3 Best S&P 500 Index Funds To Buy In 2025

The S&P 500 index, which is a proxy for large-cap U.S. equities, has seen a record rally, fueled by the AI boom and GLP-1 momentum. Since bottoming on October 13, 2022 at an intra-day low of 3,491.58, the benchmark index has bounced back by 75% reaching an all-time high of 6,099.97 on December 6 this year. This torrid pace of growth has raised concerns about whether the S&P 500 is in a bubble. However, the protracted bull run shows no signs of letting up, debunking pessimistic projections thus far. With other variables like Fed interest rate cuts and a new administration entering the fray, what is the outlook for the S&P 500 index in 2025? Is it worth investing in an S&P 500 index fund at this juncture when debates rage about overheated valuations? If so, what are the top S&P 500 index funds to consider?

S&P 500 Outlook For 2025

Following the stellar run this year, the S&P 500 index is estimated to extend its gains and end 2025 at 6,500 points, according to the median forecast of 48 equity strategists, analysts, brokers and portfolio managers polled by Thomson Reuters between November 15 and 26. This represents a 7.4% gain from Friday’s (December 13) close of 6,051.09.

President-elect Trump’s agenda of tax cuts and deregulation is expected to propel economic growth and the Fed rate easing cycle should likely contribute to further market gains.

Wells Fargo’s analyst Christopher Harvey expects the S&P 500 to end 2025 at 7,007 points, citing the favorable business policies of the incoming administration, Federal Reserve’s dovish stance, and the resilience of the domestic economy.

Deutsche Bank and Yardeni Research, see the S&P 500 finishing 2025 at 7,000, because of low unemployment levels, resilient economic growth and a pro-business climate under the Trump administration. Yardeni Research has a 10,000 target pegged for the S&P 500 by the end of the decade.

Oppenheimer expects the S&P 500 to end 2025 at 7,100 points–setting perhaps one of the most optimistic targets on Wall Street. This represents a nearly 15% rise from Oppenheimer’s target of 6,200 for 2024-end. The investment bank attributes current monetary policy, strong labor markets, and a robust economic environment for driving the outlook.

Much more than breaking news, our diverse reporting digs deeper with unparalleled insights that empower you to make better informed decisions. Become a Forbes member and get unlimited access to cutting-edge strategies, actionable insights, and updated analysis from our network of leading finance experts. Unlock Premium Access — Free For 25 Days.

The Impact Of Fed Rate Cuts On S&P 500

Historically, the Fed’s rate easing cycle has been a favorable signal for the stock market. One-year and three-year returns of the S&P 500 following rate cuts, often look impressive, except during recessions.

Rate cuts made during an economic recession—or when one is looming—have not always had the desired effect. For instance, in 2001, when the Fed slashed rates in response to the Dot-com bubble, the S&P 500 dropped by 12.6% in the subsequent year, with losses deepening to 14.5% by the third year. Similarly, ahead of the Great Recession in 2007, the Fed rate cuts preceded a staggering 22% decline in the S&P 500 the following year.

It is interesting to note that the S&P 500 has benefited from Fed rate cuts implemented to respond to major events causing severe distress/panic to the stock market. These include the Black Monday market crash in 1987, the LTCM (Long-Term Capital Management) meltdown in 1998 and the Covid-19 in 2020.

• The Black Monday stock market crash occurred on October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost 22.6% and S&P 500 lost 20.5% in a single day triggering a global stock decline. The Fed cut rates after the crash. In the following year, the S&P 500 rose 16.3%.
• In 1998, the Fed cut rates in response to the collapse of Long-Term Capital Management–a hedge fund led by Nobel Prize-winning economists and famed Wall Street traders. The blow-up threatened to destabilize the global financial system. The S&P 500 returned 22.5% in the following year. LTCM was eventually bailed out by the U.S. Government.
• In 2020, when the pandemic brought the economy to its knees, the Fed responded by cutting rates. The S&P returned 28.9% in the subsequent year with gains accumulating to 40% by the third year.

