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Begin To Invest Fund Spotlight Series – S&P Index Funds

Today we look at multiple funds that track the S&P 500 index. There are numerous funds that claim to track the S&P 500 index, which one should you choose?

The S&P 500 index may seem like a boring investment at first glance, but before writing off the simple index fund consider this:

 

Two-thirds of investors, whether retail investors or professional money managers, fail to match the S&P 500 index every year.

 

The truth is an S&P 500 index fund should be one of your largest investments for the portion of your portfolio allocated to stocks. And thankfully there are numerous high quality funds for investors to choose from.

 

The stocks that make up the funds below will all be nearly the same, because they are all tracking the same index. How big of a percentage each stock is of the index depends on the company’s market cap. The bigger the company, the more it will be weighted in the index. Currently Apple is the largest company in the world with a market cap of roughly $650 Billion – and makes up about 4.4% of the S&P 500 index. As Apple’s stock price moves up or down (and therefore Apple’s market cap goes up or down) that percentage will change.

 

Behind the scenes, that means the fund managers that manage the funds below will buy Apple (if Apple’s market cap increases) or sell Apple (if Apple’s market cap decreases) to increase or decrease its weight in the fund.

 

 

For up to date holdings for each fund click the links below of each fund. This information is usually updated quarterly.

Currently (as of 06/30/2012) holdings look like this:

 

Rank Holding Percentage
1 Apple 4.4%
2 Exxon Mobil 3.2%
3 Microsoft 1.8%
4 IBM 1.8%
5 GE 1.8%
6 AT&T 1.7%
7 Chevron 1.7%
8 Johnson & Johnson 1.5%
9 Wells Fargo 1.4%
10 Coca-Cola 1.4%

 

 

 

There are many ETFs and Mutual Funds to choose from, how do you go about selecting the fund which is right for you?

 

In large part, the decision will depends on your broker.

 

If you have an account open through Vanguard – their funds will most likely be the best fit for you because you can buy and sell them for free.

 

If you have an account with Fidelity or TD Ameritrade, you may want to choose from their commission free funds for the same reason.

 

If you have an account somewhere else, any of these funds will do great, you will just be paying a commission each time you buy – or check and see if your broker offers commission free ETFs or Mutual Funds.
Vanguard offers many funds, and if you have a brokerage account open with Vanguard they are all free for you to buy and sell (For up to 25 trades, after 25 free trades Vanguard will start to charge you. For most investors 25 trades will be more than enough).

 

ETFs:

 

 

VOOVanguard S&P 500 ETF.

 

From Vanguard VOO’s “Product Summary”:

 

 

  • Invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies.
  • Goal is to closely track the index’s return, which is considered a gauge of overall U.S. stock returns.
  • Offers high potential for investment growth; share value rises and falls more sharply than that of funds holding bonds.
  • More appropriate for long-term goals where your money’s growth is essential.

 

 

For most beginning investors, this will be your bread and butter investment until your account increases in value. Vanguard’s Mutual funds have higher minimum initial investment, higher expense ratios and charge annual fees if your investment is less than $10,000 (more on that later in this article). So until your investments reach $10,000 this is your cheapest option.

 

For this ETF, there is no minimum investment like Vanguard’s Mutual Funds, and because Vanguard account holders can buy VOO for free, makes it cheap and easy to add to your position frequently, or manually reinvest dividends which are paid out quarterly by this ETF.

With an expense ratio of just 0.05%, it is one of the cheapest fund in the industry. This means that for every $10,000 invested you pay $5 a year – you won’t find much lower fees anywhere else.

 

 

 

For Investors with accounts at Fidelity or TD Ameritrade, it may make more sense to use iShares S&P500 index fund because Fidelity and TD Ameritrade accounts pay no commission on select iShares ETFs.

 

(Note – TD Ameritrade account holders are subject to a 30 day hold rule in order to qualify. Meaning that you must hold the ETF for 30 days before selling in order to qualify for free commission).

 

IVViShares S&P 500 Index Shares

 

This ETF is run by iShares, a trademark of BlackRock Institutional Trust Company. Fidelity and TD Ameritrade have partnerships with BlackRock where Fidelity and TD Ameritrade account holders get to buy and sell iShares ETFs for free.

 

 

Expense ratio of 0.09% – This means you pay just $9 per $10,000 invested every year. Just slightly more expensive than Vanguard’s fund, but worth it if you can save money by the free trades. If you have an account through Fidelity or TD Ameritrade this is your cheapest option to invest in the S&P 500 index.

 

 

 

There are many other ETFs that track the S&P 500 index, the two above are highlighted because of the benefits they offer for Vanguard, TD Ameritrade or Fidelity account holders.

