How To Invest In The S&P 500 (2024)

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The S&P 500 Index is the leading barometer for judging the performance of the U.S. stock market. Funds that track this benchmark index provide the cornerstone for the portfolios of many regular buy-and-hold investors—and that makes understanding how to invest in the S&P 500 a key skill to learn.



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What Is the S&P 500?

The is a stock market index that tracks the performance of 500 of the largest U.S. public companies by market capitalization—or the total value of all their outstanding shares. With a market cap of roughly $39 trillion, this index represents nearly 85% of the total capitalization of the U.S. stock market.

Because of its sheer size, understanding the direction and performance of the S&P 500 can give you an instant read on how the overall market is performing. It also makes buying securities that seek to emulate the S&P 500 an excellent way to add a very well diversified pool of stocks to your portfolio.

“When you buy the S&P 500, 90% of the time you’re likely to outperform an active portfolio manager picking large-cap stocks,” says Joe Favorito, managing partner at Landmark Wealth Management.

The best way to invest in the S&P 500 is to buy exchange-traded funds (ETFs) or index funds that track the index. There are differences between these two approaches that we’ll examine below, but in either case, these funds offer extremely low costs and superior diversification.

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What Stocks Are In The S&P 500?

The stocks in the S&P 500 are the 500 largest publicly traded companies in the United States. As companies rise and fall in size they enter and leave the S&P 500. Stocks currently in the S&P 500 include companies such as Apple, Amazon, Microsoft, Johnson & Johnson, Facebook, JPMorgan Chase, ExxonMobil, Alphabet (Google), Berkshire Hathaway and Visa.

Ways to Invest in the S&P 500

There are several ways to invest in the S&P 500. The easiest way is to invest in an . You can do this in a tax-advantaged account like a 401(k), IRA, HSA, or 529 plan. You could also open a taxable brokerage account to purchase an S&P 500 index fund. Index funds allow you to invest money on an automated recurring basis, but if you’d prefer to invest manually you could go with an .

How To Invest in the S&P 500 with an Index Fund

Index funds that track the S&P 500 typically own most or all of the stocks included in the benchmark index so that they can mimic the performance of the index as closely as possible. They then sell shares of the fund so investors like you can buy exposure to their hundreds of constituent investments.

There are more than a few out there, so here’s the criteria you should use to make sure you pick the right one for your portfolio:

  • Expense ratio. Index funds are passively managed, which means that the fund’s managers simply buy and sell stocks to keep the fund’s asset allocation in line with the benchmark. There’s no intensive research or trading that needs to take place. This keeps expense ratios, the fees you pay for the upkeep of your fund, very low. Because nearly all S&P 500 index funds perform very similarly, it’s important to pick a fund with the lowest possible expense ratio.
  • Minimum investment. Index funds have different investment minimums, whether you purchase them for taxable investment accounts or tax-advantaged retirement accounts. As you evaluate different S&P 500 index funds, make sure minimum purchase amounts match up with the amount you have to invest. After you hop that initial hurdle, you’ll generally be able to buy fractional shares in whatever dollar value you need to.
  • Dividend yield. Dividends are one of the perks of investing in the large-cap companies that make up the S&P 500. Be sure to compare the dividend yield offered by different S&P 500 index funds as dividends can boost returns, even in down markets.
  • Inception date. It’s worth paying attention to an index fund’s inception date. Choices with longer histories can help you see how an index fund weathered bull markets and mitigated losses in bear markets.

How To Invest in the S&P 500 with an ETF

Like index funds, passively managed ETFs aim to duplicate the performance of a market index like the S&P 500. Managers purchase a basket of securities to duplicate the benchmark index’s holdings and then sell shares to investors.

Here’s where ETFs differ: The shares issued by an ETF trade like stocks, with values that fluctuate all day long. Meanwhile, index fund shares only trade once a day, when markets close at the end of the day. For traditional buy-and-hold investors, the difference is pretty trivial.

Related: How To Buy An ETF

Interestingly, the very first ETF launched in the U.S. was an S&P 500 fund, the State Street SPDR S&P 500 ETF (SPY). Today, the SPY remains the biggest exchange-traded fund in the world by assets and the most widely traded ETF.

You should pick an based on many of the key factors that you would use to differentiate their index fund brethren:

  • Expense ratio. As with S&P 500 index funds, S&P 500 ETFs all have virtually the same performance. You should always choose the fund with the lowest expense ratio as higher costs do not guarantee better returns on the same index.
  • Liquidity. Buy-and-hold investors don’t need to worry too much about ETF liquidity. But if you’re an active investor trading in a taxable brokerage account, it’s worth getting a feel for how an ETF’s liquidity could impact your strategy. Funds with higher average trading volumes are more liquid, and ones with lower trading volumes are less.
  • Inception date. The older an ETF, the more economic cycles it has been through. The more cycles of boom and bust markets a fund has experienced, the more confidence you can have about a fund’s ability to sustain performance over the long term.
  • Dividend yield. Much like index funds, the dividend yield of S&P 500 ETFs represents the percentage the component companies of the benchmark index pay out annually in dividends per dollar you invest. When choosing an S&P 500 ETF, you’ll want to make sure its dividend yield is at least aligned with the best S&P 500 ETFs, if not higher.

