How to Invest in the S&P 500 Index
The S&P 500 Index is well-known for its long-term returns. According to Morningstar, over the past 10 years, it has an average annual return of 13.66%.
Here’s what you need to know to invest and buy shares in the S&P 500 Index.
What is the S&P 500 Index?
An index fund is a fund that is based on a predetermined group of stocks and bonds.
Rather than picking individual stocks to invest in, investing in an index spreads out your investment across a range of stocks that mimic the index.
One of the most well-known indexes is the S&P 500 Index.
Created in 1957 by Standard & Poor, the S&P 500 Index is a measure that financial companies and banks use to measure the health of the U.S. stock market.
It measures the performance of the biggest publicly traded companies in the country.
Despite its name, there are actually 505 companies in the S&P 500 Index, due to the number of companies that meet its criteria.
Several top companies are included in the index, including Apple, Microsoft, Berkshire Hathaway, Johnson & Johnson.
Over the past 30 years, the index has grown by over 330%.
Why Invest in the S&P 500 Index?
If you want to invest in the stock market, investing in mutual funds and exchange-traded funds (ETFs) that track the performance of the S&P 500 Index as closely as possible can be a smart strategy.
The manager of the mutual fund or ETF buys all or a representative sample of the stocks, bonds, and securities within the index.
Because the mutual funds and ETFs track the performance of the S&P 500 Index, investing in these funds is a passive investment strategy that doesn’t require a hands-on touch.
By investing in mutual funds or ETFs, you can instantly diversify your portfolio, with more of your money spread across dozens or even hundreds of stocks and bonds.
By spreading out your investments, you can also minimize your losses. If one company’s stock plummets, you’ll lose less money because your money is spread across hundreds of securities.
Because they don’t need to be actively managed, they often have lower costs than other investment opportunities, helping you reap more returns.
S&P 500 Index vs. The Total Stock Market
When coming up with an investment strategy, you may be torn between investing in the S&P 500 Index or with a total U.S. stock market fund.
While the S&P 500 Index is limited to about 500 of the top companies, the total U.S. stock market fund is a mix of all publicly traded companies, regardless of size. They include large-cap stocks and small and mid-size caps that aren’t included in the S&P 500.
The returns of each index have been fairly similar.
But total market funds can be more expensive, and are less readily available, than funds that track the S&P 500 Index.
Ways to Invests in the S&P 500
There are two main ways to invest in the S&P 500 Index:
- mutual funds
When looking at funds, pay attention to the fund’s weight.
With equal weight investing, every stock in the portfolio is weighted equally, regardless of how small or large it is.
It’s very different than traditional cap-weighting investing, where each stock is weighted based on its market capitalization.
What is a mutual fund?
Investing in a mutual fund is a strategy where you pool your money together with other investors to buy a batch of stocks, bonds, and other securities.
The value of the mutual fund — called its net asset value — is based on the total value of the different securities that are in the fund, divided by the number of the fund’s outstanding shares.
Mutual funds allow you to instantly diversify your portfolio. And, you can set up automatic investments, so it can be a very passive way to save for your retirement.
If you’re looking for mutual funds that track to the S&P 500 Index, the following are popular options:
- Fidelity 500 Index Fund (FXAIX): 80% of the stocks that make up the Fidelity 500 Index Fund are assets in the index, giving you the same exposure and risk profile as the S&P 500 Index.
- Vanguard 500 Index Investor Share Class (VFINX): In this fund, investments are spread across all 500 companies with the same weight as the index.
Like mutual funds, ETFs allow you to invest in dozens or even hundreds of different securities. However, ETFs tend to have a lower investment minimum than mutual funds, allowing you to start investing earlier.
Two popular options are:
- Vanguard S&P 500 ETF (VOO): The returns of this ETF follow the S&P 500 Index closely.
- iShares Core S&P 500 ETF (IVV): These ETFs tracked the benchmark of the S&P 500 Index.
Steps to Invest in the S&P 500
If you want to start investing, you can get started in just three easy steps.
1. Identify target S&P 500 investment
Think about whether you want to invest in a mutual fund or ETF.
Once you’ve decided which makes the most sense for you, you can look at top-performing funds that track the S&P 500 Index’s performance.
2. Open a brokerage account or IRA
If you have an IRA, you can invest in mutual funds and ETFs that track the S&P 500 Index’s performance through your account. If you don’t have one already, you’ll have to open a new brokerage account to get started.
When looking for a brokerage company, consider factors like the minimum required investments, fees, and types of funds offered.
If you want to be a hands-off investor, consider a robo-advisor.
Robo-advisors will invest and allocate your money appropriately based on your risk tolerance and goals, automating the investment process for you.
3. Buy shares of mutual funds or ETFs
Once you’ve opened an account, you can buy shares of mutual funds or ETFs.
Consider the key differences between mutual funds and ETFs.
Mutual funds only trade once per day, after the market closes at 4:00 p.m. ET. If you place an order after the market closes, the order will be completed the next day after the market closes.
Because of that delay, the price may be higher or lower than the previous day’s rate.
ETFs trade much like stocks so they may be fitting for a more active investor. Like mutual funds, you invest in a basket of securities.
However, you can complete trades throughout the day, rather than waiting until after the market closes. ETFs also offer more flexibility when it comes to pricing, offering the following options:
- Market order: With this approach, you buy or sell a security immediately. It guarantees when the security will be sold, but cannot guarantee the price you’ll receive.
- Limit order: Under a limit order, you agree to buy or sell a security when it reaches a specific price or better.
- Stop order: Once the price of the security reaches a certain point — known as the stop point — the stock is bought or sold.
- Buy stop order: With a buy stop order, the order is entered at a stop price that is above the market price. This strategy is used to limit losses.
Investing in an S&P 500 Index mutual fund or exchange-traded funds can be a smart way to diversify your portfolio and take advantage of its returns.
Even if you’re a novice investor who wants to be hands-off, investing in an S&P 500 fund will allow you to enjoy its performance and annual returns.