How to Invest in S&P 500
Before 1975, if you wanted to buy the 500 stocks in the S&P 500, you would have had to buy each stock individually. Vanguard founder John Bogle introduced the first-ever index fund in that pivotal year, which tracked the S&P 500.
These days, there are many S&P 500 index funds to choose from. Find out everything you need to know about how to invest in the S&P 500 index.
How to invest in the S&P 500 Index
The S&P 500 isn't the only index in the U.S. but it's a great place to start investing.
That's because it includes most of the biggest companies in the U.S. And since S&P 500 index funds don't need fund managers to pick and choose the underlying stocks, they tend to have much lower fees than actively-managed mutual funds.
If you're looking to invest in the S&P 500, then follow these four steps:
1. Open a brokerage account
If you want to invest in the S&P 500, you'll first need a brokerage account. This could be a retirement account like a traditional IRA or Roth IRA, an employer-sponsored 401(k) or similar, or your own traditional, taxable brokerage account.
There are many online brokerages to choose from:
Tastytrade
Public.com is an online investment platform offering stocks, ETFs, crypto, and alternative assets like fine art and collectibles—all in one place and with very low fees. The company continues to innovate and add new investment features, making it a one-stop-shop for many investors. Follow along with our Public.com review to learn more about Public’s pricing, supported investments and much more.
Robinhood
Known for its commission-free model, Robinhood also offers affordable options trading that will not cut into your earnings. With mobile-optimized trading, you can invest in everything from options to cryptocurrency.
Most of the top stock brokers today now offer commission-free trading for U.S.-listed stocks, options, and ETFs. They all provide investors with research and educational tools so that even rank beginners can figure out what to do. Here's a quick comparison of three top platforms.
Look at fees for buying and selling mutual funds and ETFs if you open a new account intending to invest in the S&P 500. Many brokerages offer their own family of funds or a group of partner funds with no mutual fund trading fees.
2. Choose between mutual funds or ETFs
You can invest in the S&P 500 through an index fund or ETF, depending on your investment goals. While both offer fantastic diversification, they do operate differently and can have separate bearing on your taxes and overall gains.
Mutual funds - are intended to be owned for a relatively long period of time. They trade only once per day, after the market close. Some have a minimum investment amount and a minimum length of time to invest. And early withdrawals can lead to penalties. On the positive side, you can buy and sell mutual funds in round dollar amounts.
ETFs - are bought and sold like a stock. The price constantly changes throughout the day as traders buy and sell. Most major discount brokerage firms allow you to trade all ETFs free. There is no minimum time to hold or minimum purchase amount aside from a single share price. ETFs may have lower expense ratios in some cases as well and can be purchased via brokers like Public.com, which is known for its low fees and zero commissions.
For most people, ETFs will be a more attractive way to get started investing in the S&P 500. However, mutual funds have their benefits too. It's up to you to decide which is a better fit for your portfolio.
3. Pick your favorite S&P 500 fund
After deciding on your investment vehicle, look for the right fund. Compare the historical performance of each fund to get an idea of expected gains, and consider any fees and associated costs that can reduce your earnings.
What Stocks Are in the S&P 500?
The S&P 500 Index tracks the largest companies in the United States. Since these values change over time, the index adjusts accordingly.
There are 504 constituents in the S&P 500. There are many different types of stocks in the S&P 500, but they share a few common characteristics:
- Must be located in the United States
- Has a minimum market capitalization of $18 million
- Is listed on a major U.S. stock exchange (NYSE, Nasdaq, etc.)
- Operates in accordance with the U.S. Securities Exchange Act
The company must have traded at least 250,000 shares monthly for the six months before index evaluation, and its earnings must be positive.
4. Start trading
Once your account is open and you have chosen your fund, you’re ready to begin trading. Just fund your account to start investing.
You're an investor in the S&P 500 now! It's that simple.
Opening and funding a brokerage account is a quick and easy process. Once the funds have cleared, you can buy an S&P 500 index fund in just a few clicks. As long as you understand the risks of investing, it's an excellent first investment and a fun way to get your feet wet in the stock market.
Should you invest in the S&P 500?
While we don't recommend any specific investments at Moneywise, there are certainly a lot of benefits to investing in the S&P 500. For one, the index offers broad exposure to the companies throughout the U.S. And historically, the index has had great returns for investors, averaging about 10% annually.
Investing in an index or exchange-traded fund can also help you avoid the risks that come with individual stock picking. With the S&P 500, you'll be exposed to a lot of great companies over a variety of sectors, which is great if you're looking to diversify your portfolio.
The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.
John C. bogle, The Little Book of Common Sense Investing
How Do I Invest in the S&P 500 When It’s High?
When the S&P 500 is high, index investing can be a tougher choice. The idea is to buy low and sell high, but that is not always possible, especially with the market constantly shifting.
Even if the market is up when you’re ready to trade, the market to soar to even higher heights over the upcoming years. It’s important to think of investing in the S&P 500 as a long-term play, while leaving the rapid-fire and short-term trading to experienced investors.
