S&P 500 index funds are one of the most common types of index funds in the world. This type of fund is designed to track the movements of the S&P 500 exactly. Here are the basics of S&P 500 index funds and what you should expect from them as an investor.

S&P 500

The term S&P 500 stands for Standard & Poor's 500. This is a market index that was created by Standard & Poor's in order to track the movements of the market. It is comprised of the 500 largest companies in the United States according to market capitalization. There are companies from many different industries that are represented within this index.

Generally, the movement of the S&P 500 copies the movement of the stock market as a whole. Therefore, if you are an investor that wants to take advantage of the overall movement of the stock market, this is a solid index to follow. Historically, the performance of the stock market has always been positive. Over the long-term, it always increases in value. Even if there are some down times in the market, it always bounces back. If you are an investor with a long-term time horizon, this type of investment can be very beneficial.

Performance

Historically, the S&P 500 has performed well. There have been some years where the index has returned a negative percentage. However, in most years, it provides a decent return for investors. The historical average of the annual return of the S&P 500 is about 9.5 percent. 

Drawbacks

Even though this type of investment can be very beneficial, there are a few potential drawbacks associated with it. For one thing, you are going to have to pay operating expenses to the index fund. Managing an index fund is not as difficult as using an active management strategy, but it does require some type of professional management. When you are going to benefit from this professional management, you have to be willing to pay for it. Operating expenses can eat into the percentages that you can earn with this type of fund. For example, if you had to pay operating expenses of 2 percent, this would mean that you can only net 7.5 percent on average. 

Another potential drawback of this type of investment is that it limits your opportunities for larger gains. By investing in individual stocks, you can bring in larger returns. Investing in an individual stock could potentially double or triple your money. When you invest in a large basket of stocks like this, the companies that perform poorly are going to bring down the overall return of your investment. This means that you are going to be able to get steady returns, but they are not going to be that exceptional. This is more of an investment for those that prefer long-term, slow growth instead of those that prefer to realize quick profits.

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