Ask a beginner investor which index fund to buy first and you will usually hear one of two answers: an S&P 500 fund or a total stock market fund. They sound like different choices, but their performance is strikingly similar, because the S&P 500 makes up roughly 85 percent of the total US stock market by value. The differences are real but small, and they matter more for how you think about diversification than for your returns. This guide compares the two funds on holdings, returns, risk, and cost, so you can pick one and start investing instead of debating forever.

What Each Fund Actually Holds

An S&P 500 index fund holds the 500 largest publicly traded companies in the United States, selected by a committee. Think Apple, Microsoft, Nvidia, Amazon, and the other giants that dominate the market. A total stock market index fund holds those same 500 companies plus several thousand smaller ones: mid-cap companies, small-cap companies, and micro-caps. The extra companies add diversification on paper, but they are a small share of the fund's value, because the fund is weighted by company size. In practice, the two funds move almost identically on most days, and their long-term returns differ by only a fraction of a percent a year.

Returns and Risk: Almost the Same, With One Difference

Over long periods, the total stock market fund has a tiny edge in some decades and the S&P 500 has a tiny edge in others, and neither edge is large enough to matter. The real difference shows up in downturns and recoveries: small companies fall harder in crashes and bounce harder in recoveries, so the total market fund is slightly more volatile. The S&P 500 is slightly more concentrated in large technology companies, which has helped it in recent years but also means it depends more on a handful of giants. Neither difference should drive your decision. What matters is that you own a broad, low-cost fund and keep adding to it for decades.

Costs, Taxes and Where to Hold Them

Both funds are available as ETFs and mutual funds with expense ratios as low as 0.03 percent, which means you pay about 30 cents a year for every $1,000 invested. That is the single most important number to check: a 0.03 percent fund beats a 1 percent fund by a wide margin over thirty years, even if the expensive fund performs slightly better before fees. For taxes, both funds are efficient, but ETFs have a small edge in taxable brokerage accounts because of how they handle capital gains. In a Roth IRA or 401(k), either version works fine. The best fund is the low-cost one available in the account you already have.

Which One Should You Buy?

If you want the simplest possible portfolio, pick a total stock market fund: it owns the whole market, so you never have to wonder what you are missing. If you prefer the most famous benchmark in the world, or your employer's retirement plan only offers an S&P 500 fund, that is an excellent choice too. Many investors hold one or the other, not both, because owning both is mostly owning the same companies twice. The decision that matters is not which of these two funds you pick. It is starting now, automating your contributions, and leaving the money invested through market ups and downs for decades.

Frequently Asked Questions

Q: Is an S&P 500 fund or a total market fund better for beginners?

A: Both are excellent. The total market fund owns more companies, while the S&P 500 is the most widely tracked benchmark. Pick the low-cost one available in your account.

Q: Should I own both an S&P 500 fund and a total market fund?

A: There is little benefit. The S&P 500 is most of the total market, so owning both is mostly duplication. Pick one and add international diversification instead.

Q: What expense ratio should I look for?

A: Look for 0.10 percent or less. Many broad index funds charge 0.03 percent, and that tiny fee makes a large difference over decades.