Besides those two, the most popular S&P 500 ETF is SPDR’s S&P 500 Fund

 

SPYSPDR S&P 500

 

The fund has an expense ratio of 0.10%, meaning investors pay $10 per $10,000 invested each year.

 

This is the most liquid (most traded) S&P 500 fund out there, and with $112 billion in assets, is the largest S&P 500 fund.

 

For investors with accounts outside of Vanguard or Fidelity, this is another solid option.

 

How do these funds past performance compare to the S&P 500?

 

 

As you can see, over the last 2 years their performance has been a nearly perfect match to the S&P 500.

 

 

Mutual Funds

 

 

 

For those that can have the money to invest up to these funds minimum investment, mutual funds offer the benefit of being able to automatically reinvest dividends. If you invest in ETFs this is not possible, the dividends will go into your account like a cash deposit. With Mutual Funds you can select the dividends to automatically be reinvested instantly, meaning that instead of receiving cash in your account, that cash will instantly buy more shares of the Mutual Fund.

 

Vanguard offers multiple mutual funds that match the S&P 500 index. The two funds have the same stock holdings; however one is cheaper than the other one, but has a higher minimum investment.

 

 

VFINXVanguard 500 Index Fund Investor Shares

 

VFINX has a 0.17% expense ratio – meaning that for every $10,000 invested Vanguard charges $17 a year.

 

VFINX has a minimum initial investment of $3,000. But note – investors also face a potential additional fee from Vanguard.

 

From Vanguard’s fine print:

 

For nonretirement accounts, traditional IRAs, Roth IRAs, UGMAs/UTMAs, SEP-IRAs, and education savings accounts (ESAs):
We charge a $20 annual account service fee for each Vanguard fund with a balance of less than $10,000 in an account. This fee doesn’t apply if you sign up for account access on Vanguard.com and choose electronic delivery of statements, confirmations, and Vanguard fund reports and prospectuses. This fee also doesn’t apply to members of Flagship®, Voyager Select®, and Voyager Services®.”

 

Investors with under $10,000 invested in any Vanguard fund can get around this fee by choosing electronic delivery for everything that Vanguard sends you. Vanguard account holders can set up electronic delivery here. This fee is also waived if your account has $50,000 or more in Vanguard ETFs or Mutual Funds.

 

Mutual Funds are generally more expensive than ETFs, as evident by the 0.17% expense ratio compared to 0.05% for the S&P 500 Index ETF. For this reason I believe that the ETF offers investors better value. The ETF (VOO) saves investors about $300 every 10 years for each $10,000 invested compared to VFINX.

 

The other Mutual Fund that Vanguard offers is:

 

VFIAX – Vanguard 500 Index Fund Admiral Shares

 

Vanguards Admiral Shares mutual funds come with the lowest expense ratio for mutual funds in the industry. This fund has an expense ratio of 0.05% – matching VOO for the cheapest way to invest in the S&P 500 index.

 

There is a catch however, and that is the higher minimum investment required to invest in the fund – $10,000.

 

For beginning investors this may be outside of their reach. The good news is that Vanguard’s ETF VOO is just as cheap. Once your build up $10,000 allocated to the S&P 500 index investors can choose to switch to VFIAX if they choose.

 

 

Fidelity offers several Mutual Funds that are free for investors with an account through Fidelity, although they offer higher minimums like Vanguard.

 

 

FUSEX Spartan 500 Index Fund Investor Class

 

This mutual fund offers an expense ratio of 0.10%, meaning investors pay $10 per $10,000 invested every year.

The fund has a minimum investment of $10,000, so for beginning investors the ETF IVV may be your best bet until you account increases in value.

 

 

And lastly,

 

FUSVXSpartan 500 Index Fund – Fidelity Advantage Class

 

This fund offers a low expense ratio of just 0.07%, meaning investors pay $7 per $10,000 invested every year.

However, this fund has a minimum investment of $100,000!

 

For Fidelity account holders, as your account increases in value and you have $100,000 available to invest in the S&P 500 index FUSVX  will be a great investment and save you money over FUSEX, until then FUSEX is a fine choice and not much more expensive.

 

How does the performance of these mutual funds compare to the S&P 500 over the last 5 years?

 

Once again, returns from all funds are nearly identical to the S&P 500.

 

Summary

 

There are many cheap ways to invest in the S&P 500 index. For many investors this investment should be the core of your portfolio.

Investors who have accounts through Vanguard, TD Ameritrade or Fidelity benefit greatly by the commission free trades available, but these funds make a great investment no matter your broker.

Each fund has an excellent track record in matching the returns of the S&P 500 index. The only decision is finding the fund that gives you commission free trades, if available through your broker.

In general, there is no cheaper investment than an S&P 500 index fund and historically, no better choice to get the highest returns on your investment.

 

 

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