The S&P 5002 is a stock market index that tracks about 500 of the largest publicly traded companies in the US. While you can’t directly invest in any index, we use “how to invest in the S&P 500” in this article to discuss investment options that seek to track the index’s performance. If you’re wondering how to invest in the S&P 500 companies, here’s what you should know.
What is the S&P 500®?
The S&P 500 (aka the Standard & Poor’s 500 index) is a collection of about 500 of the largest publicly traded companies in the US. To be included, a company must meet a set of criteria including that their market capitalization—or the number of shares multiplied by the share price—must be over a certain amount. While it isn’t possible to buy this stock market index directly, you could invest in an index fund that seeks to replicate the index’s performance. It’s also possible to buy each of the individual component stocks; however, this can require a lot more upfront work and maintenance to keep your portfolio’s balance in sync with the S&P 500 over time.
How to invest in the S&P 500 companies
If you’re interested in investing in the companies that make up the S&P 500, here are the steps you could take:
1. Choose a financial institution
If you’re not already working with a brokerage firm, ask these 5 questions to help choose a broker.
2. Choose and open an investment account
Before you can make a trade, you need an account. Here are some of your choices.
- A taxable brokerage account, which has no penalties on withdrawals or restrictions on contributions
- A retirement account with tax benefits, like a traditional IRA or 401(k), for example
- A health savings account (HSA), which offers tax benefits for those who have a high-deductible health plan (HDHP) and want to invest for future expenses
- A custodial account if you’d like to get your child started with investing
If you don’t already have one of these accounts, follow your institution’s instructions for opening one. Then be sure to fund it so you have money for buying investments. For instance, you could link your bank account to the investing account and transfer cash in.
3. Decide how you want to invest
There are a variety of ways that you can invest in the S&P 500 companies, including:
- Funds
Mutual funds and exchange-traded funds (ETFs) are baskets of investments you can buy at once, potentially offering exposure to a number of stocks or other investments and helping to diversify your portfolio. Mutual funds are bought and sold at their 4 p.m. ET price, or net asset value (NAV). You can also trade ETFs throughout the day, but their prices will fluctuate based on market activity. In exchange for a fund manager managing the fund, mutual funds and ETFs charge fees. Index funds designed to match the performance of the S&P 500, rather than aim to outperform it, could be lower-cost than a fund that’s actively managed in an effort to beat market benchmarks.
- Direct indexing product
Instead of buying a pre-made basket like a mutual fund or ETF, a direct indexing provider will go to the market and buy all the individual stocks for you to hold in your own personal account. So instead of owning shares of a mutual fund or ETF that tracks the S&P 500, you directly own shares of the 500 stocks in your own account. A direct indexing service will do the work for you to automatically rebalance the account, trade, and track the S&P 500 index or index of your choosing over time. Direct indexing providers will typically charge a management fee to manage the account for you.
- Individual stocks
If you’d like to mimic the S&P 500 index performance on your own, you could buy individual stocks in amounts equal to their weighting in the S&P 500—because companies with larger market capitalizations (like Apple or Microsoft) have a greater influence on the index’s performance. Given the relatively low costs to invest in an S&P 500 index managed product, this approach is generally not recommended since it also takes a lot of work to implement and manage.
4. Buy your S&P 500 investments
Once you’ve decided how to invest in an S&P 500 product, you’ll need to place those trades.
Potential advantages of investing in the S&P 500 companies
S&P 500 returns have been relatively strong over time
Over the last century, the S&P 500 has had average annualized returns of about 10%.1 Of course, returns have varied by year and historical returns are no guarantee of future performance.
Investing in the S&P 500 companies could be easy
With S&P 500 index mutual funds, ETFs, and direct indexing products, you can create a large portfolio of hundreds of stocks with a single purchase.
It can provide diversification
Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. The S&P 500 is spread across different sectors and industries, so investing in all these companies can be a way to diversify with this asset class. This could help protect your investment mix because you don’t have all your money in one sector or individual stocks. But keep in mind that, even though investing in the S&P 500 diversifies the stocks within your portfolio, it doesn’t diversify across asset classes.
There are generally lower fees to invest
Index funds tracking the S&P 500 typically have lower fees than some other funds, such as actively managed funds. With index funds, a fund manager seeks to simply replicate an existing index whereas they must build a basket of stocks from scratch and routinely rebalance actively managed funds.
What to watch for with investing in the S&P 500 companies
It involves risk
The stock market can be volatile, meaning it can go up and down dramatically over periods of time. That means you could face considerable losses in the short term, even with S&P 500 stocks. During the 2022 bear market, for instance, the S&P 500 fell almost 20%.3 Make sure you only invest what you can afford to lose and you have money elsewhere for your needs and emergency savings.
It only includes large companies
Since the S&P 500 only focuses on large-cap companies, it excludes small and medium-sized companies that could have greater growth potential. It also doesn’t include foreign stocks, bonds, and other asset classes.
It comes with fees for mutual funds, ETFs, and direct index providers
Index funds are usually cost-effective compared to actively managed funds, but they still take a small cut of your investment money. If you buy individual stocks instead, keep in mind that they may also charge trading fees.