S&P 500 index funds are a staple of many portfolios, representing a key asset class: large-cap U.S. stocks.
Year to date as of Nov. 15, the S&P 500 has returned 23.1%, and it appears on track to end 2024 with strong gains. The benchmark index is up 30.4% over the past year.
How should investors go about choosing the right S&P 500 index fund? There are certainly similarities between the exchange-traded funds and mutual funds that track the S&P 500. However, there are some differences, such as how closely they match the S&P’s holdings and performance.
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Here’s a comparison of some of the most popular S&P 500 index ETFs and mutual funds:
| Fund | YTD Return | Expense Ratio |
| SPDR S&P 500 ETF Trust (ticker: SPY) | 24.4% | 0.095% |
| iShares Core S&P 500 ETF (IVV) | 24.5% | 0.03% |
| Vanguard S&P 500 ETF (VOO) | 24.5% | 0.03% |
| Fidelity 500 Index Fund (FXAIX) | 24.5% | 0.015% |
| Schwab S&P 500 Index Fund (SWPPX) | 24.5% | 0.02% |
SPDR S&P 500 ETF Trust (SPY)
This is the largest S&P 500 exchange-traded fund, with $621.9 billion in total assets and an average daily trading volume of 46.58 million shares in the past 50 sessions.
Index funds with high daily trading volume tend to have tighter bid-ask spreads. With frequent trades, the market price is continuously changing to reflect supply and demand, keeping the bid and ask prices close together.
SPY’s expense ratio is 0.095%, higher than some other S&P index funds.
This ETF may be traded in extended hours, says Bart Leake, a certified financial planner at Cadence Planning in Chicago. Some platforms allow 24-hour trading five days a week, he adds.
“This critical feature allows investors to act and respond to news events they feel are appropriate. The same cannot be said for the other instruments,” Leake says.
He also cites the SPY’s liquid and heavily traded options, which allow investors to use a covered call strategy to generate additional income or lower their investment’s average cost.
“I have personally invested in SPY over the years, and I always recommend this product to investors looking for exposure to the S&P 500 index due to its low cost and high liquidity,” Leake says.
iShares Core S&P 500 ETF (IVV)
BlackRock’s S&P 500 ETF is structured as an open-ended fund. That’s different from SPY’s status as a unit investment trust.
“This structure allows for greater flexibility, such as reinvesting dividends immediately, potentially improving compounding efficiency over time,” says Nick Scibilia, co-founder and CEO of Orbit, a New York-based company that provides data feeds and a social media app for retail investors.
SPY holds dividends in cash and distributes them quarterly, he adds. Faster dividend reinvestment may improve IVV’s compounding in the long run.
Year to date, IVV has returned 24.5% versus SPY’s return of 24.4%. IVV’s lower expense ratio of 0.03% also helps put a little more money in investors’ pockets.
IVV has a smaller daily trading volume than SPY, but its options chain is also active.
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Vanguard S&P 500 ETF (VOO)
Vanguard’s method of replicating the S&P 500 holdings in its ETF means it matches the actual index more closely than IVV.
VOO and State Street’s SPY ETF use a full replication method, meaning they hold all index securities in exact weights. In contrast, IVV uses an optimized replication method, which uses a sample of securities to closely track an index.
“Funds that use a full replication method of an index are likely to have lower tracking errors than funds that use partial or optimized replication methods,” says Joseph Alger, a chartered financial analyst and investment research analyst at Crestwood Advisors in Boston.
Optimized replication creates potential for gaps in performance between the ETF and the underlying index. That can be seen as an indirect cost, Alger says.
That could give VOO an edge. Its year-to-date return is 24.5% rounded, slightly higher than SPY. Its expense ratio is 0.03%, consistent with Vanguard’s long-established philosophy of keeping investing costs low.
Fidelity 500 Index Fund (FXAIX)
Fidelity’s S&P 500 index product is structured as a mutual fund. That means investors can’t actively trade it throughout the day, or use limit orders, stop orders, short selling or options.
However, one advantage of this fund is its rock-bottom expense ratio of 0.015%. For long-term investors who don’t want to trade or use options, this fund could be an efficient way to own large-cap domestic stocks.
“It’s especially good for putting in retirement accounts where you might just want to set it and forget it,” Scibilia says.
There’s also no minimum investment, making this a good choice for anyone new to the markets.
Year to date, this mutual fund has returned 24.5%, reflecting the low fees investors are paying.
Schwab S&P 500 Index Fund (SWPPX)
This S&P 500 mutual fund also has no minimum investment. Its expense ratio is 0.02%, and its year-to-date return is 24.5%.
The low expense ratio means the investor keeps more of the return, rather than handing it over to the management company.
John Foote, founder of Modoo Strategy in Great Neck, New York, says investors who already have accounts at Schwab might consider SWPPX.
“I tend to favor choosing the fund associated with the brokerage platform to avoid any additional fees,” he says.
Like FXAIX, this may be more appropriate in a tax-advantaged qualified account, such as a 401(k), as these are not structured as ETFs. That means they’re less efficient in a taxable account.
“Index funds distribute capital gains to their fundholders when investors withdraw money, forcing the fund to sell appreciated stocks, generating capital gains,” says Scott Bondurant, founder and CEO at Bondurant Investment Advisory in Evanston, Illinois.
ETFs, in contrast to their mutual fund counterparts, only generate capital gains when the owner sells shares.
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Update 11/18/24: This story was published at an earlier date and has been updated with new information.
