The Challenge of Beating the S&P 500
Creating a portfolio that consistently outshines the S&P 500 is a daunting task in the long run. This index has impressively provided average annual returns close to 10% over nearly nine decades. For many investors, purchasing an S&P 500 ETF is a straightforward and cost-effective method to gain exposure to a substantial portion of the market without breaking the bank.
Understanding ETF Variations
While several S&P 500 ETFs tend to include similar assets, subtle differences exist that you should be aware of before choosing one. A quick search for S&P 500 ETFs will reveal a plethora of options. However, not every fund labeled with “S&P 500” offers the same coverage; some may target specific segments, such as growth or value stocks, rather than tracking the entire index.
Selecting the Right ETF
You need not be overwhelmed by choices when hunting for an ETF that monitors the S&P 500's overall performance. Here are a few standout funds that encompass the whole index:
Top S&P 500 ETFs
ETF: Vanguard S&P 500 ETF
Ticker: VOO
Annualized 5-year Return: 16.81%
ETF: iShares Core S&P 500 ETF
Ticker: IVV
Annualized 5-year Return: 15.01%
ETF: SPDR S&P 500 ETF Trust
Ticker: SPY
Annualized 5-year Return: 15.13%
Source: Fund websites. Data as of March 3, 2025, for informational use only.
Opening an Investment Account
If you're leaning towards investing in any of these ETFs, ensure you have an investment account set up. If you’re seeking a brokerage, explore our carefully curated list of options available to you.
Common Features of S&P 500 ETFs
The three ETFs mentioned share a couple of notable characteristics: you can easily locate them across most online brokers, and they boast high liquidity, allowing you to trade them effortlessly, day in and day out.
Making Your Decision
Our goal isn’t to declare a champion among these funds, as the best fit for you hinges on personal criteria. Yet, here are a few factors to mull over:
Expense Ratios: Both VOO and IVV offer attractive management fees of only 0.03%, significantly lower than SPY at 0.0945%. While these numbers might appear minimal, they accumulate over time; for instance, a $10,000 investment incurs fees of just $3 with VOO or IVV compared to $9.45 with SPY annually. This difference is even more pronounced with larger investment amounts.
Trading Costs: While many brokers provide a variety of commission-free ETFs, specific fund selections may differ. Luckily, most major brokerages are moving toward zero commissions for ETF, stock, or options trading.
Price Variations: There can be minor price fluctuations between the funds. Although this shouldn’t be a deciding factor, it could influence how many shares you opt to buy at any one time.
Yield and Return: Despite all funds tracking the same index, slight differences in yield and performance may arise. Returns will fluctuate over time, so the ETF boasting the highest current return may not hold that position in the future. Hence, examining the five-year returns provides a better long-term view.
Final Thoughts
For many, diving into the intricacies of investing offers a rewarding experience, while for others, it can seem overwhelming. All three ETFs listed here present lower-than-average expense ratios and are an uncomplicated way to invest a piece of the U.S. stock market.
While it might be tempting to invest in all three ETFs, choosing just one suffices. Since they all track the same 500 companies, there’s no added diversification benefit, potentially freeing up resources for other investment opportunities.
Regardless of which S&P 500 ETF you decide on, this fund can lay a solid foundation for your investment portfolio. Unsure of your next steps? Check out our guide for insightful investment tips!
