How to Invest in the S&P 500
The S&P 500 is largely regarded as the world’s top equity index benchmark.
Many investment managers track their performance relative to the S&P 500 and it’s commonly noted how difficult it can be to beat the S&P 500 “beat the market” over time.
Given that, many wish to simply invest in the S&P 500 for their equity exposure or even sometimes for their whole portfolio.
But there are multiple ways when it comes to how to invest in the S&P 500.
That’s what we’ll cover in this article.
What Is the S&P 500 Index?
The S&P 500 is an index made up of the 500 largest publicly traded companies in the United States by market capitalization.
It’s widely considered to be a good gauge of how the overall US stock market is performing since it’s a large and diverse basket of some of the best companies in the United States.
Geographically, the S&P 500 is about two-thirds US-based with the rest coming from international firms that generate a large portion of their revenue from within the United States.
By sector, it’s currently heavily weighted towards technology (24 percent), health care (14 percent), and financials (11 percent), though these ratios vary over time based on how industries are doing, how stocks within the S&P 500 are classified, and the general evolution of the economy.
And some of its most well-known holdings include:
- Apple (AAPL)
- Amazon (AMZN)
- Meta (META) (fka Facebook (FB))
- Google parent Alphabet (GOOG and GOOGL)
- Johnson & Johnson (JNJ)
- Berkshire Hathaway (BRK.B)
- JPMorgan Chase (JPM)
The S&P 500 is often used as a proxy for the US stock market since it’s a broad-based and diversified index.
It’s also one of the most popular indices to track for both professional investors and individuals alike.
This is due to the fact that you can easily invest in the S&P 500 through index funds or exchange-traded funds (ETFs) which we’ll touch on later.
How to Invest in the S&P 500
There are a few main ways:
Each have their own benefits and drawbacks, which we’ll outline.
Exchange-Traded Funds (ETFs)
This is probably the most popular way to invest in the S&P 500 for individuals.
The largest ETF tracking the S&P 500 is the SPDR S&P 500 ETF (SPY).
As of writing, SPY has over $300 billion in assets under management and is one of the most traded securities in the world.
Investing in SPY gives you exposure to all 500 stocks in the index in a single investment.
One benefit to this is that it’s very easy to rebalance your portfolio simply by buying or selling more SPY.
Additionally, the fees for SPY are very low at just 0.0945 percent.
That means if you invest $25,000 in SPY, you’ll pay just $23.75 a year. That compares to the $137.50 you’d pay a year if you owned the average stock mutual fund that charges 0.55 percent annually.
The main drawback of SPY is that it does not track the S&P 500 perfectly.
It also only trades during US market hours, while S&P 500 futures trade 24/5 (with one hour off each weekday from 5 PM to 6 PM EST).
Futures
Another popular way to invest in the S&P 500 is through futures contracts. E-mini S&P 500 Futures trade under the symbol ES.
Futures contracts are agreements to buy or sell an asset at a future date at a predetermined price.
So with ES, you’re agreeing to buy or sell the S&P 500 at some point in the future.
The great thing about futures is that they allow you to get exposure to the S&P 500 without having to actually own any of the stocks.
However, there is one big drawback to futures which is that they generally have wider spreads than ETFs.
You can also get access to a lot of exposure with lower collateral requirements. It’s not uncommon for them to provide 10x-20 leverage.
Of course, this is a double-edged sword.
If you don’t know what you’re doing, it’s very easy to lose a lot of money trading futures.
CFDs
A CFD, or contract for difference, is a type of derivative that allows you to speculate on the price movement of an underlying asset without actually owning it.
So with a CFD, you can go long (betting the price will go up) or short (betting the price will go down) on the S&P 500.
CFDs are very popular with traders and investors who want to trade the S&P 500 but don’t want to go through the hassle of buying and selling individual stocks.
The main drawback of CFDs is that they are generally more expensive than other ways to invest in the S&P 500.
This is because you have to pay the spread, which is the difference between the bid and ask price.
Additionally, CFDs are not available in all countries.
