I Want to Buy an S&P 500 Index Fund . . . Now What? By John Spence March 9, 2001

So you've done your research, poked around the discussion boards on this site, and have come to conclusion that you want to sleep well at night and invest in an index fund. Congratulations.

By far, the index with the most money benchmarked to it is the Standard & Poor's (S&P) 500 Index, with over a trillion dollars. The index is widely regarded as the barometer to measure the performance of large-cap U.S. companies. The stocks within the index are chosen for market size, liquidity, and industry group representation. It is a market-cap weighted index (stock price times number of shares outstanding), and each stock's weight in the index is proportionate to its market value.

There are gaggles of index funds out there that seek to replicate the returns of the S&P 500, and the beginning investor may feel overwhelmed by all the options. It seems simple enough - the fund tracks the index, so the manager just rebalances the fund when changes are made to the index. So why so many funds that track the S&P 500? The answer is that fund managers are competing for your money, and ultimately you reap the benefits.

Let's take a look at what's out there.

First off, the funds on my list had to have an r-squared value of over 0.95. If you're a novice investor, in English this means that over the last three years the fund had a correlation to the S&P 500 of over 95%. As we would expect, most of the funds have low turnover rates, which reflect the percentage of the fund ’s holdings that have changed over the past year.

Fund name	Ticker	Expense Ratio	3 mo	1 yr	3 yr*	5 yr*	10 yr*	Net Assets ($MM)	Turnover	Min init. investment
SSgA S&P 500 Index	SVSPX	0.18%	-4.17	-1.01	13.00	18.15	n/a	2623.7	14%	$10,000
USAA S&P 500 Index	USSPX	0.18%	-4.19	-1.12	12.94	n/a	n/a	2985.6	13%	$3,000
Vanguard 500 Index Fund	VFINX	0.18%	-4.13	-0.84	13.19	18.34	17.26	89393.8	6%	$3,000
Fidelity Spartan 500 Idx Fund	FSMKX	0.19%	-4.14	-0.93	12.98	18.12	17.06	9996.4	8%	$10,000
California Invest Tr-S&P 500 Idx	SPFIX	0.19%	-4.13	-0.77	13.25	18.31	n/a	149.2	9%	$5,000
Dreyfus Basic S&P 500	DSPIX	0.20%	-4.21	-1.06	12.87	18.16	n/a	1823.6	17%	$10,000
Deutsche Equity 500	BTIEX	0.25%	-4.23	-1.20	12.88	18.11	n/a	841.5	4%	$2,500
Transamerica Premier Fund	TPIIX	0.25%	-4.13	-0.96	12.94	18.09	n/a	48.2	22%	$1,000
Schwab S&P 500 Fund	SWPIX	0.35%	-4.17	-1.13	12.76	n/a	n/a	3380.6	3%	$2,500
Summit Apex S&P 500	SAPIX	0.38%	-4.28	n/a	n/a	n/a	n/a	148.4	n/a	$5,000
Dreyfus S&P 500 Index Fund	PEOPX	0.50%	-4.28	-1.42	12.55	17.73	16.8	3063.4	8%	$2,500
INVESCO S&P 500	ISPIX	0.62%	-4.61	-1.92	13.23	n/a-	n/a	116.6	2%	$5,000
Strong Index 500	SINEX	0.70%	-4.29	-1.38	12.61	n/a	n/a	181.2	n/a	$2,500

Source: Morningstar, all data as of 1/31/2001
*annualized returns

Since the funds on the list basically do the same thing, as can be seen by the similar performance numbers, what really sets them apart are the management fees. Although a few basis points doesn't seem like much on the surface, those fees can really add up, especially for investors with a long time horizon.

Another important factor in selecting a fund that unfortunately can't be expressed numerically is how well the mutual fund company rates in customer service. Many trade publications and groups rank fund companies by customer service, but talking to investors who have dealt with fund companies and listening to their experiences certainly can't hurt.

The above list of S&P 500 index funds is by no means comprehensive, but it is a good place to start your research. I have no interest in making recommendations here, my intention was to provide a sample of funds with low expense ratios and minimum investments that folks not named Thurston Howell III could afford.

Remember, many people mistakenly believe the S&P 500 is the index that most broadly covers the entire stock market. If you're looking for the most inclusive index of U.S. stocks, it's the Wilshire 5000.

Next week we'll examine index funds that track the entire market. See you then.