On this page
What an S&P 500 ETF is
The S&P 500 is an index that measures the performance of roughly 500 of the largest US companies. You cannot buy an index directly, so fund companies create an S&P 500 ETF, an exchange-traded fund that holds those same companies in the same proportions and trades on a stock exchange like a single stock.
When you buy one share, you effectively own a tiny piece of all 500 companies at once. That instant diversification, in one low-cost product, is the main reason these funds are so widely held.
How it tracks the index
An S&P 500 ETF is weighted by market capitalization, meaning larger companies make up a larger share of the fund. As the index changes, the fund adjusts its holdings to match, so its return closely follows the index minus a small annual fee.
This is passive investing: there is no manager trying to pick winners. The fund simply aims to mirror the index, which keeps costs low and removes the guesswork of stock selection.
💡 Market-cap weighted means the giants matter most:Because the biggest companies carry the most weight, a handful of very large firms can drive a meaningful share of the fund's day-to-day moves. That is normal for this kind of index.
The popular S&P 500 ETFs
Several funds track the same index, and they are very similar. The best known are VOO from Vanguard, IVV from iShares, and SPY, the oldest US ETF. Because they follow the same 500 companies, their returns are nearly identical over time.
The main thing that separates them is the expense ratio, the small annual fee. A few hundredths of a percent looks tiny, but over decades it adds up, so comparing fees is a sensible habit.
- VOO and IVV: very low expense ratios, popular for long-term holding
- SPY: the oldest and most heavily traded, often used by active traders
- All three track the same S&P 500 index, so returns are nearly identical
Why investors use them
An S&P 500 ETF offers broad exposure to US large-company stocks in one cheap, simple product. It removes the need to research and pick individual companies, spreads risk across many of them, and has historically been hard for actively managed funds to outperform after fees.
This is why a low-cost S&P 500 fund is often suggested as a sensible core holding for long-term investors. It is a description of how these funds are commonly used, not a recommendation to buy.
What to keep in mind
An S&P 500 ETF is still 100 percent stocks, so it falls in market downturns just like the index it tracks. It also covers only large US companies, leaving out smaller firms and the rest of the world, and it has become concentrated in its largest technology names.
For those reasons many investors pair it with other funds, such as an international ETF or a bond ETF, to round out a portfolio. Our guide on the S&P 500 index explains the benchmark itself in more depth.
Frequently asked questions
What is the difference between an S&P 500 ETF and an index fund?
They are very similar. An S&P 500 ETF is a type of index fund that trades on an exchange like a stock throughout the day. A traditional S&P 500 index mutual fund trades once daily at the closing price. Both track the same 500 companies at low cost.
Which is better, VOO, IVV, or SPY?
They track the same index, so their returns are nearly identical. VOO and IVV usually have slightly lower fees and are popular for long-term holding, while SPY is the oldest and most heavily traded. The differences are small, and this is not advice.
Does an S&P 500 ETF pay dividends?
Yes. Many of the 500 companies pay dividends, and the fund passes that income on to shareholders, usually quarterly. You can take the cash or reinvest it automatically to buy more shares.
Is an S&P 500 ETF safe?
It is diversified across 500 large companies, which lowers single-company risk, but it is still entirely stocks and can fall sharply in a downturn. It reduces some risks but does not remove market risk, so it is best suited to long-term investors.
Related tools and pages
These are for learning. Any calculator here shows example scenarios, not predictions of future prices.
Get the free investing newsletter
Two short emails a week — Wednesday market analysis and Friday investing ideas, written for long-term investors.