology and Communication Services sectors dominate.

If big tech stumbles, the S&P 500 stumbles with it. This isn't a reason to avoid the fund, but it is a reason to consider adding international diversification (VXUS or similar) to your portfolio. Our best ETFs guide covers the specific options.

Your Next Move

1. Buy VOO, FXAIX, or IVV. Any of the three. Today. With whatever amount you have. Even $50.

2. Set up automatic monthly contributions. $100, $200, $500, whatever fits your budget. Consistency is the strategy.

3. Don't check the price every day. The S&P 500 dropped 56.8% during the 2008 crash. Investors who held through it saw their money more than quadruple over the next 15 years.

4. Use our compound interest calculator with your own numbers. Seeing $500/month become $1.1 million over 30 years tends to change behavior.

5. If you want to learn how stock prices are actually set and what happens when you place an order, our guide on how the stock market actually works explains the mechanics. And to understand the tax advantages of different account types, check our guide on choosing the right retirement account.

References

1. Buffett, W. (2021). Berkshire Hathaway Annual Shareholder Meeting. Reported via Nasdaq.com.
2. YCharts. (2026). S&P 500 Annual Total Return. YCharts.com.
3. S&P Dow Jones Indices. (2026). S&P 500 Index Fact Sheet. SPGlobal.com.
4. S&P Dow Jones Indices. (2025). SPIVA U.S. Year-End 2024 Scorecard. SPGlobal.com.
5. IFA / SPIVA. (2025). 15-Year Active Manager Underperformance Data.
6. Vanguard. (2023). The Case for Low-Cost Index-Fund Investing. Vanguard Research. https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/beyond-beta-charting-evolution-index-investing.html