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The S&P 500 is a well-known stock market index — and a major buzzword in financial news — and investors often wonder how they can invest in it. The answer: You can't directly invest in a stock market index, but you can choose investments that mirror or reflect the performance of that index. If you're interested in getting into investing in 2024, here's how.
There are two main options for investing in the S&P 500: You can invest in the individual stocks that are included in the index, or you can invest in S&P 500 index funds or exchange-traded funds.
S&P 500 index (SPX) today
This chart shows the performance of the S&P 500 index (SPX) today compared to the previous trading day's close.
What does it mean to invest in the S&P 500?
The is made up of about 500 large public U.S. companies. It is one of the stock market indexes that is often considered a proxy for the overall health of the U.S. stock market.
Contrary to popular belief, the stocks forming the index are not the 500 biggest U.S. companies, but they are arguably some of the most important U.S. companies: These stocks represent about 80% of the total U.S. stock market’s value.
The S&P 500 weights the stocks by market capitalization, or total market value (the number of outstanding shares multiplied by the stock's current market price). The larger the company, the greater its influence on the index.
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How to invest in the S&P 500 in two steps:
To invest in the S&P 500 you can buy stocks of the individual companies in the index, or invest in index funds or ETFs that replicate the index.
» Learn more: What are ETFs?
Here are two steps to start investing:
1. Open an investment account
In order to buy investments, you'll need to open a brokerage account if you don't already have one. You can use the money you deposit into the brokerage account to purchase S&P 500 stocks or funds, which will then be held within that account. It may be advantageous to consider what type of investment account you want to open, since some have significant tax benefits.
2. Choose your investments
Do you want to invest in , or a fund that is representative of most of the index? Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.) Here are some of the .
Once you've made a decision, you can simply follow the instructions within your brokerage account to purchase the S&P 500 investment(s) you've decided to buy.
How much does it cost to invest in the S&P 500?
If you want to invest in the S&P 500, there are a few costs to consider.
If you are investing in an S&P 500 index fund:
If your index fund has no minimum, then you can usually purchase in any dollar amount. If your index fund has a minimum, then you have to purchase at least the minimum amount.
If your index fund has an expense ratio, you'll be charged that as a fee. An expense ratio is an annual fee expressed as a percentage of your investment. For example, if you invest $100, and your fund has an expense ratio of 0.04%, you'll pay an annual fee of $0.04.
If you are investing in an S&P 500 ETF:
ETFs trade similarly to stocks and have a share price. Depending on your broker, you will either need to pay the full share price or you can buy fractional shares for any dollar amount.
Similarly to index funds, ETFs often have expense ratios, so make sure you see how much you'd be paying in fees to invest in a given ETF.
If you are investing in a stock within the S&P 500 index:
Stock costs vary significantly. Some stocks in the S&P 500 cost under $100, and others cost $500 a share or more. Be sure to look at each stock's share price before you make a decision to buy.
Top 20 performers in the S&P 500 index
This chart shows the top-performing stocks in the S&P 500, based on YTD returns.
Data is for informational purposes only.
» Learn more about the
Should I invest in an S&P 500 index fund or S&P 500 ETF?
While all S&P 500 funds track the holdings of this index, an investor must consider whether using an index mutual fund (a passively managed mutual fund) or an ETF makes the most sense for them. There are several differences to consider — for example, ETFs can be bought and sold whenever the stock market is open, while mutual funds can only be bought and sold at a set price point at the end of each trading day.
The good news is that there are solid S&P 500 options in each category, and all of these products leverage the diversity of the index itself. Compare index funds versus ETFs to decide which one is right for you.
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Are there drawbacks to investing in the S&P 500?
While an S&P 500 ETF or index fund may be a worthwhile investment, there are caveats to consider.
Overall diversification
The S&P 500 consists of only large-cap U.S. stocks. Portfolio diversification encompasses buying mid- and small-cap companies along with large-caps; allocating funds to international companies along with domestic ones; and including bonds, cash and potentially other asset classes with stocks.
Kevin Koehler, chartered financial analyst and director of the investment strategy group at Miracle Mile Advisors in Los Angeles, also notes drawbacks in the S&P 500 related to its market-cap weighting.
“As passive investing increases, investors are continually investing in S&P 500 funds, which has contributed to a ‘rich get richer’ problem, where the largest stocks are getting larger due to S&P 500 investing, rather than individual stock investing,” Koehler says. “This can lead to higher volatility, as active managers sell an individual stock on top of index funds selling a portion. The market could continuously be overvalued compared to its underlying value.”
But relative to the downsides of many investment types, the flaws of S&P 500 funds seem relatively minor, especially when used as a part of your overall portfolio and held for the longer term.
» Ready to start investing? See our picks of best brokerages for fund investors
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
As an investment enthusiast with years of experience in financial markets and a deep understanding of various investment vehicles, including stock market indexes like the S&P 500, I'm well-equipped to guide you through the intricacies of investing. Let's delve into the concepts presented in the provided article and explore them in detail:
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S&P 500 Index: The S&P 500 is a renowned stock market index comprising approximately 500 large publicly traded companies in the United States. It serves as a barometer for the overall health of the U.S. stock market and is often used as a benchmark by investors and analysts.
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Investing in the S&P 500: While you cannot directly invest in the S&P 500 index itself, you have two primary options:
- Invest in individual stocks: Purchase shares of the companies included in the index.
- Invest in S&P 500 index funds or exchange-traded funds (ETFs): These funds aim to replicate the performance of the index by holding the same stocks in proportions similar to their weighting in the index.
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Market Capitalization Weighting: The S&P 500 weights its constituent stocks based on market capitalization, which is calculated by multiplying the current market price of a stock by the total number of outstanding shares. This means that larger companies have a greater influence on the index's performance.
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Investment Process:
- Open an investment account: To buy S&P 500 stocks or funds, you need to open a brokerage account.
- Choose your investments: Decide whether to invest directly in individual stocks or opt for index funds/ETFs for diversification and lower risk.
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Costs of Investing:
- S&P 500 index fund: Consider minimum investment requirements and expense ratios (annual fees).
- S&P 500 ETF: Similar considerations apply, including share prices and expense ratios.
- Individual stocks: Costs vary based on the share prices of the companies within the index.
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Comparing Index Funds and ETFs: Both index funds and ETFs track the S&P 500, but they differ in their trading mechanisms and fees. Investors should weigh factors like liquidity, trading flexibility, and expense ratios when choosing between them.
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Drawbacks of Investing in the S&P 500:
- Lack of complete diversification: The S&P 500 focuses solely on large-cap U.S. stocks, potentially neglecting exposure to mid-cap, small-cap, and international companies.
- Market-cap weighting issues: The dominance of passive investing in S&P 500 funds may lead to market distortions and increased volatility, particularly in the largest stocks.
Understanding these concepts is essential for making informed investment decisions, whether you're a novice investor or a seasoned trader looking to optimize your portfolio.