Savvy investors track the market and have an account ready for trading so they can act when the time is right. Review the fact sheet and historical performance for each index fund or ETF to ensure it is the right investment for your portfolio.
Top 10 companies in the S&P 500
As of October, 2024, these are the top 10 S&P 500 constituents, according to index weight.
- 1.
Apple Inc (AAPL)
- 2.
Microsoft Corp (MSFT)
- 3.
Nvidia Corp (NVDA)
- 4.
Amazon.com Inc (AMZN)
- 5.
Meta Platforms, Inc. Class A (META)
- 6.
Alphabet Inc A (GOOGL)
- 7.
Berkshire Hathaway B (BRK.B)
- 8.
Alphabet Inc C (GOOG)
- 9.
Broadcom Inc (AVGO)
- 10.
Tesla, Inc (TSLA)
Based on these numbers, information technology accounts for 31.7% of overall market value, trailed by financials (12.9%) and health care (11.6%).
S&P 500 vs. the Dow
The Dow Jones Industrial Average (DJIA or Dow) is another stock market index that is closely followed by investors and analysts. Here’s how it compares to the S&P 500 Index.
First, the DOW tracks a significantly smaller selection of stocks — only 30 of the largest U.S. companies are included. It also excludes the utilities and transportation sectors, whereas the S&P 500 includes all sectors. This means that DJIA-tracking funds provide less diversification than S&P 500 index funds.
Second, the Dow is different from the S&P 500 Index in how it weights the companies that are included on its list. The S&P 500 is a float-market-cap-weighted index while the Dow Jones Industrial Average is price-weighted.
The chart below shows how SPY and DIA have performed recently.
As you can see, the Dow outperformed the S&P 500 pre-pandemic, from 2018 to 2020, while the S&P 500 has taken off and provided better returns since then.
S&P 500 vs. Nasdaq
When someone talks about investing in “The Nasdaq” they could mean one of two things.
On one hand, they could be referring to the Nasdaq Composite Index, which tracks every company that’s listed on the tech-heavy Nasdaq stock exchange. On the other hand, they could mean the popular Nasdaq-100 Index which, as you may have guessed it, tracks 100 of the largest companies listed on the Nasdaq.
Both the Nasdaq 100 and Nasdaq Composite are market-cap weighted like the S&P 500. However, the Nasdaq 100 doesn’t include any financial companies.
As the chart shows, the Nasdaq 100 enjoyed tremendous growth throughout 2020 and most of 2021. This makes sense as this was during the height of pandemic lockdowns when many Nasdaq-listed tech stocks were experiencing explosive growth.
How does the S&P 500 compare to the total stock market index?
The key difference between the S&P 500 and the total stock market index is that the S&P 500 only includes large cap stocks, while the total stock market index includes large cap, mid cap, and small cap stocks. For this reason, the total stock market index is often seen as a more representative measure of the stock market than the S&P 500.
However, in reality, these indexes have provided nearly identical stock market performance over time. The chart below compares Vanguard's S&P 500 ETF (VOO) and its total stock market ETF (VTI). As you can see, the lines are so similar, it's often hard to even tell them apart.
Pros and cons of investing in the S&P 500
Pros
-
Large exposure to a variety of companies
-
Historically high returns
-
Good for investors who don't want to pick individual stocks
Cons
-
Can only invest in large-cap companies
-
Index gives higher weight to companies with bigger market caps
-
Like any stock investing, can be highly volatile
Wise Insights: Navigating S&P 500 Investments
- Diverse Investment in Top U.S. Companies: The S&P 500 index includes around 500 leading U.S. companies, offering a broad and diversified exposure to the American corporate sector.
- Accessible Through Funds: While direct investment in the index isn't possible, you can invest via index funds or ETFs that track the S&P 500, providing an easy way to gain exposure to its constituent stocks.
- Accessible Through Funds: While direct investment in the index isn't possible, you can invest via index funds or ETFs that track the S&P 500, providing an easy way to gain exposure to its constituent stocks.
Investing in the S&P 500 can be a great option if you want exposure to some of the biggest companies in the U.S. It's one of the best-known indexes and most of the best stock brokers offer low-cost S&P 500 mutual funds and ETFs.
But while the S&P 500 is a great foundational investment choice for most portfolios, you may want to consider adding other investments as well such as a Total Stock Market Index fund, a Small-Cap fund, or even some individual stocks.
Learn more about how diversify your portfolio.
FAQs
Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time.
Lena Muhtadi Borrelli brings over 20 years of experience in the finance industry. She began her career at Morgan Stanley before transitioning over to media. As a finance writer, she has served as an authority for several respected outlets, including Forbes, TIME, Newsweek, Bankrate, Investopedia, Insurance.com, and InvestorPlace. No matter what she is writing, Lena has a unique ability to simplify complex topics, making finance more approachable and relatable to the average reader. When she is not writing or scanning the news for the latest headlines, she is happiest spending time in the Florida sunshine with her husband and two pups.
Latest Articles
Disclaimer
The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter. Advertisers are not responsible for the content of this site, including any editorials or reviews that may appear on this site. For complete and current information on any advertiser product, please visit their website.