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The S&P 500 Is an Index, Not an Index Fund — Here's the Difference

By Adrian Watts · Stocks and Funds Writer

The S&P 500 is a list of 500 large US companies, not a fund itself

The S&P 500 is a benchmark — a measurement tool that tracks the stock prices of 500 of the largest publicly traded companies in the United States. It is not a fund you can buy into directly. You cannot call a broker and say "I want to own the S&P 500." What you can do is buy an index fund or an exchange-traded fund (ETF) that is designed to track the S&P 500, meaning it holds the same 500 stocks in roughly the same proportions.

Think of it this way: the S&P 500 is the recipe. An S&P 500 index fund is the cake made from that recipe. The index itself is maintained by S&P Dow Jones Indices, a division of S&P Global, and it changes only when companies are added to or removed from the list — usually a few times per year.

Key Takeaways

  • The S&P 500 is a benchmark index listing 500 large US companies; you cannot buy the index itself, only funds that track it.
  • Index funds and ETFs that track the S&P 500 hold all or most of those 500 stocks and aim to match the index's performance.
  • Different fund companies offer S&P 500 tracking funds with different expense ratios, so costs vary even though the holdings are similar.
  • An S&P 500 index fund is a passive investment, meaning it does not try to beat the market — it tries to match it.

How S&P 500 index funds work

When you buy shares of an S&P 500 index fund, you are buying a small piece of a fund that holds all 500 stocks in the index. The fund manager does not pick which stocks to buy or try to time the market. Instead, the fund simply buys and holds the stocks that make up the S&P 500, rebalancing occasionally to stay aligned with the index.

Because the fund holds 500 different stocks, your money is spread across many companies in different industries — technology, healthcare, finance, energy, consumer goods, and others. This built-in diversification is one reason the S&P 500 is popular with individual investors. If one company performs poorly, it is a small part of your overall holding.

The fund's performance will closely match the S&P 500's performance, minus the fund's expense ratio — the annual fee charged to run it. If the S&P 500 goes up 10% in a year and your fund's expense ratio is 0.03%, your fund will return roughly 9.97%.

The difference between index funds and ETFs that track the S&P 500

Both index funds and ETFs can track the S&P 500, but they work differently. A traditional index mutual fund is bought and sold directly through the fund company, usually at the end of the trading day. An ETF trades on a stock exchange throughout the day, like a stock, so you can buy and sell it whenever the market is open.

For most individual investors, the choice between the two comes down to cost and convenience. ETFs often have lower expense ratios than mutual funds tracking the same index. However, if you buy an ETF through a broker, you may pay a commission per trade, while many brokers now offer commission-free trading on both ETFs and mutual funds.

Some well-known S&P 500 tracking funds include the Vanguard 500 Index Fund (mutual fund), the Vanguard S&P 500 ETF, the Fidelity 500 Index Fund, and the Schwab U.S. Large-Cap ETF. Each holds roughly the same 500 stocks but may charge different fees.

Why the S&P 500 matters as a benchmark

The S&P 500 is often used as a measure of how the overall US stock market is doing. When news outlets report "the market is up today," they are usually referring to the S&P 500, the Dow Jones Industrial Average, or the Nasdaq-100. Because the index includes 500 large companies across many sectors, it is considered a broad snapshot of the US economy.

Many professional investors and financial advisors use the S&P 500 as a benchmark to measure their own performance. If an actively managed fund — one where a manager picks stocks — returns 8% in a year but the S&P 500 returned 12%, the fund underperformed the benchmark. This comparison helps investors decide whether they are getting value from paying higher fees for active management.

The companies in the S&P 500 change over time

The S&P 500 is not a fixed list. S&P Dow Jones Indices adds and removes companies based on criteria including market capitalization, liquidity, and financial viability. When a company is added, it usually means it has grown large enough to warrant inclusion. When a company is removed, it may have shrunk, merged with another company, or been delisted from the stock exchange.

When a change happens, S&P 500 index funds automatically adjust their holdings to match. This happens infrequently — usually a handful of times per year — so it does not create constant trading or high costs for the fund.

S&P 500 index funds as part of a portfolio

Many investors use an S&P 500 index fund as a core holding in a diversified portfolio. Because it covers 500 large US companies, it provides broad exposure to the US stock market without requiring you to pick individual stocks. Some investors hold only an S&P 500 index fund plus a bond fund or international stock fund to round out their portfolio.

Others use an S&P 500 index fund as one piece of a larger strategy that might also include small-cap stocks, international stocks, or sector-specific funds. The low cost of index funds — expense ratios often range from 0.03% to 0.20% per year — makes them practical to hold alongside other investments without dragging down overall returns through fees.

Frequently Asked Questions

Can I buy the S&P 500 directly?

No. The S&P 500 is an index, not a fund. You can only buy a fund — either a mutual fund or an ETF — that tracks the S&P 500. These funds hold the 500 stocks in the index and aim to match its performance.

Do all S&P 500 index funds perform the same?

They perform nearly identically because they all hold the same 500 stocks. The main difference is the expense ratio. A fund charging 0.03% per year will outperform one charging 0.20% per year by roughly that difference, all else equal.

What is the difference between the S&P 500 and the total US stock market?

The S&P 500 includes only the 500 largest US companies. A total US stock market index includes those 500 plus thousands of smaller companies. Total market funds provide broader diversification but often have slightly higher expense ratios.

Is an S&P 500 index fund a good investment for beginners?

Many financial advisors recommend S&P 500 index funds for beginners because they offer instant diversification across 500 companies, low fees, and no need to pick individual stocks. However, any stock investment carries risk, and the value will fluctuate with market conditions.

How often does the S&P 500 index change?

Companies are added to or removed from the S&P 500 a few times per year based on criteria set by S&P Dow Jones Indices. Index funds automatically adjust their holdings when these changes occur, usually with minimal trading costs.