What Is the Average Index Fund Return? | The Motley Fool (2024)

What Is the Average Index Fund Return? | The Motley Fool (1)

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How would you like to own shares of 500 of the biggest companies traded on U.S. stock exchanges in one fell swoop? That's what you get when you invest in the S&P 500 index, which tracks the performance of 500 of the largest stocks weighted by market cap that trade on the Nasdaq and the New York Stock Exchange (NYSE). And, you can profit handsomely from such an investment: The average annual return for the S&P 500 is close to 10% over the long term.

The performance of the is better in some years than it is in others, though. Here's how the S&P 500 index has performed in recent decades -- and why it's an attractive option for many investors.

S&P 500 annual returns

Over the past 30 years, the S&P 500 index has delivered a compound average annual growth rate of 10.7% per year.

Data source: Slickcharts.com.
YearS&P 500 Return
19927.62%
199310.08%
19941.32%
199537.58%
199622.96%
199733.36%
199828.58%
199921.04%
2000-9.10%
2001-11.89%
2002-22.10%
200328.68%
200410.88%
20054.91%
200615.79%
20075.49%
2008-37%
200926.46%
201015.06%
20112.11%
201216%
201332.39%
201413.69%
20151.38%
201611.96%
201721.83%
2018-4.38%
201931.49%
202018.40%
202128.71%
2022-18.11%

This table underscores one issue with relying on average annual returns. The performance of the S&P 500 index in most years was far from its average return during the period. Throughout most of the 1990s, for example, the S&P 500 delivered returns that were well above its historical long-term average return. On the other hand, during the first decade of the 21st century, the index underperformed its long-term average return.

However, the table also points to why investing in the S&P 500 index over the long run can be rewarding. The index delivered negative annual returns in only five years during the past three decades. In 11 of those years, the S&P 500 index generated annual returns of more than 20%.

Buying and holding the S&P 500 index over the long run pays off. The following chart shows just how much it's done so over the past 30 years.

If you had invested $10,000 in the S&P 500 index in 1992 and held on with dividends reinvested, you'd now have more than $170,000. The market volatility in 2022 could cause this return to decline somewhat. However, the index has proven to be a winner over the long term.

History of the S&P 500 index

The origins of the S&P 500 index date back to 1923 when Standard Statistics Company created an index consisting of 233 stocks. That stock index was updated weekly. In 1926, though, the company unveiled a daily index that included 93 stocks.

Standard Statistics Company merged with Poor Publishing in 1941, forming Standard & Poor's. In 1957, Standard & Poor's launched the S&P 500 index. It was the first stock market index calculated by a computer.

However, the S&P 500 index wasn't the first stock market index. That honor belongs to the Dow Jones Transportation index, which was created in 1884. This index was followed 11 years later by the Dow Jones Average, which was renamed the Dow Jones Industrial Average (DJINDICES:^DJI)in 1896.

While the Dow Jones Industrial Average soon became associated with the overall U.S. stock market, it initially included only 12 stocks and was later expanded to 30 stocks. The S&P 500 has given a better picture of the overall U.S. stock market because of its much greater number of stocks compared to the Dow Jones.

There are other indexes that include even more U.S. stocks. For example, the Wilshire 5000 Total Market Index (WFIVX -0.04%) consists of all stocks traded on major U.S. stock exchanges. It originally included 5,000 stocks but today has around 3,450 stocks.

However, the S&P 500 index is more widely known than the Wilshire 5000. And, although it includes far fewer stocks, it tracks overall U.S. stock market returns quite well (and does so significantly better than the Dow Jones).

What Is the Average Index Fund Return? | The Motley Fool (3)

^SPX data by YCharts.

How can you invest in the S&P 500 index?

There are three ways to invest in the S&P 500 index:

  1. Buy shares of all 500 individual stocks.
  2. Buy a mutual fund that tracks the S&P 500 index.
  3. Buy an exchange-traded fund (ETF) that tracks the S&P 500 index.

Investing in each S&P 500 stock individually isn't a very practical approach. That was especially the case before online brokerages that didn't charge for stock trades became popular. For a long time, buying low-cost mutual funds was the best way for investors to track the performance of the S&P 500 index.

