Investing in the S&P 500 offers a straightforward way to gain exposure to the performance of the largest U.S. companies. As an essential stock market index, the S&P 500 reflects economic trends, adapts to market changes and captures around 80% of available market capitalization. With its focus on diversification and steady returns, the S&P 500 can be a strong addition to your investment portfolio. Here's how to invest in the S&P 500 and make the most of this investment opportunity.
What is the S&P 500?
S&P stands for Standard and Poor’s, and the 500 refers to the number of companies present in the stock market index. The 500 companies in the market index are a combination of the largest stocks on the New York Stock Exchange and the Nasdaq exchange. The index is a free-float capitalization-weighted index.
An index fund aims to benchmark itself against an index that resembles that fund’s investment strategy. It is essential to read the index fund's objective and prospectus to identify the index fund’s targeted benchmark.
So, instead of buying all the stocks in the S&P 500, you can invest in a fund that tracks its performance in coordination with the stock index. S&P 500 index funds stand as one of the easiest ways to invest in anything and everything.
Quick History of the S&P 500
The S&P 500, established in 1957 by Standard & Poor's, is a stock market index that measures the performance of 500 of the largest U.S. companies. Considered a key indicator of the U.S. stock market, it is market-capitalization-weighted, meaning larger companies have greater influence. Over its history, the S&P 500 has reflected economic trends and shifts, adapting to include a broader representation of the market and enduring various economic challenges. It captures around 80% of available market capitalization, symbolizing the resilience of the American financial system.
Why Should I Invest in the S&P 500?
It can be hard to decide where geographically you want to invest and in what stocks, but you should aim for exposure to the entire market for the best diversification.
It’s important to understand that not every market has identical characteristics, especially when it comes to regulations and politically motivated restrictions. For instance, if you are an emerging markets enthusiast and are looking to place an investment over a large umbrella of securities, it could be wise to avoid China because of an escalating trade war and a lack of regulatory transparency.
Investing in the S&P 500 eliminates most of this risk because no Chinese companies — or other non-U.S. companies — are included in the index.
Steps to Investing in the S&P 500
Now that you know a little more about the S&P 500, you might want to invest in it. Here's how to get started.
Step 1: Pick a Broker
If you already invest with your favorite investment adviser or online brokerage you can skip this step. But, if you're new to the investing world and need a brokerage account. You can do some research and choose what brokerage is best for you.
There’s no perfect broker, but it’s important to know the advantages and disadvantages of each. It would be wise to open a brokerage account that offers funds with no-load fees and low expense ratios on its funds. Not all brokerages have the same transaction costs. Make sure you do your research to see who can provide the most value for the cheapest price.
Step 2: Choose Your Fund
Once you have registered with a brokerage, you are ready to screen for index funds that fit your needs. Take your time to review the fund’s objective, prospectus and performance. Consider the time period you want to invest and the trends in the overall market. Geopolitical factors, taxes and natural disasters affect stock prices.
While analyzing an index fund’s performance, pay attention to historical cumulative returns, portfolio turnover and volatility metrics. Analyze regional diversification, sub-industry diversification and asset allocation when viewing the fund’s composition.
The S&P 500 should hit a lot of these metrics. But make sure to look at real-time data before investing. Also, remember that a brokerage cannot fill an order for a mutual fund until the end of the day after net asset value (NAV) has been adjusted.
What Stocks Are Included in the S&P 500?
The S&P 500 includes 500 of the largest U.S. companies listed on the New York Stock Exchange or the Nasdaq exchange. Selection is based on market capitalization, liquidity and industry representation. Companies within the index represent various sectors, such as technology, healthcare and consumer discretionary. The composition can change, with the S&P committee periodically reviewing and adjusting the constituents to reflect the evolving market landscape.
Diversification and Steady Returns
Index funds provide diversification and steady returns. Mutual funds have strict regulatory oversight and require the fund manager to release almost all profits back into the funds.
Frequently Asked Questions
How much does it cost to invest in the S&P 500?
Investing in the S&P 500 can have varying costs depending on the method chosen. Directly investing in individual stocks will depend on their current prices, while index funds and ETFs that track the index may have minimum investment requirements and associated fees. Researching and comparing investment options is important to find the most suitable and cost-effective approach.
Is an S&P 500 ETF or fund a suitable investment for a non-U.S. investor?
Investing in an S&P 500 ETF or an index fund can be a suitable option for non-U.S. investors as it allows them to gain exposure to the U.S. stock market and potentially benefit from the growth of large-cap companies. However, they should consider factors such as currency exchange rates, tax implications, and any restrictions in their home country before making investment decisions. Consulting with a financial advisor or conducting research is recommended to determine if it aligns with their goals and risk tolerance.
Do S&P 500 ETFs and funds pay a dividend?
S&P 500 ETFs and index funds typically pay dividends to investors, derived from the underlying companies in the S&P 500 index. However, not all S&P 500 ETFs and funds pay dividends, so investors should research and select the appropriate fund based on their investment goals.