The Fed’s rate cut cycle in 2024 falls neither into a distressed category nor a recessionary one. The Fed believes that inflation is under control and is cutting rates to boost the economy after a protracted period of higher interest rates. The present situation has precedent in the years 1984, 1989, 1995 and 2019, when the S&P recorded substantial gains of 81%, 33%, 114% and 44%, respectively in the third year following Fed rate cuts. These gains significantly outpaced the S&P’s one-year returns of 6%, 12%, 21% and 11%, following rate cuts.

If history is any guide, the S&P 500 may likely see a smaller gain of 7% in 2025 aligning with Reuter’s polling estimate, and potentially more substantial three-year returns ahead.

What To Know Before Investing In A S&P 500 Index Fund In 2025?

Here are a few things to know before choosing to invest in an S&P 500 index fund:

• It is not possible to invest directly in the S&P 500 or any other index. However, an index fund structured either as a mutual fund or exchange-traded fund (ETF) facilitates investing in an index. A S&P 500 index fund seeks to mimic the performance of the S&P 500 by investing in the same stocks or a representative subset.
• For investors wary of the S&P 500 being in a potential bubble, it’s essential to recognize that the index has delivered significant long-term gains since its inception. The S&P 500 has historically bounced back from major downturns, whether caused by global crises such as the Great Depression and the pandemic, or by financial scandals.
• Rather than attempting to time the market, a longer investment horizon increases the likelihood of achieving a positive outcome. Historical data supports the idea that staying invested over extended periods tends to yield better results.
• A study by Oppenheimer, which examined the performance of the S&P 500 dating back to 1950, found that the index has never experienced a loss over a 20-year period. This suggests that holding the index funds for two decades should improve investing outcomes.
• Furthermore, the S&P 500 index typically outperforms actively managed portfolios over the long term, rendering it a compelling choice for many investors.
• When selecting the right S&P 500 index fund, investors should note that both exchange-traded funds (ETFs) and mutual funds that track the S&P 500 share many similarities. However, there are key differences, particularly in how closely they align with the index’s holdings and performance.

Warren Buffett’s 90/10 Investing Policy Favoring S&P Index Funds

Legendary investor Warren Buffett, is a key proponent for investing in S&P 500 index funds. The 90/10 strategy advocated by Warren Buffett, is to allocate 90% of a portfolio to a low-cost S&P 500 index fund and 10% to short-term government bonds.

He has famously stated:

1. “In my view, for most people, the best thing to do is own the S&P 500 index fund.”
2. “The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500, and to do it consistently and in a very, very low-cost way.”
3. “My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors–whether pension funds, institutions or individuals–who employ high-fee managers.”

Having established the relevance of S&P 500 index funds, the next logical step is to identify the top options.

Methodology Used For These S&P 500 Index Fund Picks

I screened for:

1. At least one index fund included in Warren Buffett’s portfolio, serving as validation of the fund’s long-term potential.
2. At least one pick, structured as a mutual fund with an ultra-low expense ratio and no minimum investment requirements–that can be particularly useful for new market entrants.
3. At least one fund with the potential for additional income generation (via dividend reinvestment and/or trading/option strategies).

Top 3 S&P 500 Index Funds To Buy In 2025

Sources: Yahoo Finance, Seeking Alpha.

Discover more in-depth insights, entrepreneurial advice and winning strategies that can propel your journey forward and save you from making costly mistakes. Elevate your journey by becoming a Forbes member. Unlock Premium Access — Free For 25 Days.

1. SPDR S&P 500 ETF (SPY)

SPY Overview

The SPY ETF is the largest S&P 500 exchange-traded fund, with assets under management (AUM) of $644.5 billion and high average daily trading volume of 43.7 million. In October, SPY became the first ETF to surpass $600 billion in AUM, underscoring its dominant position in the index fund investment universe. SPY seeks to match the strong returns of the S&P 500 by employing a full replication strategy, which involves investing in the same stocks as the index, with the same weighting.

Why SPY Index Fund Is A Top Choice

Efficient pricing for retail trades: SPY’s high trading volume narrows its bid-ask spreads, resulting in more efficient pricing for retail trades. According to State Street, competing S&P 500 ETFs have a year-to-date average bid-ask spread that is more than two times SPY’s bid-ask spread.

Facility to trade in extended hours: SPY can be traded in extended hours–a critical feature that allows investors to act and respond to new developments outside of regular hours.

