Individuals can invest in the S&P 500 through index funds or ETFs that follow the index. Investors can choose a taxable brokerage account, a 401(k), or an IRA. The index tracks the largest companies in the United States based on factors like market capitalization, sector allocation, and liquidity.
The S&P 500 Index was launched in 1957 as the first U.S. market-cap-weighted equity index and is considered the best single gauge of large-cap U.S. equities.
Key Takeaways
- The S&P 500 tracks the largest U.S. companies based on market capitalization.
- An S&P 500 Index fund can help investors 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.
What Is the S&P 500 Index?
The index includes 500 leading U.S. companies, although that number may fluctuate. The S&P 500 represents approximately 80% of available U.S. market capitalization. As of May 2024, 503 constituents comprise the S&P 500, with an estimated $43.4 trillion total market capitalization.
S&P 500 stocks reflect the U.S. economy's growth drivers. As of Apr. 30, 2024, the top 10 constituents of the S&P 500 by index weight include:
- Microsoft Corp. (MSFT)
- Apple Inc. (AAPL)
- Nvidia Corp. (NVDA)
- Amazon.com Inc. (AMZN)
- Alphabet Inc. A (GOOGL)
- Meta Platforms Inc. Class A (META)
- Alphabet Inc. C (GOOG)
- Berkshire Hathaway B (BRK.B)
- Eli Lilly & Co. (LLY)
- Broadcom Inc. (AVGO)
Three sectors hold the largest concentration of companies in the S&P 500 in April 2024: Information Technology 29.2%, Financials 13.1 %, and Healthcare 12.3%.
Why Investors Choose the S&P 500
Index investing allows individuals to effectively follow the market activity of up to 500 companies with the S&P 500. An index fund or exchange-traded fund (ETF) that benchmarks to the S&P 500 allows investors to gain exposure to all those stocks.
ETFs focus on passive index replication, giving investors access to every security within a particular 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.Nearly all major brokerages and fund companies offer some type of S&P 500 fund, such as the iShares S&P 500 Value ETF (IVE), the SPDR Portfolio S&P 500 Value ETF (SPY), and the Vanguard S&P 500 Value ETF (VOO).
S&P 500 index funds tend to have slightly higher fees than ETFs because of higher operating expenses. Because a mutual fund has a structure that differs from an ETF, investors can only buy it at the day’s closing price, based on the fund's net asset value (NAV).Index investing pioneer Vanguard's S&P 500 Index Fund (VFINX) was the first index mutual fund for individual investors. The Vanguard 500 Index Fund Admiral Shares (VFIAX) is one of the largest index funds.
An index is a measure of the performance of its constituent securities. Individuals invest in an index through ETFs and index funds that try to replicate the performance of specific indexes.
How To Invest in the S&P 500
To invest in , investors can gain exposure through discount brokers with commission-free trading. S&P 500 index funds trade through brokers and discount brokers and may be accessed directly from the fund companies. Investors may also access ETFs and mutual funds through employer 401(k) programs, individual retirement accounts (IRA), or roboadvisor platforms.
The expense ratio for ETFs is the overall annual cost paid to the fund manager by investors. Many mutual funds include loads or commissions paid to the fund managers. These may be classified as front-end or back-end loads.
Investors can review the performance by accessing the fact sheet for every investment on the company's website that offers the ETF or the mutual fund. Using the name and ticker symbol of the funds, investors can then determine the amount of capital they have to invest.
Advantages of Investing in the S&P 500
- Exposure to the world's most dynamic companies: Investing in the S&P 500 exposes individuals to some of the world's most dynamic companies, such as Apple, Amazon, Walmart, and Johnson & Johnson.
- Consistent long-term returns: Although returns in any single year can vary widely over a long-term period, the S&P 500 has consistently performed.
- Intricate analysis not required: Investing in the S&P 500 through an ETF or index fund means investors do not have to analyze or pick stocks.
- Can serve as a core holding: S&P 500 index funds and ETFs are liquid and trade with tight bid-ask spreads, making S&P 500 funds and ETFs ideal as core holdings for most investment portfolios.
Disadvantages of Investing in the S&P 500
- The index is dominated by large-cap companies: The S&P 500 is dominated by large-cap companies, with its 10 biggest constituents accounting for almost one-third of the index. This means that the S&P 500 index has limited exposure to small-cap and mid-cap stocks that may have the ability to grow much faster.
- The index has risks inherent in equity investing: The S&P 500 has risks inherent in equity investing, such as volatility and downside risk. Newer investors may find it difficult to tolerate such volatility.
- Only includes U.S. companies: The S&P 500 only includes U.S. companies.
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What Are Smart Beta Indexes?
Investors may choose an advanced approach to S&P 500 fund investing and consider smart beta indexes. These options have lower costs and offer the advantage of fundamental or customized investing. Examples of such funds include the AAM S&P 500 High Dividend Fund (SPDV) and the S&P 500 Equal Weight Index Fund (RSP). Investors can also target index segments that offer capital appreciation potential, with funds like the SPDR sector series or dividend-focused funds.Bullish leveraged funds use leverage to multiply the return of the S&P 500 when it performs well. Bearish leveraged funds short the S&P 500 to pull in positive returns when the index falls.
How Much Does It Cost to Invest in the S&P 500?
The difference in fees between S&P 500 index funds and ETFs these days is marginal. For example, some of the biggest and most popular S&P 500 ETFs have a very low expense ratio. Vanguard's S&P 500 ETF (VOO) has an expense ratio of 0.03%, while the Vanguard 500 Index Fund Admiral Shares (VFIAX) has an expense ratio of 0.03%.
Do S&P 500 ETFs and Funds Pay a Dividend?
S&P 500 index ETFs and mutual funds pay dividends to the constituent companies. The S&P 500 index has a dividend yield of about 1.47% as of Apr. 2024.
What Are Some Required Criteria for a Company To Be Included in the S&P 500?
For a company to be in the S&P 500, it must be a U.S. company, it should have an unadjusted market cap of at least $12.7 billion and a float-adjusted market cap of at least 50% of that minimum threshold, and it must have positive as-reported earnings over the most recent quarter as well as over the four most recent quarters combined.
The Bottom Line
Investing in an S&P 500 index fund is a way to diversify an investor's portfolio. An ETF or a mutual fund allows investors to gain exposure to a variety of stocks included in the index such as Apple, Microsoft, or Walmart.
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