How To Invest in S&P 500 Stocks
If you’re a would-be investor wondering how to grow your wealth without exposing yourself to too much risk, try investing in Wall Street’s biggest index. Even as a complete newcomer to the trading world, you’ve likely heard about the S&P 500 index. The S&P 500, maintained by S&P Dow Jones Indices, is a benchmark index of the US stock market performance.
But what exactly is this index? And how to invest in an S&P 500 fund? Read on to find out and decide if it should become a part of your portfolio.
The S&P 500 Index Explained
The S&P 500 Index, or the S&P for short, is a stock market index that tracks and measures the performance of 500 of the largest companies in the US, all large-cap stocks. Along with the Dow Jones Industrial Average (Dow 30), the Russell 2000, and the Nasdaq 100, it’s one of the most famous stock market indices in the United States.
Standard & Poor’s, an American investment information service, created the S&P 500 in 1957. Since its introduction, the agency’s investment committee has been gathering every quarter to review the changes in the index, and thus the stock market, and determine which stocks should remain part of the index, which new ones should be brought on, and which no longer belong.
The committee looks at a company’s market capitalization, group representation, and liquidity, among other factors. Since some of the included companies have multiple shares classes, more than 500 stocks - 503 to be exact - comprise the S and P of today.
Contrary to what people may think, the stocks forming the index aren’t necessarily those of the 500 biggest US companies. One could argue, however, that they belong to the 500 most important ones.
More than $15 trillion in assets is indexed or benchmarked to the S&P 500 today, and these 503 stocks make for approximately 80% of the US stock market’s total value. The S&P 500’s 12-month dividend yield stood at 1.69% at the end of September 2022.
Considering that it reflects almost all the largest US stocks, it comes as no surprise that the S&P 500 index is often referred to as "the market" as a whole.
Standard and Poor's index weights its components primarily by market capitalization - the total dollar market value of a publicly-traded company's outstanding shares of stock. Also called the market cap, this equals the total number of a company's outstanding shares multiplied by the current share price.
To qualify, an enterprise must have an unadjusted market cap of at least $14.6 billion. Because the S&P 500 index is capitalization-weighted, the largest stocks greatly influence the index’s daily movements and long-term performance.
The top 10 stocks account for 27.8% of the index's market value, and as of August 31, 2022, these are the top companies in the S&P 500 by market capitalization:
- Apple (AAPL)
- Microsoft (MSFT)
- Amazon (AMZN)
- Tesla (TSLA)
- Google’s parent company Alphabet, with class A shares (GOOGL) followed by Class C shares (GOOG)
- Berkshire Hathaway B (BRK.B)
- UnitedHealth Group (UNH)
- Johnson & Johnson (JNJ)
- Exxon Mobil (XDM)
Ways to Invest in the S&P Index
An index is a measure of its underlying stocks’ performance, so you can’t directly invest in the S&P 500 itself.
You can, however, learn how to buy the S&P 500 stock, i.e., shares from each of the 500 individual companies, as long as you don’t mind examining the financial fundamentals of 500 separate enterprises and making a total of 503 transactions.
An exchange-traded fund, invented by State Street Global Advisors in 1993, employs a passive index replication strategy and helps investors get exposure to all the S&P stocks without the laborious analysis. You can also invest in a total stock market index fund, a type of mutual fund or ETF that tracks a stock index such as the S&P 500.
Mutual Index Funds vs. Exchange-Traded Funds
Thanks to Vanguard’s creation of the first US mutual fund to mimic the S&P 500, direct investing has been accessible and affordable to individual investors since 1976. The launch of the first ETF that tracked the S&P 500 in a similar way came approximately two decades later.
Nowadays, almost all major fund companies and brokerages offer some kind of an S&P 500 investment opportunity.
In other words, you can buy S&P 500 index stocks as either mutual index funds or exchange-traded funds. Although these options share many similarities, there are also some key differences.
An index fund is a mutual fund that follows a passive investment strategy and seeks to match the market’s risk and return. Index funds trade only once a day, after the market closes, and are usually meant to be owned for a relatively long period.
Some have minimum investment lengths and minimum investment amounts, but index funds are known for charging much lower fees than actively managed funds, making them an excellent low-cost option for building a diversified portfolio.
ETFs can be purchased with just a few clicks via a taxable brokerage account or another online platform. S&P 500 ETFs are traded on an exchange, just like stocks: Their price changes throughout the day as traders buy and sell. There are no minimum purchase amounts (apart from the price of a single share) or investment-time constraints.
Like index funds, ETFs offer fewer broker commissions and lower expense ratios than those you’d have to face if you buy individual stocks.
No matter which approach you decide on, there are several different ways to access these funds. You can embark on your S&P 500 investing journey with a bank, a full-service broker, a discount broker, or a robo-advisor. Let’s take a closer look at the advantages and disadvantages of each:
Many new investors consider banks the most convenient way to approach investing in the S&P 500 simply because they let you keep all of your accounts - such as checking, savings, and investment accounts - in one place.
On the downside, these financial institutions tend to charge the highest fees, so it might turn out that investing in the S&P 500 through a bank is your most expensive option.
