A:

In 1976, Vanguard introduced individual investors to the first mutual fund designed to mimic the S&P 500 Index. Today it is known as the Vanguard® 500 Index Fund. Nowadays, most investment firms, including Fidelity and Schwab, offer an S&P 500 index fund.

But if all of these brokerage firms are offering funds based on the same index, how does an investor discern which fund is appropriate for him or her? What distinguishes these seemingly identical funds is the expense each charges for managing the fund. It may seem logical that an index fund requires little trading or management, but the management expense ratio can vary considerably from firm to firm - and the actual returns they offer will also vary as a result. (Have a look at the article You Can't Judge An Index Fund By Its Cover to learn more on this issue.)

Investing in the S&P 500 is as simple as making a call to a brokerage firm that offers this type of fund. Another alternative is to purchase an exchange traded fund (ETF), such as a Standard & Poor's Depository Receipt (SPDR) or the iShares S&P 500 Index, both of which are securities that track the index but trade just like a stock. Both index funds and ETFs provide cost-efficient ways for individual investors to achieve the diversification of the S&P 500 Index.

For further reading on investing in indexes, take a look at the Index Investing Tutorial.

RELATED FAQS
  1. Is it possible to invest in an index?

    First, let's review the definition of an index. An index is essentially an imaginary portfolio of securities representing ... Read Answer >>
  2. Which mutual funds have the lowest fees?

    Discover why index mutual funds are generally less expensive than actively managed funds and learn about three of the lowest-cost ... Read Answer >>
  3. Why do index funds tend to have low expense ratios?

    Understand what an index fund is and why the nature of index funds causes them to have lower expense ratios than more actively ... Read Answer >>
  4. What is an appropriate large cap mutual fund fee?

    Discover what an appropriate fee for a large-cap mutual fund should be, and learn how choosing index mutual funds can lead ... Read Answer >>
Related Articles
  1. Investing

    5 Things You Need To Know About Index Funds

    Index funds, at their best, offer a low-cost way for investors to track popular stock and bond market indexes. But not all index funds are created equally.
  2. Investing

    The Lowdown On Index Funds

    If you can't beat the market, why not join it? Read on to go over your options.
  3. Investing

    Enhanced Index Funds: Can They Deliver Low-Risk Returns?

    These funds may look appealing. Find out whether they can really live up to all of their promises.
  4. Investing

    Fund Management Issues

    The quality of management is a key component of a fund's success.
  5. Investing

    Vanguard Equity Index Funds Overview (VFINX, VTSAX)

    Learn about Vanguard's investment philosophy and its equity index mutual fund offerings, which encompass substantially all equity fund sectors.
  6. Investing

    Make Sure You Avoid Adding These Mutual Funds to Your 401(k)

    Find out which five types of mutual funds you should avoid in your 401(k), including why buying this year's hottest fund is likely a losing bet.
  7. Investing

    ETF Tracking Errors: Protect Your Returns

    Tracking errors tend to be small, but they can still adversely affect your returns. Learn how to protect against them.
  8. Investing

    Studying Financial Sector: XLF (ETF) vs. VFAIX (Mutual Fund)

    Explore the similarities and differences between securities that are exposed to the financial sector, XLF and VFAIX.
  9. Investing

    The Top 5 Passive Equity Mutual Funds for 2016

    Examine five passive equity mutual funds that are poised to do well in 2016, as ranked according to their efficiency, performance and management skill.
RELATED TERMS
  1. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
  2. Index Investing

    A form of passive investing that aims to generate the same rate ...
  3. Index ETF

    Exchange-traded funds that follow a specific benchmark index ...
  4. Expense Ratio

    A measure of what it costs an investment company to operate a ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  6. Index Hugger

    A managed mutual fund that tends to perform much like a benchmark ...
Hot Definitions
  1. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  4. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
Trading Center