What investment beats 90% of active fund managers in the long-run? What investment turned $10,000 into $1.1 million over the last 50 years? What investment does Warren Buffett want 90% of his wealth invested in after he’s gone?
If you guessed the S&P 500, you’re right!
Like Mr. Buffett, I’m a huge fan of investing in low-cost S&P 500 index funds to grow your wealth. It’s a bet on the future prosperity of America!
There are plenty of S&P 500 index funds to choose from, so how do we decide which one is best?
In this post I’m going to tell you what criteria I look for when choosing the best funds. Then I’m going to give you my picks for the 3 brokerages for which I am a customer – TD Ameritrade, Fidelity, and Etrade. I plan to update this list once a year.
3 criteria for selecting the best s&P 500 index funds
Number 1: low fees
No Load, No Transactions Fees
When I purchase a fund, I want to make sure that my brokerage doesn’t charge me any fees for buying it. I also want to make sure that there are no fees for selling it. Usually your brokerage makes it easy to find funds that charge no load fees and no transaction fees.
The only reasonable fee to me is the early-redemption fee. This is a fee charged by the brokerage or the fund if you buy and sell the fund within a short time period, like 90 days or 180 days. Excessive buying and selling of mutual funds raises costs for the fund. So by discouraging excessive trading of mutual funds, they help keep the costs low for everyone.
gross and net expense ratios, 12-b1 fees
The fund prospectus and the brokerage makes it easy to find what the fund charges annually to own it. This can be found under gross expense ratio and net expense ratio. The lower the better. Most S&P 500 index funds charge less than 1%.
Some funds may also charge a 12-b1 fee, which is used to pay for their marketing. This is rare for an index fund and I would be very hesitant if a fund charged this.
Here’s a great article on The Motley Fool about gross and net expense ratios.
Here’s another great article on The Balance about mutual fund fees
Number 2: Does it actually invest in the S&P 500?
does the fund own 500 stocks or so?
A fund that invests in the S&P 500 theoretically should own the 500 stocks in the index. But it’s not practical to track the index with 100% accuracy. So sometimes the fund may own a little more or less than 500 stocks.
It’s very reasonable for the fund to own between 480 and 520 stocks. I’d be concerned if it went outside this range.
what’s the portfolio turnover?
S&P 500 index funds are passive investment funds. Therefore, portfolio turnover – the buying and selling of stocks – should be low. Each fund can decide when they want to rebalance their fund to sync up with the S&P 500 index’s composition. Some may rebalance once a year, others once a month.
I just want to make sure that the fund that has less than 30% turnover.
do the charts match?
An S&P 500 fund’s chart should match nearly 1 for 1 with the S&P 500. An easy way to check this is to look at the 5 year chart of the fund compared with the S&P 500. As you can see from this chart, TRSPX tracks the S&P 500 very well.
Number 3: low minimum investment requirements
Low initial investment minimums
I generally look for an initial investment minimum of $500 or less. The only reason to pay more is if the fund has ultra-low fees.
Low Add-on Investment minimums
I like the add-on investment minimum to be $100 or less. This makes it easier to dollar cost average into the fund.
the best s&p 500 index funds on tdameritrade, fidelity, and etrade (updated april 11, 2019)
TIAA-CREF S&P 500 Index Fund Retirement Class
Fidelity® 500 Index Fund
SCHWAB® S&P 500 INDEX
I/we are long TRSPX and SWPPX.
I wrote this article myself and it expresses my own opinions. I’m not receiving compensation for it (other than from Wolves Of Investing), and I have no business relationship with any company whose stock is mentioned in this article.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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