Online Trading Platforms
The most significant advantage of online trading platforms is that they charge low fees, which is also why they’re called discount brokerages.
However, low prices mean sparse benefits, as these platforms offer no advice on navigating your investing approach. If you lack experience, we suggest you ask around first and get at least some level of stock market understanding before starting your trading journey.
However, experienced investors who don’t need help figuring out how an S&P 500 index fund investment fits into their strategy would probably prefer a DIY approach.
You can hire a financial advisor or a full-service broker to provide investment advice.
Keep in mind that this kind of service typically costs big bucks - working with a personal advisor is a luxury usually reserved for investors with a high net worth who don’t mind paying for a premium service.
On the plus side, a full-service advisor helps you understand your financial situation, provides a well-informed view on how investing in S&P 500 index funds and ETFs works and guides you towards achieving a specific financial goal.
Considering that they combine the benefits of online platforms’ low fees and the opportunity to discuss your investment approach with a financial advisor, it’s no wonder that robo-advisors are in high demand.
Also called automated investment advisors, these platforms are less hands-on than human brokers, employing an AI-powered approach to helping users design and execute investment strategies.
These platforms sometimes also offer access to human financial planners who can help you make an S&P investment for a premium fee.
Opening an Investment Account
After you’ve decided to invest in an S&P index fund or an ETF and picked the best way to access these funds, it’s time to open an investment account.
Once again, there are several options: The most popular solutions include standard brokerage accounts (also called non-retirement or taxable brokerage accounts) and retirement accounts such as traditional IRAs, Roth IRAs, and 401(k)s.
Once you’ve opened a suitable investment account, it’s time to narrow down which S&P 500 index fund to buy into. To make sure that you go for the most affordable option, remember to look at the different funds’ expense ratios (the percentage of your assets you’ll have to pay in fees annually).
Comparing fees is crucial, as the returns on these funds should be more-or-less the same, considering that they all track the same index. Put simply, the lower the expense ratio, the more of that return you’ll get to keep.
The Benefits of Investing in the S&P 500
There are quite a few reasons why investing in the S&P is often a smart decision. No matter if you are just starting your investment journey or have been trading for some time and want to increase your exposure to the United State’s stock market, there are several advantages to look forward to:
Affordability. Index funds and ETFs are passively managed, which typically makes them inexpensive to invest in. Considering that you won’t lose much on fees, your S&P 500 returns will be higher.
Diversification. You probably already know how important it is to diversify your investments between multiple securities. When you invest in an index such as the S&P 500, your portfolio gets inherently diversified among different stocks. Thanks to this risk-prevention strategy, should some of the companies in the index perform poorly, your entire portfolio will remain in good standing.
Solid performance. The S&P 500 components are well-established companies that operate in various industries. As such, their stocks generally carry less risk and lower volatility. Investing in an index fund or an ETF that mimics S&P 500 stocks means that your returns will match the fund's performance, which has had an average stock market return of 10% annually over the last few decades.
Simplicity. S&P index funds offer share ownership opportunities for hundreds of stocks, even if you buy a single share of the fund. Given that it requires minimal investment experience and almost no time, this approach is much simpler than buying individual stocks.
The Drawbacks of Investing in Standard & Poor's 500
Each investment approach has its flaws. Although the upsides substantially outweigh the downsides, there are a few negative aspects of the S&P funds to consider:
Volatility potential. One of the most significant disadvantages of the S&P 500, from an investor’s point of view, is that the index assigns higher weights to large-cap companies. In other words, the stock prices for Apple, Microsoft, and Amazon have a much greater influence on the index as a whole than S&P companies with a lower market cap.
Large-cap stocks only. If you want to do portfolio diversification right, you need to buy shares of mid-cap and small cap companies along with large caps, include cash and bonds along with stocks, and make sure to allocate funds to international stocks, not just the domestic ones.
Frequently Asked Questions
Can you just invest in the S&P 500?
No, you cannot invest in the S&P 500 directly. However, there are other possibilities to explore: You can either buy a share of stock of each of the S&P 500 companies - which we advise against - or invest in a mutual fund or an ETF that mirrors the S&P 500. The latter is a sound strategy, even among investors who don’t have millions to allocate to trading.
How much money do you need to invest in the S&P 500?
The answer to this question depends on the approach you choose and the platform you use. To get started, you’ll need roughly $250-$300 for an ETF and $2,000-$3,000 for an index fund.
How do I buy an S&P 500 index fund?
If you don’t know how to buy into an S&P 500 ETF or an index fund, we suggest you work with an advisor to find the right investment opportunity and determine how much you can comfortably afford.
Even if you hire a discount broker, a bank, or a robo-advisor, figuring out what you need to do won’t take long. The steps include deciding whether you want to buy an ETF or an index fund, opening a brokerage account, choosing a fund, and making a purchase.
Can you lose money in an index fund?
If you are unsure about how to invest in the S&P 500 without running an unnecessary risk, we suggest you invest in index funds. The financial world is full of uncertainties, but the chances that any index fund mirroring the S&P will lose all of its value are practically nonexistent.
After all, legendary investor Warren Buffett has long recommended investing in one of the S&P 500 index funds.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.
More from blog
Your email address will not be published.