The 3 Best S&P 500 Index Funds

If you want your portfolio to grow with American business, and don't want to choose individual stocks, a S&P 500 index fund could be a smart choice for you. In fact, legendary investor Warren Buffett has said several times that low-cost index fund investing is the smartest way to go for most people, and he has mentioned S&P 500 index funds as a bet on the future of U.S. growth.

Data sources: Vanguard, BlackRock, State Street Global Advisors. Data obtained on 5/8/17.

These are the three major S&P 500 ETFs, and by definition, all are extremely similar in composition since they all track the same index. All three funds invest in the 500 stocks that make up the S&P 500 index, and all have done an excellent job of replicating the index's performance:

Data sources: Vanguard, BlackRock, State Street Global Advisors. Data obtained on 5/8/17, and is representative of each fund's performance as of 3/31/17.

As you can see, there are negligible differences between the performance of the S&P 500 index and each of the three ETFs that track it. The S&P 500 outperformed each fund slightly, as would be expected, when accounting for each fund's expense ratio. However, just to put these differences into perspective, a $10,000 investment would have grown to $18,670 over the past five years at the S&P 500's rate of return. Even with the "worst" performing ETF on this list, a $10,000 investment would have grown to $18,547.

The point is that with any of these three funds, you can expect your investment to deliver performance that's virtually identical to the S&P 500. I tend to gravitate to either the Vanguard or iShares option because of the slightly lower expense ratio, however if you're a fan of SPDR products, a 0.09% expense ratio isn't high by any means, and the fund is a solid ETF choice.

Image source: Getty Images.

Reasons to invest in S&P 500 ETFs

I mentioned earlier that Warren Buffett has been a big supporter of low-cost index fund investing, and has specifically mentioned S&P 500 index funds.

Buffett's logic is that as a group, "active investors" will match the market's performance over time, just like S&P index funds. The problem is that active managers come at a higher cost, and these fees can eat away at your investment returns. Buffett was referring to hedge fund managers when he made these comments, but the same logic applies to actively managed mutual funds, many of which charge expense ratios of 1% or more.

The main reason to invest in a low-cost S&P 500 index fund like the examples discussed here is to match the market's performance (which has historically been in the 9%-10% range annually), while keeping most of your investment profits in your pocket.

Beware of leveraged S&P 500 index funds

As a final thought, when researching these funds, I came across a list of 15 "S&P 500 ETFs," however these three were the only true examples.

The rest are products known as leveraged ETFs, which use borrowed money and/or derivative securities to amplify investment returns, or to bet against the index. For example, a 2x leveraged S&P 500 ETF aims to return twice the index's performance each day. So, if the index rises by 2%, the ETF rises by 4%. If the index falls by 3%, the ETF falls by 6%.

You can read more about the dangers of leveraged ETF investing at the link in the previous paragraph, but just keep in mind that these are intended to be short-term investment instruments and have an inherent downside bias over the long-term. In other words, a 2x leveraged S&P 500 ETF will not return twice the index's performance over the long run.

Knowing the basics of investing in stocks is the best way to build wealth and make your financial dreams come true.