How to Invest in the S&P 500 Index

How to Invest in the S&P 500 Index

The S&P 500 index tracks the largest companies in the United States. Its stocks are curated by the S&P Index Committee, which selects companies based on a number of factors, including market capitalization, sector allocation, and liquidity.

But what if you’re looking to invest in S&P 500 stocks and don’t have the temperament to sift through and analyze 500 companies? You may want to consider an S&P 500 index fund or exchange traded fund (ETF) to help you gain exposure to all those stocks.

Vanguard introduced individual investors to the U.S.’s first mutual fund in 1976. It was designed to mimic the S&P 500 Index. The first ETF was introduced by a subsidiary of AMEX 17 years later, which also allowed investors to begin tracking the index.

Nearly all major brokerages and fund companies now offer some type of S&P 500 fund. Investors may access these funds through financial advisors, full-service brokers, or discount brokers. If you need some guidance, we break down some of the basics of S&P 500 index investing through ETFs and mutual funds. All figures are as of April 2022, unless otherwise indicated.

Key Takeaways

  • The S&P 500 is an index that tracks 500 of the largest U.S. companies based on their market capitalization.
  • You can’t actually invest in the index but you can in an index fund or ETF.
  • An S&P 500 Index fund can help your portfolio gain broad exposure to the constituent stocks in the S&P 500 index.
  • Index mutual funds and ETFs maintain a strategy of passive index replication, affording investors broad access to all of the securities within the given index.
  • Many funds that track the S&P 500 generally have very low management fees.

What Is an S&P 500 Index Fund?

An S&P 500 Index Fund is an investment comprised of stocks that are listed in the Standard & Poor’s 500 Index. Its performance will be nearly identical to the performance of the market index. Many exchange-traded funds (ETFs) and mutual funds track the index.

What Is the S&P 500 Index?

The S&P 500 Index was launched in 1957 as the first U.S. market-cap-weighted equity index and is widely regarded as the best single gauge of large-cap U.S. equities. As the most influential equity index in the world, the index has trillions of dollars indexed or benchmarked to it.

The index is traditionally made up of 500 of the leading U.S. companies, although that number may fluctuate. The S&P 500 represents approximately 80% of available U.S. market capitalization. The median market cap of the stocks held in the index is $31.7 billion, with the highest being $2.85 trillion.

S&P 500 stocks reflect the U.S. economy’s growth drivers to a significant extent. For example, the top 10 constituents of the S&P 500 by index weight are:

  1. Apple
  2. Microsoft
  3. Amazon
  4. Tesla
  5. Alphabet (class A shares)
  6. Alphabet (class C shares)
  7. Nvidia
  8. Berkshire Hathaway
  9. Meta Platforms
  10. UnitedHealth Group Inc.

These mega-cap stocks, which dominate the U.S. and global markets, are mostly concentrated in three sectors:

  • Information technology, the largest sector by weight in the S&P 500 index, at 28%
  • Consumer discretionary, the third-largest by weight, at 12%
  • Communication services, the fifth-largest at 9.4%

Together, these three sectors account for close to 50% of the S&P 500, reflecting the dominance of technology and related sectors in the U.S. economy. Other large sectors in the S&P 500 are health care at second with a 13.6% weight and financials at fourth with 11.1%.

The top five sectors together constitute almost three-fourths of the S&P 500. The other six sectors—industrials, consumer staples, energy, real estate, materials, and utilities—combined make up the remaining 25.9% of the S&P 500.

An estimated $13.5 trillion is indexed or benchmarked to the S&P 500, with index funds and ETFs comprising about $5.4 trillion of this total.

Index ETFs vs. Index Mutual Funds

You cannot invest directly in an index because it’s simply a measure of the performance of its constituent securities. What you can do is invest in an index through ETFs and index funds that try to replicate the performance of specific indexes.

ETFs focus on passive index replication, giving investors access to every security within a particular index. So an S&P 500 ETF exposes the investor to all of the stocks in that index. Index ETFs are generally low-cost and trade throughout the day just like stocks. Consequently, they are highly liquid and subject to intraday price fluctuations.

S&P 500 index funds tend to have slightly higher fees than ETFs because of higher operating expenses. Furthermore, because a mutual fund has a structure that differs slightly from that of an ETF, investors can only buy it at the day’s closing price, which is based on the fund’s net asset value (NAV).

The following are examples of index ETFs and mutual funds that are popular with investors:

  • The largest S&P 500 ETF is State Street Global Advisors’ SPDR S&P 500 ETF (SPY), which has $402 billion in assets under management (AUM). SPY was launched in January 1993 and was the very first ETF listed in the U.S.
  • Index investing pioneer Vanguard’s S&P 500 Index Fund was the first index mutual fund for individual investors. The Vanguard 500 Index Fund Admiral Shares (VFIAX) is one of the largest index funds, with total assets of $808 billion.

Buying an S&P 500 Fund or ETF

If you want an inexpensive way to invest in S&P 500 ETFs, you can gain exposure through discount brokers. These financial professionals offer commission-free trading on all passive ETF products. But keep in mind that some brokers may impose minimum investment requirements.

S&P 500 index funds also trade through brokers and discount brokers and may also be accessed directly from the fund companies. You may want to manage your portfolio through an advisor or a broker, or you may prefer to manage a portfolio of funds that are all housed within a specific mutual fund provider.

If you have the option, you may also access ETFs and mutual funds through employer 401(k) programs, individual retirement accounts (IRA), or roboadvisor platforms.

What to Look For

Whether you’re a novice or an experienced investor, there are a few things you’ll have to consider before you lay down any money. If you don’t have an investment account, be sure you find a brokerage or investment firm where you can purchase shares of your chosen ETFs or mutual funds.

Cost is a big factor when it comes to any investment. The expense ratio for ETFs is the overall annual cost paid to the fund manager by investors. An expense ratio between 0.5% to 0.75% is considered good. Be sure to approach anything greater than 1.5% with caution as funds that charge these expense ratios are considered high.

Many mutual funds come with sales loads or commissions that are paid to the fund managers by investors. These may be classified as front-end or back-end loads. The first is charged when you buy the fund while the latter is charged when you sell your fund shares. Funds that are sold directly by the investment provider don’t come with a load.

Although cost is an important factor, don’t forget to look at the performance of the fund. You can find the fact sheet for every investment on the website of the company offering the ETF or the mutual fund.

How to Invest

Choosing the right funds is half the battle. Knowing how to invest in them is the next step. Make a note of the name and ticker symbol of all the funds that you’re interested in as you’ll need this information when you begin purchasing shares.

Then determine the amount of capital available to use. This can help you figure out how much money you can afford to pay your brokerage firm when it comes to fees and commissions. If you don’t have an account, look for one that meets your criteria. If you don’t have a lot of capital, look for a firm that offers low-fee trading options.

Once your account is set up, you can begin investing in your funds.

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