What Is an S&P 500 Index Fund?


Quick Answer

An S&P 500 index fund is a mutual fund that has no active management and holds a portfolio matching the S&P 500 at all times, Investopedia explains. Although funds have been created that track many indices, the S&P 500 is the most popular.

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Full Answer

An index fund typically offers exposure to a large section of the market and carries very low transaction costs due to passive management and infrequent portfolio changes, Investopedia reports. Thanks to these advantages, index funds on average consistently outperform actively managed funds. Because there is no active management, experts consider index funds to be passive investments.

The S&P 500 is an index covering the majority of the U.S. economy, and experts typically consider it a highly reliable indicator of overall U.S. stock market performance, Investopedia states. The S&P 500 includes approximately 70 percent of U.S. public companies and reflects the performance of the U.S. economy. Investors consider its performance a standard benchmark for actively managed funds. The S&P 500 Index Committee selects portfolio stocks according to criteria that includes stock liquidity, market size, and the industry in which the company is operating. The market capitalization of each stock dictates its proportion in the portfolio. Typically, 5 to 10 percent of the index changes each year.

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