How to Invest in the S&P 500

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Whether you are an active investor or just starting out, you’ve probably heard of the S&P 500. But what exactly is it?

While the S&P 500 isn’t actually an investment itself, it is an index that tracks the performance of 500 major companies. You can invest in these companies through mutual funds and index funds.

If you are thinking about investing in the S&P 500, we’ll cover how to do so and whether or not you should add it to your portfolio.

What is the S&P 500?

The S&P 500, short for Standard & Poor’s 500, is a stock market index that includes 500 of the largest publicly traded corporations in the country. 

The index is considered one of the best gauges of the stock market’s performance overall and, more specifically, of large-cap equities.

In fact, Warren Buffet has famously said that buying and holding an S&P 500 fund is the best investment strategy for most people.

To be included in the index, companies must be based in the United States, have an unadjusted market capitalization of $13.1 billion or more and meet a handful of other requirements. 

The top companies in the index by weight are:

  • Apple Inc.
  • Microsoft Corp
  • Amazon.com Inc
  • Facebook Inc
  • Alphabet Inc (Google)
  • Tesla, Inc
  • Berkshire Hathaway
  • Nvidia Corp
  • JP Morgan Chase & Co

How to Start Investing in the S&P 500

As the most prominent stock market index around, the S&P 500 can make an excellent addition to many people’s investment portfolios. Here’s how you can invest in the S&P 500 today.

1. Get a Brokerage Account

Before you can invest in any stock market index, you’ll first have to open a brokerage account. 

When it comes to the type of account you choose, there are generally two options you can select from. 

These options include:

  • A tax-advantaged retirement account like a 401(k) or an IRA
  • A taxable brokerage account

In addition to selecting a brokerage account, you can also choose the type of broker you’ll use. Online brokerage firms like Vanguard, Charles Schwab and Fidelity are popular options. 

But, with the rise in investing services and apps, there are more brokers to choose from. 

As you consider which brokerage firm to open an account with, it’s worth doing your research into which fund you want to invest in. 

Some brokers with their own S&P 500 funds may offer them exclusively to their brokerage customers or charge higher fees to investors from different brokerage firms.

2. Pick Between ETFs and Mutual Funds

The two simplest ways to invest in the S&P 500 are mutual funds and exchange-traded funds (ETFs). The two are very similar in that they passively track the performance of the underlying index. 

However, there are some important differences worth evaluating.

Mutual Funds

Mutual funds are pooled investments that allow investors to spread their money across multiple investments at the same time. 

While many mutual funds are actively managed, S&P 500 mutual funds are typically index funds. These are a type of mutual fund that passively tracks a particular index.

Depending on the brokerage firm, mutual funds might have a higher minimum investment requirement. For example, Vanguard’s S&P 500 index fund requires a minimum investment of $3,000. 

An important feature of mutual funds is that orders are settled at the close of the trading day at the fund’s closing price.

Exchange-Traded Funds

An exchange-traded fund (ETF), like a mutual fund, is a pooled investment that makes it easy for you to diversify your portfolio through a single investment. 

ETFs can be either actively or passively managed. In the case of S&P 500 ETFs, they are actively managed.

An important difference between ETFs and mutual funds is that ETFs trade through the day like stocks. This is quite different from mutual funds, where trades are settled at the close of the trading day.

ETFs also often have lower investment minimums and can be traded commission-free. The expense ratios of S&P 500 ETFs are often comparable to those of S&P 500 mutual funds.

Choosing the Right Option

For most investors, the difference between mutual funds and ETFs is minimal, and either would be suitable investments. But there are a couple of considerations to help you decide between the two. 

Investors who prefer to trade throughout the day or who don’t want to be subject to investment minimums might prefer an ETF. 

Alternately, a mutual fund is likely a better option for investors who want to set up automatic investments to their S&P 500 fund.

3. Select One of the S&P 500 Funds

Once you’ve decided between mutual funds and ETFs, it’s time to choose the specific fund you want to invest in. 

You might be wondering why it matters which fund you choose. After all, aren’t they all tracking the same S&P 500 index? 

