Understanding S&P 500 Index Funds

Not sure if S&P 500 index funds are a good investment for your retirement, or even what an index fund actually is? We hear you. Basically, the S&P 500 (or Standard & Poor’s 500) is what’s called a stock market index. An index is simply a measuring stick or a way to track the progress of the stock market. The S&P 500 index measures the performance of the top 500 American companies on the stock market.

Still with us? Great! There are a few more key things to understand about the S&P 500. Let’s break it all down.

What Is an S&P 500 Index Fund?

An S&P 500 index fund is a type of mutual fund that buys stock in the companies on the S&P 500 index. On the one hand, that’s not a bad deal because the S&P 500 accounts for around 80% of the stock market’s value. It’s widely considered the best single gauge of large-cap U.S. equities as it includes 500 leading companies.¹  

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An index fund that follows the S&P 500 will do exactly what the S&P 500 does. It won’t perform any worse, but it won’t do any better either. That’s an important trade-off to remember.

How Do Index Funds Work?

Index funds work by passively tracking a market index instead of trying to beat it. So instead of a fund manager picking stocks to outperform the market, the fund simply mirrors whatever index it follows, whether that’s the S&P 500, the Nasdaq Composite (which tracks thousands of stocks), or something else. That’s why index funds end up settling for average returns instead of aiming for above-average ones.

You probably have the option to invest in index funds in your workplace 401(k) or your IRA, and the S&P 500 is one of the most common ones you’ll find. But should you? Is average really the best you can do for your retirement? We’ll circle back to these questions in a few minutes. First, let’s go over how S&P 500 index funds work.

How Does an S&P 500 Index Fund Work?

An S&P 500 index fund owns a small piece of all 500 companies in the S&P 500. Instead of a fund manager picking stocks, the fund simply copies the index.

The list of 500 companies isn’t set in stone either. A committee checks it every few months and swaps companies in or out. A company might get dropped if it’s bought by another company or if it no longer meets requirements, like having enough market value (or capitalization), enough shares available for trading, and steady earnings. When the index changes, the fund automatically changes too, so it always matches and mirrors S&P 500 activity. Index funds can be structured as mutual funds or as ETFs, but the passive, mirror-the-index approach is the same either way.

You can invest in S&P index funds through several different investment firms. Since they’re all copying the same 500 companies from the S&P index, the only real difference between them is the fee, called an expense ratio. A higher fee means you keep less of your money, so a lower fee is better. That said, a higher fee isn’t automatically a dealbreaker if it’s the only fund your 401(k) offers. So don’t focus too much on the fees here unless you’ve got more options.

One more plus: An S&P 500 index fund is already diversified since its investments are spread out among 11 big-time industries. But that doesn’t mean it’s evenly spread. As of mid-2026, information technology hovers around 40% of the S&P 500, more than three times the next-largest sector (financials).² So a downturn in tech affects the fund more than a downturn in any other single industry would. Let’s take a closer look at the top companies that make up the index.

Which Companies Are in the S&P 500?

The 10 largest companies in the S&P 500, ranked by index weight, are:

Source: State Street Investment Management. Data as of October 1, 2026.

Together, these 10 companies make up almost 40% of the index’s total value. Which means an S&P 500 index fund’s performance relies heavily on how a handful of the biggest companies do. And because the index reshuffles as companies grow, shrink or get replaced, this list will look different a year from now.

What Are the Pros and Cons of S&P 500 Index Funds?

S&P 500 index funds come with some real advantages, like diversification across hundreds of companies and low fees. But they also come with trade-offs. The biggest one is that you can match the market, but you’ll never beat it. Here’s how the other pros and cons stack up.

Pros of Index Funds

• Index funds give you built-in diversification. An index fund like the one that tracks the S&P 500 spreads your money across hundreds of large U.S. companies. That means you’re not betting anything on one company, which we never recommend for long-term wealth building.
• Index funds usually have low fees. Index funds are passively managed, so there’s no fund manager actively picking investments. That often means lower expense ratios and fewer fees eating into your returns.
• Index funds are simple and predictable. The goal is straightforward: Follow the index. If the market goes up, your fund should go up with it. If it goes down, your fund follows it down. From the start, you know what you’re signing up for.