Income generation through options trading: SPY’s highly-liquid and heavily traded options, render it ideal for option strategies like covered calls, which help generate income or reduce the overall cost of an investment.

Steady dividends: SPY has paid a dividend consistently since its inception in 1993 for over 30 years in a row. The dividends are derived from the underlying stocks in the index. When a company in the S&P 500 index declares a dividend, SPY receives a portion of that dividend in proportion to the number of shares it holds in the company. The SPY ETF subsequently distributes this dividend to its investors on a quarterly basis.The TTM dividend yield for SPY is 1.2% on a dividend payout of $7 and SPY’s current price of $604.21.

Additional income optionality from security lending: SPY offers investors the opportunity to engage in securities lending, where they can lend their ETF shares to other investors and get revenue in return. This practice helps offset costs for investors and generates additional income. The average notional value of SPY shares on loan was $57.3 billion in 2023, significantly higher than IVV ETF’s $2.6 billion and VOO ETF’s $2.2 billion. Due to higher demand for SPY shares, it generated a stronger return on lendable assets of 1.3 basis points, compared to 0.0 basis points for IVV and 0.1 basis points for VOO. It’s important to note that the income from securities lending comes from lending SPY shares, not the underlying securities within the trust.

Low-cost fund: SPY’s expense ratio stands at 0.095%, which represents the annual fee for owning the fund. This means that an investor allocating $100,000 to the SPY ETF would incur management fees of $94.50 each year. While the expense ratio is low, it is still higher than that of some other ETFs that track the S&P 500 index.

One downside to owning SPY, which is structured as a unit investment trust, is its inability to reinvest dividends automatically. Instead, the fund holds the dividends in cash until they can be distributed to shareholders. This lack of automatic reinvestment can hinder the potential for long-term compounding, as reinvesting dividends can significantly boost growth over time. Charles Schwab highlights the power of reinvesting dividends and compounding with a million-dollar example: A hypothetical $100,000 invested in a S&P 500 index fund in 1990 would have exceeded $2.1 million by 2022-end had dividends been reinvested, but worth only $1.1 million in the absence of dividend reinvestment.

2. Vanguard S&P 500 ETF (VOO)

VOO Overview

VOO is a prominent ETF with AUM of $588.2 billion and an average daily trading volume of 5.6 million. Just like the SPY ETF, VOO tracks the S&P 500 index using a full replication strategy. This approach ensures that the fund’s returns closely mirror the index, unlike sampling strategies that select only a subset of stocks. While full replication generally leads to more accurate tracking of the index, optimized or partial replication can be more cost-effective, especially for complex or large indices.

Both VOO and SPY provide low-risk, low-cost, diversified exposure to the U.S. equity market, for investors seeking broad market returns without the hassle of stock-picking. Notably, both ETFs are part of Warren Buffett’s portfolio, which is a powerful endorsement of their long-term value.

Why VOO Index Fund Is A Top Choice

Low expense ratio: VOO has an expense ratio of 0.03%, one of the lowest among S&P 500 ETFs. This is cost-effective as the value of the investment grows over time.

Endorsement from prestigious investors: VOO is backed by renowned investors such as Warren Buffett, who has even recommended it in his will. Hedge fund Citadel, led by Ken Griffin, also holds a significant position in VOO, and increased its stake by 277% in third-quarter 2024. Citadel also owns SPY and so does Buffett.

Consistent dividend payments: The VOO ETF has paid dividends consistently since its inception in 2010. The trailing 12 month dividend yield for VOO is 1.2% on a dividend payout of $6.77 and VOO’s current price of $555.61.

Dividend reinvestment: Structured as an open-ended fund, VOO offers the choice to automatically reinvest dividends. Dividend reinvestment entails buying additional or fractional shares of VOO using dividend payouts, which can help grow the portfolio over time and leverage the power of compounding.

High liquidity: VOO has strong trading volumes, sufficient for most individual investors. However, it may not be as well-suited for high-frequency traders compared to SPY, which typically offers higher liquidity and tighter bid-ask spreads.

Attractive revenue opportunity for Vanguard fund shareholders from securities lending: Vanguard’s practice of returning nearly 97% of gross revenue from securities lending to fund shareholders enhances its appeal. Only a small percentage of Vanguard’s portfolios is ever out on loan, thereby limiting risk exposure. To be exact, securities lending levels typically represent low-single-digit percentages of Vanguard funds’ net asset value (NAV), as Vanguard lends only scarce securities that demand a premium. As a standard risk mitigation process, Vanguard requires over-collateralization for loaning securities to protect against borrower default.