Yes, but there are likely to be a few differences.

For example, each fund will have its own expense ratio. Most will be 0.05% or less, but some hover closer to 0.10%. 

While this is not a considerable difference when you compare those costs to actively managed funds, it’s still worth considering how those fees will affect your profits.

The other factor to look at is the annual returns. Even though each fund tracks the same index, the returns from one to the next can differ by a few fractions of a percent.

Some of the top S&P 500 mutual funds include:

  • Fidelity 500 Index Fund: No minimum, 0.015% expense ratio
  • Schwab S&P 500 Index Fund: No minimum, 0.02% expense ratio
  • Vanguard 500 Index Fund Admiral Shares: $3,000 minimum, 0.04% expense ratio

Some of the top S&P 500 ETFs, which each have an expense ratio of 0.03%, include:

  • Vanguard S&P 500 ETF (VOO)
  • SPDR Portfolio S&P 500 ETF (SPY)
  • iShares Core S&P 500 ETF (IVV)

4. Enter and Complete Your Trade

Once you have set up your brokerage account and chosen which fund to invest in, there’s nothing left to do but complete your trade. This process isn’t too difficult. 

No matter which type of fund you choose, go into your brokerage account and look for a button labeled “Trade” or “Buy and sell.” 

From there, you’ll be prompted to enter the fund you want to purchase along with how much you want to buy. You can simply follow the instructions from your broker.

Depending on the type of fund you’re buying, your trade may be completed right away, at the end of the current trading day or on the next trading day if the day you’re initiating the trade is a weekend.

Once the trade is completed, you’re officially a fund owner.

Should You Invest in the S&P 500?

The S&P 500 has long been one of the most trusted benchmarks for U.S. stock market performance. 

Additionally, as passively managed investment funds have become increasingly popular, investing has become even more simple, accessible and affordable.

Deciding whether to invest in the S&P 500 or any other investment requires you to identify your investment goals, time horizon and risk tolerance.

It has long provided consistent returns. For long-term investors preparing for retirement, it’s often an obvious choice. 

But it also won’t be the right option for some people. Investors with a low risk tolerance and shorter time horizon might feel uneasy about the stock market’s volatility.

Furthermore, for investors with a higher risk tolerance who hope to beat the market, the S&P 500 might feel limiting. 

It can be an excellent addition to many investment portfolios. Whether it’s right for your portfolio is a question that only you (and your advisor, if you have one) can answer.

Pros and Cons

Here are some of the pros and cons of investing in the S&P 500.

Pros

  • Invest in many different stocks with one investment
  • Simple
  • Diversify your portfolio
  • Low costs
  • Performs consistently

Cons

  • Only large-cap stocks
  • Stock market can be volatile
  • No chance of beating the market

FAQs

Before investing in the S&P 500, don’t miss these answers to frequently asked questions.

Is investing in the S&P 500 safe?

While no investment is 100% safe, the S&P 500 is actually one of the safest equity investments available. Because of the number of companies and variety of sectors included, S&P 500 funds are well-diversified. 

Over the long term, it has produced positive returns.

How much does it cost to invest in the S&P 500?

Because S&P 500 funds are passively managed, they make for some of the most affordable investments. 

Many brokers don’t require a minimum investment. Better yet, the expense ratios on these funds are some of the lowest available, often less than 0.05%.

Is it worth it to invest in the S&P 500?

Whether the S&P 500 is a worthwhile investment for you ultimately depends on your investment goals. It can be an effective place to invest money for long-term returns, such as for your retirement account. 

But for short-term financial goals or investors with very high or very low risk tolerances, it might not be the preferred choice.

Summary

The S&P 500, an index made up of the largest U.S. companies, has consistently been one of the best benchmarks for the performance of the nation’s stock market. 

It has provided consistent returns over the decades, making it an excellent tool for long-term growth.

Luckily, there are two easy ways to invest in the index. Both S&P 500 mutual funds and ETFs provide simple diversification and low costs to your portfolio. 

Regardless of if you are an experienced or a beginning investor, it’s hard to go wrong with either option.