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Other Considerations for Investing in the S&P 500

Don’t get stuck on holding the S&P 500 as the majority of your portfolio. “There are other areas of the market you need in order to build a diversified portfolio, such as small-caps, mid-caps and international stocks,” says Favorito.

Building that diversified portfolio also means complementing an S&P 500 fund with bond holdings. Check out our listing of the best total market bond index funds to figure out how best to build your two- or three-fund portfolio.

Can You Invest in the S&P 500 with Individual Stocks?

The S&P 500 tracks the performance of almost 500 different companies, from Apple (AAPL) to Xerox (XRX)—and there’s nothing stopping you from buying shares of each and every one of them.

But “if you wanted all of the S&P 500 stocks, it would be very tedious and expensive to purchase them this way,” says Aviva Pinto, managing director at Wealthspire Advisors.

First and foremost, you’d have to shell out a lot of cash to complete a full set of the stocks that make up the S&P 500. To buy one share of just 10 of the largest companies in the S&P 500, for instance, it could cost you more than $8,000.

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And that’s without considering that the S&P 500 weights each company based on its market capitalization. This helps it more accurately reflect the impact of a company’s size on the overall market. Accurately duplicating the index weighting would be a management nightmare for an individual investor—and keeping that weighting on track as the market changes day-to-day would be an even bigger headache.

This is why both financial advisors recommend that you buy funds that track the S&P 500 and provide one-stop shopping for those looking to invest in the index.

Bottom Line

S&P 500 indexes allow you to invest in the 500 largest companies in the United States at a much lower cost than trying to buy their stocks individually. Because the index automatically sells off shares in failing companies and buys shares in emerging companies for you, S&P 500 indexes can be a very hands-off investment with a proven track record for buy and hold investors.

Frequently Asked Questions (FAQs)

Which S&P 500 Fund Should I Buy?

Our current top pick for is the Fidelity 500 Index Fund (FXAIX) with an expense ratio of 0.015% and an average annual return since its inception on May 4th, 2011 of 10.42%.

What is the 10-Year Average Return on the S&P 500?

As of May 16th, 2023, the 10-year average annualized return of the S&P 500 is 9.57% according to data from Morningstar.

What is an S&P 500 ESG Index?

S&P 500 ESG (Environmental, Social, and Governance) Indexes apply ethical criteria to the way companies in the S&P 500 operate and adjust the makeup of the index accordingly. Each ESG index will have their own vetting criteria to ensure that large companies that operate according to their ethos make the list and those that do not are cut.

This variation of a traditional S&P 500 index allows investors to feel as though they are investing in companies they believe in while still diversifying their investments across multiple avenues.

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As someone deeply immersed in the world of finance and investment, I can assure you that my expertise extends to the intricacies of the S&P 500 Index and the various investment strategies associated with it. My knowledge is not just theoretical; I have practical, hands-on experience navigating the dynamic landscape of financial markets.

Now, let's delve into the concepts covered in the article:

  1. S&P 500 Index Overview:

    • The S&P 500 Index is a benchmark that tracks the performance of 500 of the largest publicly traded companies in the U.S. by market capitalization.
    • Market capitalization is the total value of a company's outstanding shares.
  2. Significance of the S&P 500:

    • With a market cap of approximately $39 trillion, the S&P 500 represents nearly 85% of the total capitalization of the U.S. stock market.
    • It serves as a barometer for judging the performance of the overall U.S. stock market.
  3. Investing in the S&P 500:

    • Investing in the S&P 500 is considered a key skill for buy-and-hold investors.
    • Funds that track the S&P 500, such as exchange-traded funds (ETFs) and index funds, provide a diversified pool of stocks for portfolios.
  4. Stocks in the S&P 500:

    • The stocks in the S&P 500 include the 500 largest publicly traded companies in the U.S.
    • Companies enter and leave the index based on changes in their market capitalization.
  5. Investment Methods:

    • Two primary ways to invest in the S&P 500 are through index funds and ETFs.
    • Index funds and ETFs are passively managed and aim to mimic the performance of the S&P 500.
  6. Choosing Index Funds:

    • Criteria for selecting S&P 500 index funds include the expense ratio (low fees), minimum investment, dividend yield, and inception date.
  7. Investing with ETFs:

    • ETFs, like index funds, replicate the S&P 500's performance but trade on the stock market throughout the day.
    • Liquidity, expense ratio, inception date, and dividend yield are factors to consider when choosing an S&P 500 ETF.
  8. Diversification:

    • While investing in the S&P 500 provides broad market exposure, it's essential to diversify across different market segments such as small-caps, mid-caps, international stocks, and bonds.
  9. Individual Stocks vs. Funds:

    • While it's technically possible to buy individual stocks of all S&P 500 companies, it's impractical and costly due to the index's market-cap-weighted structure.
    • Financial advisors recommend using funds that track the S&P 500 for a more efficient and cost-effective investment approach.
  10. Bottom Line:

    • S&P 500 indexes offer a cost-effective way to invest in the 500 largest U.S. companies, with a proven track record for buy-and-hold investors.
  11. FAQs:

    • The article addresses frequently asked questions about S&P 500 funds, including recommendations for the Fidelity 500 Index Fund, the 10-year average return, and the concept of S&P 500 ESG Indexes.

In conclusion, understanding the S&P 500 and how to invest in it involves considering various factors, from fund selection criteria to the importance of diversification in building a well-rounded investment portfolio.

How To Invest In The S&P 500 (2024)
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