Individual stocks
Of course, you can always buy individual stocks that make up the S&P 500.
The main advantage of this is that you have complete control over your investment.
You can buy or sell any stock at any time without having to worry about the underlying index.
However, the drawback is that it’s much more work to build a diversified portfolio this way.
It’s also more expensive since you have to pay commissions on each trade.
Mutual funds
Another option is to invest in a mutual fund that tracks the S&P 500.
The largest mutual fund tracking the S&P 500 is the Vanguard 500 Index Fund Admiral Shares (VFIAX), started on November 13, 2000.
VFIAX has over $500 billion in assets under management and has an expense ratio of just 0.04 percent.
Like with ETFs, investing in VFIAX gives you exposure to all 500 stocks in the index.
The main advantage of mutual funds is that they are very diversified.
This is because each share represents a tiny fraction of each company in the fund.
So even if one stock tanks, it’s unlikely to have a big impact on the overall fund.
The main disadvantage of mutual funds is that they are not as liquid as ETFs.
This means that it can take longer to buy or sell shares and you may have to pay a higher price.
Options
You can also invest in the S&P 500 through options.
Options are a type of derivative that give you the right, but not the obligation, to buy or sell an asset at a certain price.
You can use options to speculate on the future price movement of the S&P 500.
Options are very versatile and can be used in a variety of different ways.
However, they are also very complex and risky.
So if you’re new to trading and investing, it’s probably best to stay away from options.
Why Invest in the S&P 500?
Now that you know some of the different ways to invest in the S&P 500, you might be wondering why you should bother.
After all, there are thousands of different stocks and indexes to choose from.
So what makes the S&P 500 so special?
Well, there are a few reasons.
The first is that the S&P 500 is one of the oldest and most well-established indexes in the world.
It was first introduced in 1957 and has been used as a benchmark for the US stock market ever since.
This means that there is a lot of data available on the S&P 500, which can be helpful for making investment decisions.
Another reason to invest in the S&P 500 is that it’s a very diversified index.
It contains 500 different stocks, which gives you exposure to a wide range of companies.
This diversification can help to reduce risk since no single stock is likely to have a big impact on the overall index.
Finally, the S&P 500 is one of the most liquid markets in the world.
This means that it’s easy to buy and sell shares, and there is always someone willing to take the other side of your trade.
Related: Alpha vs. Beta vs. Smart Beta
Index ETFs vs. Index Mutual Funds
Now that you know a bit about the S&P 500 and how to invest in it, let’s compare two of the most popular ways to do so: index ETFs and index mutual funds.
Index ETFs
The first option is to invest in an exchange-traded fund (ETF) that tracks the S&P 500.
The largest and most popular ETF tracking the S&P 500 is the SPDR S&P 500 ETF (SPY).
SPY has over $250 billion in assets under management and an expense ratio of just over 0.09 percent.
Investing in SPY gives you exposure to all 500 stocks in the index.
So if the S&P 500 goes up, SPY is going to go up as well.
The main advantage of index ETFs is that they are very liquid. This means that it’s easy to buy and sell shares, and you can do so at any time during the trading day.
Index mutual funds
Another option is to buy a mutual fund that tracks the S&P 500.
As mentioned earlier, the largest mutual fund tracking the S&P 500 is the Vanguard 500 Index Fund Admiral Shares (VFIAX).
This fund has an expense ratio of 0.04 percent, which is very low.
The minimum investment for this fund is $3,000, but if you have a Vanguard account, you can get started with just $100.
Advantages and Disadvantages of Investing in the S&P 500
There are a few advantages and disadvantages to investing in the S&P 500 that you should be aware of before making a decision.
Advantages
The S&P 500 is one of the oldest and most well-established indexes in the world
Many view the S&P 500 as something that will always be in demand no matter what the market conditions are.
It’s a very diversified index, which can help to reduce risk
With diversification among 500 different stocks, the S&P 500 offers investors a good deal of protection against any one company or sector going through a tough time
The S&P 500 is an index made up of 500 large-cap stocks that are publicly traded on US exchanges.
