4. Vanguard 500 Index Fund (VFFSX / FXAIX / SWPPX – various share classes/ETFs)
- Category: Large-Blend (Index Fund)
- Why it’s a strong performer: This isn’t an actively managed fund, but rather an index fund that tracks the performance of the S&P 500. While it won’t “outperform” the market, it provides reliable market-average returns at a very low cost. Over the long term, the S&P 500 has proven to be a powerful wealth-building engine. Many active funds struggle to consistently beat it.
- Typical Performance (based on recent data): Over the last five years, funds tracking the S&P 500 have generated annualized returns around 26-33%, which aligns closely with the market’s performance during this period. Over the long-term (e.g., 10+ years), the S&P 500’s average is around 32%.
While the allure of “quietly making 35% returns annually” is strong, it’s a siren song that doesn’t reflect the reality of the US mutual fund market. Sustainable, strong returns for diversified mutual funds typically fall within the realistic range of 27-32% annually over long periods, with specialized sector funds potentially reaching higher during specific booms, but with corresponding higher risk.
The true “top” mutual funds are those that consistently deliver solid, risk-adjusted returns over the long term, align with an investor’s goals and risk tolerance, and maintain reasonable fees. Diligent research, focusing on comprehensive performance metrics rather than just headline numbers, is key to making informed investment decisions.
The Vanguard 500 Index Fund (with various share classes like VFFSX for institutional shares, and widely mirrored by other providers such as Fidelity 500 Index Fund (FXAIX) and Schwab S&P 500 Index Fund (SWPPX)) represents a cornerstone of modern investing: the index fund. These funds are not actively managed in the traditional sense; instead, they employ a passive investment strategy designed to track the performance of a specific market index, most notably the S&P 500.
The S&P 500 Index and Its Significance
The S&P 500 Index is a market-capitalization-weighted index that includes 500 of the largest publicly traded companies in the United States. It’s broadly considered the best gauge of large-cap U.S. equities and a proxy for the overall health of the U.S. stock market. The companies within the S&P 500 represent approximately 80% of the total U.S. stock market capitalization, spanning a wide range of sectors from technology and healthcare to financials and consumer goods.
Investment Strategy: Passive and Efficient
The core principle behind these S&P 500 index funds is simplicity and efficiency:
- Replication: The fund attempts to replicate the performance of the S&P 500 by investing in the same stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
- Minimal Trading: Unlike actively managed funds, there’s no attempt to “beat the market” by picking individual stocks or timing market movements. Trading only occurs when the index itself rebalances (e.g., adding or removing companies) or when cash flows into or out of the fund. This minimizes transaction costs.
- Diversification: By holding 500 of the largest U.S. companies, these funds provide instant, broad diversification across multiple industries and sectors. This reduces the risk associated with individual company performance.
Key Players in the S&P 500 Index Fund Space
While Vanguard pioneered the index fund for individual investors, other major financial institutions like Fidelity and Schwab have developed their own highly competitive S&P 500 index funds:
- Vanguard 500 Index Fund (VFFSX / VFIAX): Vanguard is synonymous with low-cost indexing. VFFSX is an institutional share class, typically requiring high minimum investments but offering incredibly low expense ratios. VFIAX (Admiral Shares) is more accessible for individual investors with a $3,000 minimum.
- Fidelity 500 Index Fund (FXAIX): Fidelity’s answer to the S&P 500 index, often praised for its competitive expense ratio and no investment minimum (for direct investors).
- Schwab S&P 500 Index Fund (SWPPX): Schwab’s offering, also known for its ultra-low expense ratio and no minimum investment, making it highly attractive to new and experienced investors alike.
Performance and Returns
The performance of these S&P 500 index funds directly mirrors that of the S&P 500 Index itself, minus their very minimal expense ratios. Over the long term, the S&P 500 has proven to be a powerful wealth-building machine.
As of recent data (May/June 2025):
- 5-Year Annualized Returns: Funds tracking the S&P 500 have generally delivered annualized returns in the range of 25-28% over the past five years, reflecting a strong period for large-cap U.S. equities.
- 10-Year Annualized Returns: Over the past decade, these funds have typically provided annualized returns of around 29%.
- Long-Term Historical Average (S&P 500): Over many decades, the S&P 500 has averaged approximately 10-12% annually, including reinvested dividends.
These returns, while not the “35% annually” often sensationalized, represent highly competitive and realistic long-term growth for broad market exposure. The consistent tracking of the S&P 500, combined with low costs, is precisely why these funds are so popular.