3. Fidelity 500 Index Fund (FXAIX)

FXAIX Overview

Fidelity’s S&P 500 Index Fund is a low-cost mutual fund that aims to closely mirror the returns and characteristics of the S&P 500 Index. It typically invests at least 80% of its assets in the common stocks that make up the index and holds each constituent security at approximately the same weight as the index.

Why FXAIX Index Fund Is A Top Choice

Highly cost-effective: FXAIX has an incredibly low expense ratio of just 0.015%, making it one of the most cost-efficient choices available. The fund has no minimum investment requirement, making it accessible to a broad range of investors, especially new market entrants embarking on an investment journey.

Tax-efficient vs. actively managed funds: Typically, ETFs are more tax-efficient than mutual funds. However, FXAIX, as a passively-managed fund, experiences a minimal portfolio turnover ratio of 3%, which is the percentage of its holdings that change each year. The reduced turnover helps lower the likelihood of taxable events, making FXAIX tax-efficient vs. actively managed funds that usually have a higher turnover ratio with the fund manager aiming for market-beating returns.

Offers automatic dividend reinvestment and compounding growth: FXAIX has a ttm dividend yield of 1.2% based on its dividend payout of $2.52 and latest price of $210.70. An added benefit of FXAIX is its automatic dividend reinvestment program, which helps investors achieve compounded growth over time with minimal effort, as dividends are automatically reinvested in additional shares.

High liquidity for investors: While FXAIX cannot be traded throughout the day like an ETF, it enjoys substantial liquidity and daily transaction volume. Investors can liquidate their position without much challenges, at the fund’s net asset value at the end of the trading day. FXAIX is well-suited for long-term investors, especially within qualified retirement accounts, as it benefits from low costs and compounding growth over time.

Quick Takeaways: SPY Vs. VOO Vs. FXAIX

When looking to compare SPY, VOO and FXAIX, here are some considerations to make while examining these funds:

• SPY, VOO and FXAIX each offer low-risk, low-cost diversified exposure to the U.S. equity market to capture overall market returns without the hassle of stock-picking.
• While dividend yields are similar for SPY, VOO and FXAIX, the SPY ETF does not offer automatic dividend reinvestment like VOO and FXAIX. However, dividends can be manually reinvested with SPY.
• FXAIX has the lowest expense ratio among the S&P Index funds highlighted herein, followed by VOO and SPY.
• SPY boasts the highest liquidity among the three and could be a great fit for high-frequency traders and option strategies like covered calls. VOO ranks second in liquidity. While not a trader magnet, VOO has high trading volumes sufficient for most investors. FXAIX, as a mutual fund, cannot be traded intraday.
• As mutual funds trigger capital gain taxes, FXAIX is less tax-efficient than SPY and VOO. However, as a passively-managed fund with a low turnover of 3%, FXAIX reduces the likelihood of taxable events.

Bottom Line

SPY provides optionality for additional income generation via trading and options strategies, thanks to its high liquidity and trading volumes. VOO offers the flexibility of automatically reinvesting dividends, thereby leveraging the power of compounding, at one of the lowest expense ratios among S&P 500 ETFs. It is also a personal favorite of Warren Buffett (as mentioned in his will). FXAIX has an ultra-low expense ratio with dividend reinvestment flexibility, and may be a good fit within qualified retirement accounts, as well as new investors.

Please note that I am not a registered investment advisor and readers should do their own due diligence before investing in the securities/investment vehicles mentioned in the article, or any other stock. I am not responsible for the investment decisions made by individuals after reading this article. Readers are asked not to rely on the opinions and analysis expressed in the article and encouraged to do their own research before investing.

Read Next

Whether it’s mastering cutting-edge strategies, uncovering actionable investment opportunities from influential leaders, or breaking down complex topics, our in-depth journalism has you covered. Become a Forbes member and gain unlimited access to bold ideas shaking up industries, expert guides and practical investment advice that keeps you ahead of the market. Unlock Premium Access — Free For 25 Days.