The S&P 500 is a go-to stock market index for so many different investors. But do note that this index is not exactly an investment by itself. It is only a collection of businesses that are somewhat related to one another or just grouped together for strategic purposes. You may not be able to directly invest like the S&P 500 or others, but you can still invest in ETFs, short for exchange-traded funds, or index funds, both of which simply track that index.
What Investing in the S&P 500 Means?
The S&P 500 comprises about 500 major public U.S. businesses. It is typically considered to be a proxy indicating how healthy the U.S. stock market is. Contrary to what people generally believe, the stocks that make up that index aren’t necessarily the 500 biggest companies in the United States, but they are a few of the most important ones. Moreover, these stocks form around 80% of the US stock market’s entire value.
Stocks inside the S&P 500 are weighed in terms of market capitalization, or the total market value, i.e., every outstanding share multiplied by current market prices. The bigger the firm, the larger the influence on that index. As businesses grow or fall in size, they will either enter or leave that S&P 500 index. To give you an idea of what firms look like in this index, you have the likes of Amazon, Apple, Facebook, Microsoft, Visa, Google, and other big names.
The Simplest Method of Investing in the S&P 500
The easiest way one could invest in this index would be to look into an S&P 500 ETF or index fund. By tracking it, such funds seek to replicate the S&P 500’s returns, providing investors with that exposure to firms within the index without exercising the effort that would be involved in buying each firm’s individual stock.
To buy the S&P 500 ETFs or index funds, though, you will have to first create a brokerage account. After that, you may use the funds you deposit within that account to then purchase the relevant S&P 500 funds or stocks, which will be stored inside that account then.
Investing within S&P 500 funds may help diversify one’s portfolio, as they’re typically regarded as less risky than directly buying individual stocks. Since those S&P 500 ETFs or index funds can track the S&P 500 performance, it means that when the index performs well, the same will be true for your investment as well. The opposite will also be true, obviously.
How to Invest in an S&P 500 Index Fund
Index funds tracking the S&P 500 usually own all or most of the stocks within the benchmark index, which means they could closely mimic the index’s performance. They then sell that fund’s shares so investors may buy exposure to their many constituent investments.
There are quite a few S&P 500 index funds, so below is the criteria you may want to use to choose the right one.
Expense Ratio
Index funds are managed passively. This means that fund managers just purchase and sell stocks to make the asset allocation of the fund consistent with the benchmark. There won’t be any intensive trading or research on your end, which keeps expense ratios, namely fund upkeep fees, generally low. Since every S&P 500 index fund performs similarly, try picking a fund with as low an expense ratio as possible.
Minimum Investment
Index funds possess different investment minimums, no matter what accounts you buy them from, taxable or tax-advantaged. As you assess various S&P 500 index funds, ensure that the minimum purchase amounts are identical to what you plan on investing. Once you hop on that initial hurdle, you’ll be able to purchase fractional shares within whatever dollar amounts you plan to.
Dividends
Dividends are among the most attractive perks of investing that come with the S&P 500. You’d want to compare the dividend yields that the various S&P 500 index funds provide since they can boost returns, even within down markets.
Inception Date
It’s also worth noting the inception date of the index fund. Those with longer histories will undoubtedly have more data, showing you how they’ve weathered bull and bear markets.
How to Invest in an S&P 500 ETF
Like index funds, ETFs are managed passively, and they seek to match the performance of market indexes such as the S&P 500. Managers buy baskets of securities to duplicate benchmarks’ holdings to then sell the shares.
But here’s the difference: shares issued by ETFs exchange similarly to stocks, with values fluctuating throughout. Whereas index fund shares trade once each day, when markets close at the day’s end. For conventional buy-and-hold investors, though, that may be negligible.
However, like with index funds, have some criteria in mind with which to select your ETFs.
Expense Ratio
Like with the index funds, you should pick lower expense ratios since most of them tend to have the same performance.
Liquidity
Buy-and-hold investors don’t have to worry a lot about ETF liquidity. However, if they’re active investors trading within taxable brokerage accounts, it should be worth seeing how liquidity may impact strategies. Funds with greater average trading volumes will naturally be more liquid, with the opposite for ones with less trading volumes.
Inception Date
The older those ETFs are, the more economic cycles they’ve experienced. And the more the cycles, the more the confidence that you could have in their long-term sustainability.
Dividends
Like index funds, S&P 500 ETF dividend yields represent the percentage the firms within that benchmark index annually pay out in dividends for every dollar invested. When selecting an S&P 500 ETF, make sure those dividend yields are at least matching the best S&P 500 ETFs or are even more than them.
Conclusion
With the S&P 500, you can expose yourself to the top 500 companies in the U.S., and that too at a much lower cost than if you were to purchase stocks individually. Since failing firms have their shares automatically sold off and emerging firms have theirs bought, they can be a good hands-off approach if you’re into buying and holding your investments.
