How to Invest in the S&P 500

If you’re new to investing or just want a portfolio built around a diversified, core holding that covers most of the U.S. stock market, you don’t have to look any further than an S&P 500 index fund.

The S&P 500 index, short for Standard & Poor’s 500 index, is one of the most widely traded and talked about stock indexes in the world. At the end of 2023, investors had $2.9 trillion in assets in funds that track the S&P 500 index, making them the most popular equity investments on the U.S. market, according to Morningstar, a Chicago-based financial research firm.

• What is in the S&P 500?
• How to invest in the S&P 500
• Historical performance of the S&P 500
• Alternatives to the S&P 500 index

Investors who want broad exposure to the U.S. stock market can simply buy an index fund that invests in all of the stocks of the S&P 500 rather than buying hundreds of individual stocks, which would requite hundreds of thousands of dollars.

“An S&P 500 index is one of the best ways to invest in the broad stock market,” says Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices. “It’s a simple way for people to diversify.”

The Vanguard Group introduced the first S&P 500 index fund in 1975. Unlike actively managed funds which try to pick stocks that will outperform the market, the goal of an index fund is to match it—and to keep costs low.

Today, there are lots of different index funds you could buy (more on that later), however, S&P 500 funds “still have the throne,” says Morningstar analyst Ryan Jackson.

What is in the S&P 500?

The S&P 500 is an index of 500 publicly traded large U.S. companies and many believe it is the best gauge of U.S. stock market performance. How broad is the S&P 500? As of year-end 2023, its market value was $40 trillion, which is roughly equivalent to the combined economic output of the U.S., Japan, India and Germany.

To be added to the index, a company’s shares must have a minimum market value of $16 billion, half of which must be publicly traded. The company must also have positive earnings over the past four quarters and its stock traded for at least one year.

Companies with larger market caps have a bigger share of the index. As a result, many of the companies in the index are household names. Consider the largest components by weight, as of February 2024.

How to invest in the S&P 500

The most people who invest in the S&P 500 do so through index funds, which are mutual funds or exchange-traded funds that aim to replicate the benchmark’s performance.

Most employer-sponsored retirement accounts—like 401(k)s or 403(b)s—offer at least one S&P 500 index fund. You can also purchase an S&P 500 index fund through a brokerage account and hold it either in an individual retirement account or a taxable account.

You’ll find S&P 500 index funds offered by different fund companies such as Vanguard and Fidelity. Since the composition of the funds are the same, the key when choosing between them is fees.

When you invest in a fund, you will pay a fee known as the “expense ratio.” The expense ratio, always expressed as an annual percentage, is the share of your invested assets that the fund manager uses to cover the cost of running the fund (including paying its own fee.)

The average asset-weighted fee for S&P 500 index funds is 0.05%, or 50 cents for every $1,000 invested, according to Morningstar. That’s low, seeing as in 2022, the average expense ratio for U.S. funds was 0.37%.

S&P 500 mutual funds vs. S&P 500 ETFs

Another thing to consider is whether you want to buy a traditional mutual fund or an exchange-traded fund, or ETF, which trades like a stock.

The two vehicles are very similar, but there are differences that investors should be aware of. For instance, mutual fund shares price at the end of the trading day; ETFs, throughout the day, making them a better fit for frequent traders.

ETFs are also more tax efficient because of the difference in the ways shares are added and retired. Mutual funds, on the other hand, must pay out any realized gains to shareholders on a pro rata basis at least once a year. For that reason, investors may want to avoid S&P 500 mutual funds in their taxable accounts and choose a comparable ETF instead.

This tax efficiency of ETFs isn’t needed if you own an S&P 500 index fund in a tax-deferred free account like a 401(k). If you have a 401(k), you are most likely using a mutual fund.

Historical performance of the S&P 500

The value of the S&P 500 has gone up over time, gaining an average of 10.2% annually since 1926, when S&P began tracking an index of stocks daily. However, like the broader stock market, the index can be volatile. In 2022, the index dropped 19.4% in value before snapping back 24% in 2023.

While 2022 was a poor-performing year for the S&P 500, it wasn’t its worst. That unlucky distinction belongs to 1931, during the Great Depression. The S&P Composite Index, an S&P 500 precursor with just 90 stocks, lost 47% of its value that year. Its best year was 1933, when the index surged 46% as the economy recovered.

In 2008, during the 2007-09 recession, the S&P 500 dropped 38.5% and didn’t return to its previous peak until 2013. Silverblatt says there is no clear pattern to the index’s declines and rebounds, or their durations. “Each situation is slightly different,” he says.

If you’re investing in the S&P 500 for the long term, chances are you’ll experience your fair share of bear markets—defined as a drop of 20% or more from the last market high. Just remember that they don’t last forever: Since 1946, the typical bear market has lasted around 10 months, according to an analysis by the research arm of LPL Financial. The median bull market—when the index rises 20% or more—on the other hand lasts around four years.

Alternatives to the S&P 500 index

There are other funds that invest in a swath of U.S. equities that investors might want to consider.

Total market funds

Although the S&P 500 is the most popular large-cap U.S. stock index, it has been running into tough competition from U.S. total market indexes, which also include midcap and small-cap stocks.

“While the S&P 500 is good, it captures only about 75% of the U.S. market and leaves out smaller companies that can do well over time. I’d prefer to use a total market fund,” says Charles Sachs, a financial planner and investment manager at Kaufman Rossin Wealth in Miami. The Vanguard Total Stock Market Index, for instance, is one of our top picks.

If you don’t want to buy shares of a total stock market index fund, you can augment your S&P 500 index fund holding with investments in midcap and small-cap index funds, including Buy Side’s best ETFs like the Pacer U.S. Small Cap Cash Cow 100.

Equal weight, value or ESG S&P 500 funds

Moreover, if you’re concerned about the heavy weighting of certain sectors in the S&P index you can invest instead in an equal weight S&P 500 index fund or add those shares to your portfolio.

Alternatively, you can buy an S&P 500 value fund, which represents stocks that are considered undervalued or an S&P 500 growth fund, which represents the fastest-growing companies in the S&P 500. Each will have roughly half the number of stocks as the S&P 500.

Another variation on the S&P 500 index theme incorporates ESG (environmental, social and governance) values while maintaining similar overall industry group weights as the S&P 500.

Other index funds

Other alternatives include funds that invest in the Dow Jones Industrial Average, a price-weighted index of the 30 of the most traded stocks on the New York Stock Exchange; the Nasdaq-100, made up of the largest and most actively traded nonfinancial companies listed on the Nasdaq; or the Russell 1000, representing the top 1,000 U.S. companies by market cap.

Mallika Mitra contributed reporting to this article.

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