How To Invest In The S&P 500 – Financial Treat. The S&P 500 is the primary barometer for evaluating the performance of the U.S. stock market. Funds that track the benchmark index form the cornerstone of many regular buy-and-hold investors’ portfolios — making understanding how to invest in the S&P 500 a key skill.
The S&P 500 is a stock market index that tracks the performance of the 500 largest U.S. public companies by market capitalization or the total value of all outstanding shares. The index has a market capitalization of about $39 trillion, or nearly 85% of the total U.S. stock market capitalization.
Because of its sheer size, knowing the direction and performance of the S&P 500 gives you an instant insight into how the entire market is doing. It also makes buying securities designed to mimic the S&P 500 a great way to add a very diverse pool of stocks to your portfolio.
“If you buy the S&P 500, 90 percent of the time, you’re probably outperforming an active portfolio manager who chooses large-cap stocks,” said Joe Favorito, managing partner at Landmark Wealth Management.
The best way to invest in the S&P 500 is to buy an exchange-traded fund (ETF) or index fund that tracks the index. There are differences between the two approaches, which we’ll explore below, but either way, these funds offer extremely low fees and great diversification.
Index funds that track the S&P 500 typically own most or all of the stocks included in the benchmark index, so they can replicate that index’s performance as closely as possible. They then sell shares in that fund so investors like you have access to their hundreds of individual investments.
There are many S&P 500 index funds, so consider using the following criteria to make sure you choose the right one for your portfolio:
Like index funds, passively managed ETFs are designed to replicate the performance of market indices such as the S&P 500. Managers buy a basket of securities to replicate benchmark index holdings, and then sell the shares to investors.
That’s what makes ETFs different: ETFs issue shares that trade like stocks and fluctuate in value throughout the day. Meanwhile, index fund stocks trade only once a day at the close. For traditional buy-and-hold investors, the difference is negligible.
Interestingly, the first ETF to launch in the US was an S&P 500 index fund, the State Street SPDR S&P 500 ETF (SPY). Today, SPY is the world’s largest exchange-traded fund and the most traded ETF by asset value.
You should choose an S&P 500 ETF based on a number of key factors that you use to differentiate its index fund siblings:
Don’t make the S&P 500 the bulk of your portfolio. “There are other areas of the market where a diversified portfolio needs to be built, such as small caps, midcaps and international stocks,” Favorito said.
Building this diversified portfolio also means adding bond holdings to an S&P 500 index fund. Check out our list of the best overall market bond index funds to learn how to best structure your two or three fund portfolio.
The S&P 500 tracks the performance of nearly 500 different companies, from Apple (AAPL) to Xerox (XRX), and there’s nothing stopping you from buying shares in each one.
But, “if you want all the S&P 500 stocks, it’s going to be very tedious and expensive to buy them that way,” said Aviva Pinto, managing director of Wealthspire Advisors.
First, you have to spend a lot of money to complete a full set of S&P 500 stocks. For example, buying shares in just the 10 largest companies in the S&P 500 can cost more than $8,000.
That’s before taking into account the S&P 500’s weighting of each company’s market capitalization. This helps to more accurately reflect the impact of company size on the overall market. Exactly replicating index weights would be a management nightmare for an individual investor – keeping that weighting on track will be an even bigger problem as the market moves on a daily basis.
For this reason, both financial advisors recommend buying funds that track the S&P 500 and offer one-stop shopping for those looking to invest in the index.