How to Invest in an S&P 500 Index Fund (Beginner’s Guide)

An S&P 500 index fund for beginners works like this: you buy one fund, and it owns roughly 500 of the largest US companies in proportion to their size, for an annual fee that can be as low as a few dollars per $10,000 invested. To get started, you open a brokerage or retirement account, choose a low-cost S&P 500 ETF or mutual fund, and invest a set amount on a regular schedule.

Index funds have become a default starting point for long-term investors because they are cheap, diversified across sectors and require no stock picking. The trade-off is that you get the market’s return, including its crashes, not a shot at beating it.

This guide explains what the S&P 500 is, how index funds and ETFs that track it differ, how to buy one step by step, what historical returns do and do not tell you, and the risks, including how concentrated the index has become in big tech.

What Is the S&P 500?

The S&P 500 is a stock market index: a list of companies whose combined value is tracked as a single number. It was launched in 1957 and is maintained by S&P Dow Jones Indices. It covers about 80% of the value of US-listed companies available to investors, which is why it is widely used as shorthand for “the US stock market.”

Three features matter for investors:

• Selection by committee. Companies are not added just for being big. To qualify, a company generally must be based in the US, meet a minimum size threshold that S&P reviews regularly, have enough shares available to trade, and show positive earnings (as defined under US accounting rules, GAAP) over the most recent quarter and the last four quarters combined. A committee makes the final call.
• Market-cap weighting. Each company’s weight equals its float-adjusted market capitalization (share price times the shares available to public investors) divided by the total. The largest companies therefore have the biggest influence.
• Around 500 companies, a few more securities. Some companies have two share classes in the index, so it usually holds about 503 securities.

The index measures price changes only. A fund that tracks it also collects the companies’ dividends, which is why “total return” figures, which include reinvested dividends, are higher than the index’s price change alone.

How Does an S&P 500 Index Fund Work?

An index fund is a fund that tries to match an index rather than beat it. An S&P 500 fund pools money from many investors and buys the stocks in the index in the same proportions. When a company enters or leaves the index, or weights change, the fund trades to stay aligned.

Because there is no team picking stocks, costs are low. The fund’s annual fee is its expense ratio: the percentage of your investment deducted each year to run the fund. At 0.03%, you pay about $3 a year per $10,000 invested. The fee is taken from the fund’s assets, not billed to you separately.

The difference between a fund’s return and the index’s return is called tracking difference. For large S&P 500 funds it is usually close to the expense ratio. That is why two funds tracking the same index deliver nearly the same result: the fee is the main thing you are choosing.

Low-cost index funds have also been hard to beat. S&P Dow Jones Indices’ long-running SPIVA reports have repeatedly found that most actively managed US large-cap funds trail the S&P 500 over periods of ten years or more.

S&P 500 Index Fund vs ETF: Your Main Options

You can own the S&P 500 through an exchange-traded fund (ETF), which trades on a stock exchange throughout the day like a share, or through a traditional index mutual fund, which you buy or sell once a day at the closing net asset value (NAV, the value of the fund’s holdings per share). Our guide to index funds vs ETFs covers the structural differences in depth; here are the most common S&P 500 choices for US investors.

*Expense ratios and minimums as published by the fund providers as of October 2026. Fees change, so check each fund’s page or the FINRA Fund Analyzer before you buy. This list is for comparison only and is not a recommendation.

How to choose between them

• Fees: the gap between 0.015% and 0.0945% is small in dollars, but it compounds. All of these are far cheaper than the 0.5% to 1% many actively managed funds charge.
• Where your account is: mutual funds are often cheapest or only available without fees at their own brokerage (Fidelity funds at Fidelity, Schwab funds at Schwab). ETFs trade commission-free at most major US brokers.
• How you invest: mutual funds make automatic fixed-dollar investing easy. ETFs do too at brokers that support fractional shares and recurring buys.
• Taxes in a US taxable account: ETFs usually distribute fewer capital gains because of how shares are created and redeemed. Inside an IRA or 401(k) this difference does not matter.
• Trading features: SPY is the most heavily traded ETF and has a deep options market, which matters to active traders, not to most buy-and-hold investors.

New to ETFs in general? Start with what an ETF is and how it works.

How to Invest in an S&P 500 Index Fund: Step by Step

1. Check your foundations. Before investing, pay down high-interest debt and keep an emergency fund in cash. Money you may need within a few years should not be in a 100% stock fund.
2. Choose the account. In the US, the main choices are a workplace 401(k), an IRA and a regular taxable brokerage account. If your employer matches 401(k) contributions, that match is usually the first dollar to capture, and many 401(k) plans include an S&P 500 fund. Our Roth IRA vs Traditional IRA guide explains the tax trade-off for 2026.
3. Open the account. If you do not have one, see how to open a brokerage account. You will need ID, your Social Security number (in the US) and a bank account to fund it.
4. Pick the fund. Use the table above. If you are at Fidelity or Schwab, their own mutual fund or any of the ETFs works. Elsewhere, an ETF such as VOO, IVV or SPYM is usually simplest.
5. Place the order. For an ETF, search the ticker, choose the amount in dollars (if fractional shares are available) or shares, and use a limit order (an order that sets the maximum price you will pay) during regular market hours. For a mutual fund, enter a dollar amount; it executes at that day’s closing NAV.
6. Turn on dividend reinvestment. Most brokers offer automatic reinvestment, so dividends buy more shares instead of sitting in cash.
7. Automate contributions. Set a recurring transfer and purchase, such as $200 every payday. Then leave it alone and review once or twice a year.

