A popular investment choice for retirement portfolios is adding the S&P 500 (.SPX) because it is a low-cost mutual fund or exchange-traded fund that is broadly diversified. A benchmark index that is used by investors and traders to determine the pulse of the stock market, the S&P 500 consists of the top 500 public companies based on market capitalization. "The S&P 500 is an excellent asset and has a great track record in the past 50 years," says Scott Puritz, a managing director of Rebalance, an investment firm. "It's a great place to start whether you have $500 or $100,000." Here are seven S&P 500 index funds and ETFs to consider adding to a portfolio.
Vanguard 500 Index Investor Share Class (VFINX)
The Vanguard 500 Index fund invests most of its assets in all 500 stocks in the S&P 500 at approximately the same weight as the index and for a cost of 0.14%, says Chris Osmond, chief investment officer at Prime Capital Investment Advisors. This mutual fund is a popular index fund with the objective of replicating the S&P 500 index. Index funds are a type of passive investing that track specific benchmarks. Both types of investing have risen in popularity as investors seek more diversification to avoid volatility and lower their risk. VFINX boasts a year-to-date return of 10.7%.
Fidelity 500 Index Fund (FXAIX)
The Fidelity 500 Index Fund (FXAIX) invests at least 80% of its assets in stocks comprising of the index, with the objective of delivering the same exposure and risk and return profile as the index. But FXAIX does this at a significantly lower cost than its Vanguard counterpart, carrying a 0.02% expense ratio, Osmond says. The returns mirror the index closely with a 10-year average annual return of 13.93%, a three-year average annual return of 11.71% and a one-year average annual return of 3.77% as of the end of May. The annual average return for the benchmark was 13.95% for the 10-year return, 11.72% for the three-year return and 3.78% for the one-year return.
Schwab S&P 500 Index Fund (SWPPX)
Like the Fidelity 500 Index (FXAIX), the Schwab S&P 500 Index invests at least 80% of its assets in the stocks comprising the S&P 500, generally matching the index weights and for a cost of 0.02%, Osmond says. The fund received five stars from Morningstar. An investor really needs to evaluate the platform they want to use for investing first, since many retirement providers have created their own S&P 500 index fund to gather assets, says Bill DeShurko, president of 401 Advisor, a registered investment advisory in Centerville, Ohio. Investors should seek out a list of available funds, isolate the index funds and compare costs, he says.
iShares S&P 500 Index Fund (BSPAX)
The iShares S&P 500 Index Fund (BSPAX) is another option, but it has a higher expense ratio of 0.36% since it is actively managed. Alan Mason, a managing director and head of Americas ETF and index investments at iShares, manages the index fund along with four other managers. The fund has slightly underperformed the S&P 500 over the past decade. The 10-year average annual return for the fund was 13.5% compared to the benchmark at 13.95%; the five-year average annual return was 9.28% compared to the benchmark at 9.66%. The one-year return as of May 31 was 3.45% compared to its benchmark of 3.78%.
T. Rowe Price Equity Index 500 Fund (PREIX)
The T. Rowe Price Equity Index 500 fund (PREIX) is actively managed and has an expense ratio of 0.21%. "The more important question would be picking the right platform for the long run and how much investment flexibility are you looking for," DeShurko says. "The alternative is to buy direct from the fund family such as Vanguard, but that limits flexibility if you want to change investments in the future. There is a significant price to pay when you buy from an advisor or broker," he says.
Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (VOO) was founded in 2010 and has a much lower expense ratio of 0.03%. The returns of the ETF mirror the benchmark much more closely than the mutual funds. For example, the one-year annualized return is 3.75%, which is close to the benchmark's one-year annualized return at 3.78%. "We prefer ETFs like VOO because they are easier to trade and easier to rebalance," Puritz says. "The beauty is they are doing a good job to have the efficiencies and scale, which makes their job easier to track an underlying index."
iShares Core S&P 500 ETF
The iShares Core S&P 500 ETF (IVV) has an expense ratio of 0.04%, and its annualized average returns have tracked closely to its benchmark in recent years. Using an ETF such as IVV means more precise price execution when the market is volatile, says Alex Chalekian, CEO of Lake Avenue Financial. "Unlike a mutual fund that is priced at the close of the market, an ETF trades throughout the day," he says. "Imagine the S&P 500 is down 2% during the day and you buy more shares of a mutual fund to lower your average share cost. The index closes up 1%. If you placed your fund trade during the day when the index was down, you're still going to get an execution price based on the close when the index was up. With an ETF, you can avoid this issue."
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