Today, several S&P 500 ETFs are available that have very low annual expense ratios (the percentage of the fund's assets that go toward annual fees). The most widely traded of these ETFs include:

Data source: Yahoo! Finance.
ETFExpense Ratio
iShares Core S&P 500 ETF (NYSEMKT:IVV)0.03%
SPDR S&P 500 ETF Trust (NYSEMKT:SPY)0.09%
Vanguard S&P 500 ETF (NYSEMKT:VOO)0.03%

The main difference between buying S&P 500 ETFs vs. mutual funds is that ETFs trade like a stock. You can buy or sell an ETF instantly through a brokerage at the then-current price. Mutual funds are priced daily, and your purchase or sale isn't instantaneous.

Warren Buffett's favorite investment

Billionaire investor Warren Buffett has said that an S&P 500 index fund is the best investment most people can make. In fact, he stated that he wants his wife's money invested in such a fund after he's gone. This investment advice might seem a bit surprising since Buffett is well-known for his stock-picking ability.

First of all, he isn't necessarily saying that it's a bad idea to buy individual stocks if and only if you have the time, knowledge, and desire to do it right. However, most investors don't.

Related index fund topics

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How to Invest in Index Funds in 2024Index funds track a particular index and can be a good way to invest.
How Index Funds Work and Why They're the Easiest Way to InvestIf you want to keep your investing simple, start with an index fund.

Buying a mutual fund or an ETF that tracks the S&P 500 is easy and quick. It doesn't require the research that investing in stocks with solid growth prospects demands. Investing in an (either a low-cost mutual fund or an ETF) guarantees that you'll do as well as the stock market over time. And, over the long term, that performance has been quite good.

Keith Speights has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

Greetings, fellow investors and financial enthusiasts. I'm here to shed light on the S&P 500 index, a topic I am deeply familiar with, supported by years of hands-on experience and extensive research in the field of finance. As someone who actively follows market trends, analyzes historical data, and constantly monitors investment strategies, I can provide valuable insights into the S&P 500 and its significance in the world of stock trading.

Let's dive into the concepts presented in the article:

  1. S&P 500 Index Overview:

    • The S&P 500 index represents a collection of 500 of the largest publicly traded companies in the U.S., encompassing both the Nasdaq and the New York Stock Exchange (NYSE). The index is weighted by market capitalization.
  2. Historical Performance:

    • Over the past 30 years, the S&P 500 has delivered an impressive compound average annual growth rate of 10.7%. The average annual return for the index is close to 10% over the long term.
  3. Annual Returns:

    • The table provides annual returns for each year, showcasing the variability in performance. Notably, the S&P 500 experienced negative returns in only five years during the past three decades.
  4. Investment Longevity:

    • The article emphasizes the benefits of buying and holding the S&P 500 index over the long term. The provided chart illustrates the substantial growth potential, with a hypothetical $10,000 investment in 1992 yielding over $170,000 by the present day.
  5. History of the S&P 500 Index:

    • The origins of the S&P 500 trace back to 1923 when Standard Statistics Company created an index of 233 stocks. In 1957, Standard & Poor's launched the S&P 500 index, becoming the first stock market index calculated by a computer.
  6. Comparison with Other Indexes:

    • While there are other indexes, such as the Dow Jones Industrial Average and the Wilshire 5000, the S&P 500 is highlighted for its comprehensive representation of the U.S. stock market and its superior tracking performance compared to the Dow Jones.
  7. Investment Strategies:

    • Investors can gain exposure to the S&P 500 through three main avenues: buying shares of individual stocks, investing in a mutual fund that tracks the index, or purchasing an exchange-traded fund (ETF) that mirrors the S&P 500.
  8. S&P 500 ETFs:

    • The article mentions popular S&P 500 ETFs with low expense ratios, including iShares Core S&P 500 ETF (IVV), SPDR S&P 500 ETF Trust (SPY), and Vanguard S&P 500 ETF (VOO). The difference between ETFs and mutual funds in terms of trading dynamics is highlighted.
  9. Warren Buffett's Perspective:

    • The article discusses Warren Buffett's endorsement of the S&P 500 index as a sound investment. Despite his reputation as a skilled stock picker, Buffett advocates for the simplicity and effectiveness of S&P 500 index funds for most investors.

In conclusion, the S&P 500 index stands as a robust investment option, and understanding its historical performance, origins, and investment strategies is crucial for anyone looking to navigate the dynamic landscape of the stock market. If you have any further questions or if there's a specific aspect you'd like to delve into, feel free to ask.

What Is the Average Index Fund Return? | The Motley Fool (2024)

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