How To Invest in the S&P 500

July 31, 2023

Invest in the S&P 500

The S&P 500 index tracks the largest companies in the United States. Its shares are held by the S&P Index Committee. This committee selects companies based on a number of factors, including market capitalization, industry allocation and liquidity. But what happens? What if you are looking to invest in the S&P 500? stock and no temperament to screen and analyze 500 companies? You may want to consider an S&P 500 index fund or an exchange-traded fund (ETF) to give you exposure to all of these stocks.

Vanguard has introduced individual investors to America’s first mutual fund in 1976. It was designed to mimic the S&P 500 index. The first ETF was introduced 17 years later by an AMEX subsidiary, allowing investors to get started track the index. Almost every major brokerage and fund today offers some type of S&P 500 fund. Investors may access these funds through financial advisors, full-service brokers, or discount brokers. If you need some guidance, we break down some of the basics of S&P 500 index investing through ETFs and mutual funds.

Key Takeways

  • The S&P 500 is an index that tracks 500 of the largest U.S. companies based on their market capitalization.
  • You can’t actually invest in the index but you can in an index fund or ETF.
  • An S&P 500 Index fund can help your portfolio gain broad exposure to the constituent stocks in the S&P 500 index.
  • Index mutual funds and ETFs maintain a strategy of passive index replication, affording investors broad access to all of the securities within the given index.
  • Many funds that track the S&P 500 generally have very low management fees.

What Is the S&P 500 Index?

The S&P 500 Index was launched in 1957 as the first U.S. market-cap-weighted equity index and is widely regarded as the best single gauge of large-cap U.S. equities. As the most influential equity index in the world, the index has trillions of dollars indexed or benchmarked to it.

The index is traditionally made up of 500 of the leading U.S. companies, although that number may fluctuate. The S&P 500 represents approximately 80% of available U.S. market capitalization. The median market cap of the stocks held in the index is $30.61 billion, with the highest being $3.05 trillion.

The companies in the index are mostly concentrated in the following three sectors as of March 31, 2023:

  • Information technology, the largest sector by weight in the S&P 500 index, at 28.3%.
  • Healthcare, the second-largest by weight, at 13.4%.
  • Financials, the third-largest at 12.4%.

Together, these three sectors account for more than 50% of the S&P 500, reflecting the dominance of technology in the U.S. economy. The other major sectors in the S&P 500 are Consumer discretionary (10.7%) and Industrials (8.5%).

The top five sectors together account for nearly 75% of the S&P 500. The other six sectors: Media Services, Consumer Goods, Energy, Utilities, Materials and Real Estate – combine to make up the rest.

Index ETFs vs Index Investments Mutual Funds:

You cannot invest directly in an index because it is simply a measure of the performance of the constituent securities. What you can do is invest in an index through ETFs and index funds that attempt to copy the performance of specific indices.

ETFs focus on passive copying of indices. number, giving investors access to all securities of a particular index. Thus, an S&P 500 ETF gives an investor access to all the stocks in that index. Index ETFs are generally inexpensive and trade throughout the day, just like stocks. As a result, they are highly liquid and subject to intraday price fluctuations.

S&P 500 index funds typically have slightly higher fees than ETFs due to higher operating costs. Also, because a mutual fund is structured slightly differently from an ETF, an investor can only buy the fund at the closing price for the day based on the fund’s net asset value (NAV).

The largest S&P 500 ETF is the SPDR S&P 500 ETF (SPY) from State Street Global Advisors, had assets under management (AUM) of $415.86 billion as of July 6, 2023. SPY was launched in January 1993 and was the first ETF listed in the United States. The Vanguard S&P 500 Index Fund is the first index mutual fund for individual investors. The Vanguard 500 Admiral Shares Index Fund (VFIAX) is one of the largest index funds, with total assets of $823.10 billion as of May 31, 2023.

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