If you’ve ever read anything about investing, you’ve probably heard the term diversification.
In fact, you’ve probably heard it a lot.
As you can guess, it’s a pretty important factor for investing. After all, diversification (aka, having different kinds of investments in your portfolio) is how you don’t get screwed when the stock market crashes or a real estate deal goes under.
Through the S&P 500, you’ll get instant diversification and have access to some of the best stocks in the market.
What is the S&P 500?
In the stock market, you’ll find an abundance of “indexes” — which are basically a fund that tracks a particular type of stock, sector, company, etc. So, in the case of the S&P 500, it follows the 500 largest publicly traded companies. Other well-known indexes are the Dow Jones Industrial Average and the NASDAQ.
While you tend to hear the Dow in the news a lot, the S&P 500 is actually a better indicator of the overall stock market’s performance. Since it has the 500 biggest companies, experts often use it as a baseline for comparing how individual stocks are performing “against the market.”
Many people don’t realize how small the NASDAQ and Dow Jones indexes really are. The NASDAQ is actually called the NASDAQ 100 — because it tracks only 100 companies (many of which are tech stocks). The Dow tracks only 30 companies.
S&P 500 companies ranking by weight
Below are some of the top companies in the S&P 500 and their corresponding portfolio weights. Note that this list is merely to give you a sense of the companies that dominate, especially since their portfolio weights will change daily. You can always look up a complete list of companies in the S&P 500 if you’re interested.
- Apple Inc. (AAPL) – 7.2%
- Microsoft Corp. (MSFT) – 5.8%
- Amazon.com Inc. (AMZN) – 3.3%
- Tesla Inc (TSLA) – 2.5%
- Alphabet Inc. Class A Shares (GOOGL) – 1.9%
- Alphabet Inc. Class C Shares (GOOG) – 1.7%
- Berkshire Hathaway Inc. (BRK.B) – 1.6%
- UnitedHealth Group Incorporated (UNH) – 1.5%
- Johnson & Johnson (JNJ) – 1.4%
- Exxon Mobile Corp. (XOM) – 1.2%
As you can see, you’ll get access to some pretty popular companies. Remember, though, there are 490 other companies in the index, so you’re well-diversified off the bat, and may not need to invest in individual stocks (more on this below).
How do you invest in the S&P 500?
You can’t invest in the S&P 500 itself, but you can invest in an S&P 500 fund (index fund, ETF, mutual fund, etc.) that tracks the S&P 500.
Meaning, you’d essentially hold the stock of every single company within the S&P 500.
This way, you don’t have to limit yourself to purchasing a handful of S&P 500 stocks (or 500+ stocks, which I can’t even imagine) and instead have one investment.
The most common ways to invest in the S&P 500 are index funds and ETFs — both of these will mirror the S&P 500 index.
Index funds and ETFs are similar, but there are minor differences.
S&P 500 ETFs
Index funds tend to have a higher “buy-in” and many times a lower expense ratio.
They also trade like a mutual fund, meaning you can only buy and sell them at the end of the trading day.
Read more: How to invest in index funds
S&P 500 ETFs
On the other hand, ETFs trade like stocks, and there’s no minimum investment (except for the price of the stock itself). You can buy and sell shares throughout the day.
In some cases, ETFs will have higher expense ratios.
Read more: How to invest in ETFs
So, which should you choose?
Honestly, it comes down to two things:
- Your preferences
- Where your investments are located
For example, if you have a 401(k), odds are you can’t pick an index fund. But there’s a good chance there’s an S&P 500 ETF.
Beyond that, you have to know your preferences. Some people prefer index funds since they’re super cheap, and you can set it and forget it. ETFs move up and down in price faster since they trade like stocks, so you’ll need to treat them like one.
Either way, you’re getting exposure to the S&P 500 with both of these types of investments, so it doesn’t matter what you decide.
How do I buy an S&P 500 index fund or ETF?
Investing in the S&P 500 through an index fund or ETF is incredibly simple. In fact, many financial experts have advocated for this being the primary (if not only) investment that you need.
Here is how you invest in the S&P 500:
Step 1: Find the index fund or ETF that works for you
Finding an ETF or index fund that mirrors the S&P 500 is really simple. Since all S&P 500 funds are going to hold the same stocks with the same weights, you should look at:
- The cost
- The investment firm
For instance, if you’re looking for an S&P 500 fund in your 401(k), you’ll be narrowed to the available options. Otherwise, you can pick a brokerage that works for you and has the fund family (such as iShares) you want to invest in.