The index covers a wide range of sectors, making it a popular choice for investors who want diversification in their portfolios.
While the S&P 500 is often viewed as a bellwether for the US stock market and even the global stock market and global economy, it’s also worth noting that the index includes many companies with foreign exposures as well.
The S&P 500 is one of the most liquid markets in the world
Many market participants and institutions trade the S&P 500 directly rather than individual stocks.
This is due in part to the large number of stocks in the index as well as the high level of liquidity.
A track record of consistent long-term returns
The S&P 500 was officially formed in 1957, but its origins date back to the early 1920s.
Since its inception, the index has generated an average annual return of about 10 percent.
While there have been periods of volatility, the long-term track record of the S&P 500 is one of consistent growth.
This makes it an attractive option for investors who are looking for exposure to US equities with a history of strong returns.
Tight bid-ask spreads
The bid-ask spread is the difference between the price at which a market maker will buy a security (the “bid” price) and the price at which the market maker will sell the same security (the “ask” price).
The tighter the bid-ask spread, the more liquid the market.
With 500 stocks in the index, the S&P 500 has one of the tightest bid-ask spreads of any market in the world.
This makes it an attractive option for investors who want to trade large volumes without incurring significant costs.
A long track record of dividends
Dividends are payments made by a company to its shareholders out of its profits.
Many companies that are included in the S&P 500 have a long history of paying dividends, and the index as a whole has a track record of steadily increasing dividend payments.
This makes the S&P 500 an attractive option for income-seeking investors who want to invest in a market with a history of growing its dividend payments.
No complicated analysis required
One of the appeals of the S&P 500 is that it doesn’t require a lot of analysis to invest in it. You’re generally simply seeking broad exposure.
Investors can simply buy an index fund that tracks the performance of the S&P 500, and they don’t need to worry about picking individual stocks.
This can be a major advantage for investors who don’t have the time or expertise to perform in-depth analysis on individual companies.
Disadvantages
Mutual funds tracking the S&P 500 are generally more expensive than other options
Mutual funds tracking the S&P 500 may have high expense ratios and fees.
The index is not equally weighted
Because the S&P 500 is a market-value weighted index, the largest companies have the biggest impact on performance.
This can be a disadvantage if these companies underperform the rest of the market.
The index is dominated by large-cap companies
The S&P 500 is a large-cap index, which means that it is biased toward large companies.
This may be a disadvantage in periods when small-cap stocks outperform large-cap stocks.
Bias toward US companies and US output
80 percent of the world’s output and 96 percent of the world’s population lives outside the United States.
The S&P 500 is biased toward large American companies.
So if the rest of the world outperforms, the S&P 500 can lag other equity indices.
Has volatility and downside risk, like other forms of equity investing
The S&P 500 can be volatile and has downside risk, like other forms of equity investing. This means that investors could lose money in the short term.
However, over the long term, the index has tended to rise, providing investors with the potential for capital gains.
How Much Does It Cost to Invest in the S&P 500?
You can invest in the SPY through ETFs that charge as little as 3 or 4 basis points (0.03-0.04 percent) to get exposure.
There are also mutual funds that track the S&P 500, but they often have higher expense ratios than ETFs. For example, the Vanguard 500 Index Fund (VFINX) has an expense ratio of 0.14 percent.
Even though there are some low-cost options available, the S&P 500 is generally more expensive to invest in than other markets.
This is due to the high cost of trading the individual stocks in the index.
Is an S&P 500 ETF or Fund a Good Investment for a Non-US Investor?
It depends on one’s investment objective, risk tolerance, time horizon, and so on, but generally having some exposure to US companies is a good idea as part of having a well-diversified portfolio.
For a non-US investor, there are two main ways to get exposure to the S&P 500 – through an ETF or mutual fund that tracks the index, or by investing in individual stocks.
Each option has its own set of pros and cons that need to be considered before making a decision.
For example, ETFs and mutual funds offer diversification and ease of investment, but they also come with fees and expenses. Individual stocks offer the potential for higher returns, but they also carry more idiosyncratic risk.
