How to Invest in the S&P 500 Index

Wondering how to invest in the S&P 500? This popular index measures the stock performance of the 500 largest publicly traded U.S. companies (also known as large-cap companies). It’s generally seen as a solid market benchmark for how the stock market as a whole is doing.

While you can’t invest directly in the S&P 500, you can invest in funds and ETFs that mimic its structure, attributes, and typically its performance. This allows you to invest in many companies at once. It’s simpler than buying 500 individual stocks, and it provides some built-in diversification. Here’s how it works.

What is the S&P 500 index?

The S&P 500 is a well-known U.S. stock market index that tracks the stock performance of the biggest U.S. companies, which is determined based on their market capitalization. A company’s “market cap” measures its total value (or the total dollar value of all stocks currently held by shareholders). Think of it as a snapshot of a company’s worth relative to others. Market cap is based on supply and demand from market forces, industry, and individual investors, so it’s constantly changing.

The S&P 500 assigns a weight to each company based on the value of all available shares. That means companies with the biggest market caps have a greater impact on the index. A company like Apple, for example, would count for more than a company with a comparatively smaller market cap.

Aside from the S&P 500, there are two other major stock market indexes:

  • The Dow Jones Industrial Average (the “Dow’): This is a price-weighted index, which means that companies with higher share prices have a greater impact on the index. The Dow Jones contains stocks from 30 large companies.

  • The Nasdaq Composite: This is a market-capitalization-weighted index that includes thousands of stocks traded on the Nasdaq Stock Exchange, which has a focus on tech companies.

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What companies are in the S&P 500?

As of February 28, 2023, there are actually 503 companies included in the S&P 500. That’s because some companies have multiple share classes — and, in turn, multiple listings. Fox Corporation, for example, has Class A and Class B shares.

As of February 28, 2023, here are the top 10 companies in the S&P 500 by index weight:

  1. Apple Inc.

  2. Microsoft Corp.

  3. Amazon.com Inc.

  4. Nvidia Corp

  5. Tesla Inc.

  6. Berkshire Hathaway B

  7. Alphabet Inc. A (Google)

  8. Alphabet Inc. C (Google)

  9. Exxon Mobil Corp

  10. Unitedhealth Group Inc.

Criteria for a company to be included in the S&P 500

Making it into the S&P 500 is a bit of a process. U.S. companies must meet a slew of eligibility requirements that are meant to weed out smaller companies that are still finding their footing. As of January 2023, eligible companies must (with some exceptions):

  • Have a market capitalization of at least $12.7 billion, with 50% of shares being publicly traded

  • Offer common stock

  • Be structured as a corporation

  • Already be listed on a qualifying U.S. stock exchange

  • Have positive earnings in four consecutive quarters, including the most recent quarter

Benefits of using the S&P 500

It’s seen as a relatively stable investment strategy

Only companies with relatively strong market capitalization can be included in the S&P 500. As a result, the bulk of the index consists of large, well-established companies.

That certainly doesn’t guarantee investment returns, but it might help risk-averse investors sleep a little better. Over the last 10 years, the S&P 500 has had an average annualized return of 9.76%. S&P 500 exchange-traded funds (ETFs) and index funds allow for slow-and-steady investing over the long term. Going with individual stocks and trying to time the market, on the other hand, can be considered much riskier.

S&P 500 funds provide diversification

Maintaining a diversified portfolio is an important part of investing for the long term. That means having a healthy variety of different assets. Investing in the S&P 500 provides diversification because this approach can allow you to invest in many different stocks at once. Peppering in different asset classes and risk levels can provide some much-needed balance.

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How to invest in the S&P 500

1. Choose an index fund or ETF

If you want to invest in an S&P 500 company, you can buy shares in a company individually, or consider index funds and exchange -traded funds (ETFs). They’re different from mutual funds, which usually rely on an active fund manager who actively researches stocks, then buys and sells shares in an attempt to outperform the market.

This approach isn’t a sure thing. In 2021, almost 80% of actively managed U.S. equity funds underperformed, according to the S&P Dow Jones Indices. Conversely, index funds and ETFs don’t try to beat the S&P 500 — they just aim to match it.

Index funds

These funds pool money from a group of investors and use that capital to buy shares in a certain index, that is similar to the S&P 500. They provide diversification because they include a basket of shares from a specific market segment. Index funds are known for their low fees and buy-and-hold strategy.

ETFs

An ETF also allows you to buy hundreds of investments in one fell swoop. But unlike index funds, which are rarely bought and sold, ETFs are traded on an exchange the same way stocks are. That means prices can fluctuate throughout the day, so investors can buy and sell at any of those price points. ETFs also tend to have a cheaper buy-in.

2. Open an investment account

Once you decide on the right fund for you, the next step in how to invest in the S&P 500 is opening an investment account. There are many ways to do this. A few are:

  • Robo-advisor: After answering some basic questions, a robo-advisor uses software and algorithms to make investment choices on your behalf. It’s a simple way to automate investing, and robo-advisors can invest in funds that track the S&P 500. With Acorns Invest, for example, you can invest in an S&P 500 ETF with a minimum investment of just $5.

  • Brokerage account: You can open a brokerage account and buy into a fund that follows the S&P 500. You’ll just need to fund your account and choose your investments. With these types of accounts, a licensed brokerage firm helps facilitate transactions.

  • Retirement accounts: If you have access to a 401(k) or other employer-sponsored retirement account, you can select investments from the available funds. Contact your plan administrator to clarify your investment options. Index funds are common within employer-sponsored plans.

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3. Determine and add funds

Whether you invest in an exchange-traded fund or an index fund, how much you kick in is up to you. Your contributions will depend on your budget and financial goals. The latter can include saving for retirement, buying a home, starting a business, or any other investment goal you have in mind.

A robo-advisor can help you invest in a way that aligns with your age and risk tolerance. From there, your contributions might be split between retirement accounts, a taxable brokerage account, and other investment vehicles.

Is the S&P 500 a good investment?

If you’re curious about how to invest in the S&P 500, know that it’s an investment like any other.

Risk is always part of the equation, but ETFs and index funds that track a stock market index are generally seen as safer investments than individual stocks or cryptocurrency. They provide immediate diversification and don’t try to outperform the market.

From 2011 to 2020, the average annual return on the S&P 500 was 14.4%, according to the American Enterprise Institute. That’s almost three times higher than the average return for hedge funds, which are considered high-risk investments.

With that said, the best investment strategy is one that’s tailored to you. Your financial goals, age, and appetite for risk should lead the way.