Outside the US, the steps are similar but the products differ. UK and EU investors typically buy UCITS-compliant S&P 500 ETFs listed in London or Europe, because many US-listed ETFs are not available to them, and they can often hold them in a tax-advantaged account such as a UK Stocks and Shares ISA. Tax rules differ by country.

Lump Sum or Dollar-Cost Averaging?

Dollar-cost averaging (DCA) means investing a fixed amount at regular intervals regardless of price. If you invest from each paycheck, you are already doing it. Because a fixed dollar amount buys more shares when prices are low and fewer when they are high, your average cost per share ends up below the average price over the period.

If you already have a lump sum, the evidence slightly favors investing it at once: because markets have risen in most years, Vanguard research published in 2012, covering the US, UK and Australia, found lump-sum investing beat dollar-cost averaging about two-thirds of the time. DCA’s real benefit is behavioral. It reduces regret if the market drops right after you invest and keeps you investing through downturns.

Average S&P 500 Index Fund Return: What History Shows

According to historical data compiled by NYU Stern professor Aswath Damodaran, the S&P 500 including reinvested dividends returned:

• About 10.0% a year compounded from 1928 to 2025 (the simple arithmetic average of yearly returns was about 11.9%).
• Roughly 6.8% a year after inflation over the same period, by our calculation from the same dataset.
• About 14.7% a year compounded from 2016 to 2025, a strong decade that should not be treated as normal.

The path was far from smooth. The index fell in 26 of those 98 years. The worst years were 1931 (−43.8%) and 2008 (−36.6%); it lost money three years in a row from 2000 to 2002, and fell 18.0% in 2022.

Keep these caveats in mind:

• Before 1957 the data uses a smaller predecessor index.
• An index fund earns the index return minus its expense ratio, and real investors also face taxes and their own buying and selling decisions.
• The US market has one of the strongest long-run records of any country, and that is not guaranteed to repeat. Future returns depend on starting valuations, earnings growth and interest rates, and may be lower.
• Averages hide sequence risk: a crash just before you need the money hurts far more than one early on.

The large gaps between those outcomes come from compound interest: returns earning returns over decades.

Risks of an S&P 500 Index Fund

Concentration in big tech

Market-cap weighting means the biggest companies dominate. The ten largest stocks made up close to 40% of the index at times in 2025 and 2026, up from roughly a fifth for much of 1985 to 2015. Most of those leaders are technology or tech-related companies. When they rise, the index rises; when they fall together, owning “500 stocks” offers less cushion than the number suggests. Check the current top-10 weight on the fund’s fact sheet.

Deep drawdowns

A drawdown is a fall from a previous peak. Measured by price, the S&P 500 fell about 49% from peak to trough between 2000 and 2002 and about 57% between 2007 and 2009. If you would sell in a panic after a 40% drop, the fund is too risky for your plan, however good its long-run average.

US-only and large-company-only exposure

The fund holds no small companies, no international stocks and no bonds. Many investors add other funds for those, and our guide to stocks and ETFs covers the options.

Valuation risk

When prices are high relative to earnings, history suggests returns over the following decade have tended to be lower. That is not a timing signal, but it is a reason not to assume the past century’s average will repeat.

Common Beginner Mistakes

• Buying three S&P 500 funds for “diversification.” VOO, IVV and SPY hold the same stocks. Owning all three adds nothing.
• Chasing the fund with the best one-year return. Differences between S&P 500 funds come almost entirely from fees and small tracking differences.
• Stopping contributions in a downturn. Regular buying during declines is when DCA does its work.
• Ignoring the account type. Holding funds in a tax-advantaged account can matter more than a few hundredths of a percent in fees.
• Checking the balance daily. Frequent checking makes normal volatility feel like an emergency.

Bottom Line

An S&P 500 index fund gives you a share of about 500 large US companies for a very low fee, and the main decision is which low-cost fund fits the account you use. Open the right account, pick a fund, automate contributions and reinvest dividends. Expect years with losses of 20% or more, remember that the index is increasingly concentrated in a few giant companies, and give the investment a decade or longer to work.

Sources

• S&P Dow Jones Indices – S&P 500 index overview and methodology
• NYU Stern (Aswath Damodaran) – Historical Returns on Stocks, Bonds and Bills
• Investor.gov (SEC) – Index Fund
• Investor.gov (SEC) – Dollar Cost Averaging
• FINRA – Fund Analyzer
• Vanguard – Vanguard S&P 500 ETF (VOO)
• iShares by BlackRock – iShares Core S&P 500 ETF (IVV)
• State Street Global Advisors – SPDR S&P 500 ETF Trust (SPY)