How To Invest In the S&P 500
If you know anything at all about the stock market, then you’re probably familiar with the S&P 500. It’s considered by many financial experts to be the best barometer of the overall stock market’s performance, as well as a key indicator of how large corporations are performing financially.
There are a few different ways to invest in the S&P 500. Theoretically, you could purchase stock in all 500 of the companies in the index, but that would require a whole lot of money. For the average investor, the simplest and most affordable option is to buy shares of an S&P 500 exchange-traded fund or index fund. These are collections of stocks grouped together so that the fund’s performance mimics the S&P 500 index.
Keep reading to learn what you need to know about how to invest in the S&P 500.
What Is the S&P 500?
The S&P 500, also known as the Standard & Poor’s 500 or S&P, is a stock index that includes some of the biggest and best-known companies in the United States. Because it is made up of large corporations across multiple industries, it is often used as a proxy for the overall stock market. Founded in 1957, the current S&P 500 actually includes 505 stocks because some companies issue more than one class of shares.
The S&P 500 is weighted by market capitalization, meaning that a specific company’s valuation determines its influence over the index’s performance. In this regard, you shouldn’t look at each company as representing 1/500th of the index. Instead, huge companies like Apple and Microsoft will carry a lot more weight than smaller companies such as Whirlpool and American Airlines.
Ways To Invest in the S&P 500
Because the S&P 500 is a stock market index instead of an individual stock, you can’t invest in it directly. But there are passive investment options that track the S&P 500s performance. Here are two of them:
- Exchange-traded funds
- Index funds
The main difference between an ETF and an index fund is that an ETF can be traded throughout the day, just like a stock. In contrast, shares of index funds, like all mutual funds, are priced and traded at the end of the trading day.
Your first step before investing in the S&P 500 is to open an account with a brokerage firm such as Scottrade, E-Trade, Fidelity, Charles Schwab and TD Ameritrade. Most brokerages have simple online platforms, and you can buy and sell most types of investments for a per-transaction fee. If you have a 401(k) or IRA, the same site where you view and manage your account will likely include options for brokerage services.
Using an ETF
An ETF is a basket of stocks that are bundled together to create a single fund that can then be broken up into shares and sold to individual investors. It gives investors an easy way to buy a piece of the S&P 500 without having to break the bank by buying a bunch of individual stocks.
The SPDR S&P 500 ETF, for example, recently priced at about $422 a share, and the fund carefully balances stock purchases to ensure that it matches the S&P 500. Keep in mind that the company that manages the ETF charges an expense ratio, which is essentially a small management fee. For the SPDR S&P 500 ETF, the expense ratio is 0.0945 percent.
Good To Know
The SPDR S&P 500 ETF is a popular choice for investors, but it isn’t the only ETF that tracks the S&P 500. Others include the iShares Core S&P 500 ETF and the Vanguard S&P 500 ETF.
Using an Index Fund
Index funds are mutual funds that also mimic the performance of a particular stock index. Index funds are similar to ETFs, but there are differences. As mentioned earlier, ETFs trade like stocks throughout the trading day, while mutual funds don’t price until the end of the day.
Index funds also have an advantage in the way they can reinvest the dividends paid by the stocks they hold. ETFs have to accumulate cash over the course of the quarter, whereas index funds can simply reinvest immediately. There are also minor differences in the way capital gains are taxed for each.
S&P 500 index funds might differ in the exact makeup of their portfolios. For example, the Vanguard S&P 500 Growth ETF emphasizes growth-oriented companies in the S&P 500, while the Invesco S&P 500 High Dividend Low Volatility ETF specializes in stocks that offer strong dividends.
The Bottom Line
One reason ETFs and index funds are good options for novice investors is that they both feature passive management, which means they simply track the performance of the index itself instead of trying to pick individual stock winners. The consistently strong returns of the S&P 500 make an ETF or mutual fund tied to the index a comparatively safe and affordable investment option.
Vance Cariaga contributed to the reporting for this article.
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- Business Insider. 2021. "How To Invest in the S&P 500: S&P Index Funds."
- Yahoo Finance. "SPDR S&P 500 (SPY) Stock Price, News, Quote & History."
- State Street Global. "SPY: SPDR S&P 500 ETF Trust."