In most cases, the fund family doesn’t really matter. For example, the difference between a Fidelity, iShares, Vanguard, or Blackrock S&P 500 fund may be non-existent. So it just comes down to what’s cheapest and what’s available to you. (Note that many people have an affinity for Vanguard, but you don’t need to).
The one thing you will need to look closely at is the expense ratio. The expense ratio is the percentage you pay back to the investment brokerage for managing that particular fund. For example, Vanguard’s VFIAX has an expense ratio of 0.04% — which is absurdly cheap. That means for every $100,000 you have invested, you’ll pay a measly $40 in expenses.
You can even find free index funds now, or just have it rolled into the total cost of management from your robo-advisor. There are many options available to you, so it’s best not to waste a ton of time here. Just pick one that mirrors the S&P 500 and has a low expense ratio.
Step 2: Find a good brokerage
Steps one and two can be reversed since some brokerages don’t offer certain funds. But in most cases, you’ll find what you’re looking for (even if it’s an ETF version of an index fund, like Vanguard tends to do).
So the next step is to find a brokerage — and again, you’ll want to focus on cost. However, depending on your future goals, you want to balance the cost and tools/resources available.
Most online brokers now are ridiculously easy to get started with and take only a few minutes to open online, fund, and start trading.
Read more: Best online brokerage accounts for beginners
Step 3: Determine your investment amount
Now that you’ve picked an online brokerage account and know the fund you want to buy, you need to figure out how much you’re comfortable investing.
This is a personal decision, but I can tell you that investing even small amounts early on, stretched out over a long period, leads to a high probability of wealth in the future (smart investing is all about long-term wealth management!)
It’s really the power of compounding. So whatever you decide, don’t overthink it — it’s better to start off with something versus getting analysis paralysis and holding off on your investment.
Read more: The power of compound interest
Step 4: Search for your fund
Next, do a search with your broker to find the fund you want. There’s usually a search box somewhere on the platform that’s easily accessible. Punch in the ticker (such as VOO, for instance), and it’ll bring you to a screen that shows the fund, and its performance, among other data.
Step 5: Decide on the number of shares you want
From there, you’ll set how many shares you want to buy. Note that if you’re buying an index fund, chances are there’s going to be a minimum investment amount. If you don’t meet that minimum, you’ll need to buy the ETF version or find a different class of that investment (which usually has a lower buy-in but a slightly higher expense ratio).
Step 6: Submit your trade
From there, submit your trade, and you’ll be the proud owner of some S&P 500 index fund or ETF shares. Or a better way of looking at it, you now own a slice of the 500 biggest companies that are publicly traded in the United States.
Now that you’ve made your initial investment don’t stop. Set up recurring contributions to invest in that fund as often as you possibly can. Some brokers will allow you to buy partial shares too, which enables you to put more of your money into the fund and do dollar-cost averaging. Either way — keep those contributions going so your money can start compounding.
Which S&P 500 funds should I invest in?
Below are a few funds to check out that’ll get you started:
- The SPDR S&P 500 ETF (SPY) — This is actually the oldest ETF in the United States as it was initially made available in 1993. It’s also the largest ETF, with more than $350 billion in total assets. The expense ratio is 0.09%.
- Fidelity 500 Index Fund (FXAIX) — This is an excellent index fund (it’s actually a mutual fund) because the expense ratio is only 0.015% — one of the cheapest available. It’s also been around since 1988 and is managed by Fidelity, one of the biggest investment firms out there.
- State Street S&P 500 Index Fund Class N (SVSPX) — This fund has a minimum investment of $1,000 and an expense ratio of 0.18%. However, it has shown strong performance since its inception in 1992.
- iShares Core S&P 500 ETF (IVV) — This is biased, but this is my favorite of the bunch. IVV has been around for a while and is very cheap (0.03% expense ratio). It’s offered through many online brokerage accounts and robo-advisors.
Investing in an S&P 500 ETF or index fund is one of the most sound investments you can make. You’ll get low-cost, instant diversification in your portfolio. It also doesn’t hurt that Warren Buffett himself has recommended these funds.
Finding a fund, setting up an online brokerage, and buying your first handful of shares is simple and requires little to no research. Then, ideally, you can set up a recurring investment, and sit back and relax, enjoying the long-term gains we expect to see from the S&P 500 with time.