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. Less than twenty years later, the first exchange-traded fund (ETF) was launched, also tracking the S&P 500. Nowadays, most investment firms, including Fidelity and Schwab, offer an S&P 500 index fund and there are a variety of S&P 500 ETFs on the market. 

Index Funds

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.

Exchange-Traded Funds

Another option for investors to consider is an exchange traded fund, such as a Standard & Poor's Depository Receipt (SPDR) or the iShares S&P 500 Index ETF, both of which are securities that track the index but trade like a stock.

The Bottom Line

Both index funds and ETFs provide convenient, cost-efficient ways for individual investors to achieve the diversification of the S&P 500 Index. Investing in the S&P 500 is as simple as making a call to a brokerage firm that offers this type of fund or ETF.

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