The bottom line is that there is no right or wrong answer when it comes to deciding whether or not to invest in the S&P 500 as a non-US investor.
It ultimately comes down to knowing your investment objectives and risk tolerance, and making the decision that is best for you.
What Are the Criteria for a Company to Be Included in the S&P 500?
To be included in the S&P 500:
- The company must be based in the US.
- The company should have an unadjusted market cap of at least $14.6 billion in addition to a float-adjusted market cap of at least a 50 percent minimum of that minimum threshold.
- Its ratio of annual dollar value traded to the float-adjusted market cap should be at least 1x “at the time of addition to the Composite 1500” and the stock should trade a minimum of 250,000 shares in each of the six months leading up to the evaluation date for S&P 500 inclusion.
- It must have positive reported earnings over the most recent quarter as well as over the four most recent quarters combined.
How to Invest in the S&P 500 – FAQs
What is the S&P 500?
The S&P 500 is a stock market index that consists of 500 large-cap companies.
The index is widely regarded as a good representation of the US stock market, and it is often used as a benchmark for other equity indices around the world.
What is the inception date of SPY?
SPY started trading on January 22, 1993.
On Google charts, you can track the price data back to January 29, 1993.
What are the criteria for a company to be included in the S&P 500?
To be included in the S&P 500, a company must be based in the US, have an unadjusted market cap of at least $14.6 billion, have positive reported earnings over the most recent quarter and four most recent quarters combined, and meet a certain volume requirement.
What are some of the advantages of investing in the S&P 500?
The S&P 500 is a well-diversified index, and it offers investors exposure to some of the largest and most successful companies in the world.
The index is also highly liquid, which makes it easy to buy and sell ETFs and mutual funds that track the S&P 500.
What are some of the disadvantages of investing in the S&P 500?
The main disadvantage of investing in the S&P 500 is that it carries fees going through a mutual fund or passive index, and is biased toward large American companies.
Additionally, the index has downside risk, which means that investors could lose money in the short term.
Is an S&P 500 ETF or mutual fund a good investment for a non-US investor?
It depends on one’s investment objective, risk tolerance, time horizon, and so on, but generally having some exposure to US companies is a good idea as part of having a well-diversified portfolio.
Should I invest in the S&P 500 or individual stocks?
Each option has its own set of pros and cons that need to be considered before making a decision.
For example, ETFs and mutual funds offer diversification and ease of investment, but they also come with fees and expenses.
Individual stocks offer the potential for higher returns, but they also carry more risk.
The bottom line is that there is no right or wrong answer when it comes to deciding whether or not to invest in the S&P 500 or something else.
It ultimately comes down to knowing your investment objectives and risk tolerance, and making the decision that is best for you.
What stock index should I buy if I want even more diversification than the S&P 500?
You can go with an option like VTI – Vanguard Total Stock Market Index Fund ETF.
VTI seeks to track the performance of the CRSP US Total Market Index.
It has large-, mid-, and small-cap equity diversified across growth and value styles.
Conclusion – How to Invest in the S&P 500
The S&P 500 is one of the oldest and most well-established indexes in the world.
Investing in the S&P 500 is a great way to get exposure to some of the largest and most profitable companies in the world.
Many view the S&P 500 as something that will always be in demand no matter what the market conditions are.
It’s a very diversified index, which can help to reduce risk.
With diversification among 500 different stocks, the S&P 500 offers investors a good deal of protection against any one company or sector going through a rough patch.
When thinking about how to invest in the S&P 500, you can purchase an ETF or mutual fund, or buy stocks in the index individually.
There are pros and cons to both approaches. It’s important to understand your investment objectives and risk tolerance before making a decision.
The most important thing is to choose an approach that is best for you and will help you reach your financial goals.
There are many different ways to do this, but each has its own advantages and disadvantages.
The best way to invest in the S&P 500 will depend on your individual circumstances and investing goals.
Index ETFs are a good choice if you’re looking for a liquid investment that tracks the index closely.
There are also other options like futures, CFDs, mutual funds, and options to get access to the S&P 500.