Cons of Index Funds

• Index funds are built to match the market, not beat it. This is the main problem with index funds. An S&P 500 index fund aims to give you roughly the return of the S&P 500. Now, this isn’t necessarily a bad thing. But you can do better over the long run with the right growth stock mutual funds.
• Index funds don’t give much room to adjust. An S&P index fund holds the companies in the index. That’s it. It doesn’t have a manager choosing to drop a weak company if it’s bringing down the whole fund, add a promising company, or shift the fund when conditions change. Buckle in. You’re along for the ride.
• Index funds can limit your investment choices. An S&P 500 index fund focuses on large U.S. companies, so it won’t give you the same exposure to smaller companies or international stocks. That’s why you should spread your investments across four types of growth stock mutual funds.

Here’s the comparison at a glance:

S&P 500 Index Funds vs. Growth Stock Mutual Funds

An S&P 500 index fund has one job: Follow the S&P 500. That gives you a simple, usually low-cost way to invest in large U.S. companies. But the fund is built to match its benchmark, not beat it. A growth stock mutual fund takes a more active approach. A fund manager researches companies and chooses investments within the fund’s category, giving the fund the chance to outperform the market.

Historically, the S&P 500 has averaged around 10–12% annually over long periods.³ And from 2016 through 2026, it ran even hotter, delivering a 15.36% annualized return as of October 1, 2026.⁴ So, giving credit where credit is due, that’s a strong run. But it doesn’t change what an index fund is built to do: track the benchmark, not beat it.

That’s why Dave Ramsey recommends spreading your retirement investments evenly across four types of growth stock mutual funds: growth and income, growth, aggressive growth and international. Together, those categories give you exposure to large, midsize and small U.S. companies, plus companies outside the U.S.

Here are four mutual fund examples, using their 10-year annualized returns as of October 1, 2026:

• Growth and income: Fidelity Growth Company Fund (FGCKX)—23.13%⁵
• Growth: Marsico Midcap Growth Focus Fund (MXXIX)—15.57%⁶
• Aggressive growth: Fidelity Small Cap Growth Fund (FCPGX)—13.59%⁷
• International: WCM Focused International Growth Fund Investor Class (WCMRX)—10.63%⁸

If you had invested an even amount in each of these four funds, your average annual return over the past 10 years would’ve been about 15.73%.

These funds are examples, not recommendations. And while past performance doesn’t guarantee future results, this shows why looking for mutual funds with strong long-term track records still matters.

Now, the S&P 500’s returns stayed pretty close over roughly the same stretch. But return isn’t the only thing that matters. The four-fund approach spreads your risk out instead of concentrating it in one index. So instead of asking one market to do all the heavy lifting, you’re also giving your retirement savings more than one place to grow.

How Do I Choose Between an Index Fund and a Mutual Fund?

If your retirement plan at work offers index funds and actively managed mutual funds, choose growth stock mutual funds. Remember to spread your money evenly across four types of funds: growth and income, growth, aggressive growth and international.

Once you’re debt-free and have a fully funded emergency fund, invest 15% of your gross income for retirement. If your 401(k) offers a company match, always invest enough to get the full match. That’s free money.

Once you’ve invested up to your match, invest in a Roth IRA if you’re eligible. You can easily open one online through a brokerage firm on your own. A Roth IRA gives you more control over the funds you choose. Plus, your investments grow tax-free, and qualified withdrawals in retirement are also tax-free—nice!

Choosing which funds go inside that Roth IRA is where an investment pro can help. They can find and choose a diversified mix of growth stock mutual funds with long-term track records of beating the S&P 500. Then, if you max out your Roth IRA and still haven’t invested 15% of your gross household income, go back to your 401(k) and invest the rest there.

Just remember this rule of thumb: Match beats Roth beats traditional. And if your employer offers a Roth 401(k) with good mutual fund options? Even freaking better. You can invest your full 15% there and keep things simple.

Connect With a Financial Advisor

But listen, you should never ever invest in anything you don’t understand. It’s always a good idea to sit down with a financial advisor who’s got the heart of a teacher. They can help you set goals for your financial future and understand all your options, from index funds to growth stock mutual funds. And when the market dips—it always does—they can be your voice of reason and keep you on track.

If you need help finding an advisor, check out SmartVestor. You’ll be connected with investment professionals serving your area who are ready to help you work toward your retirement goals.