You’ve probably heard of the S&P 500 before – it’s a stock market index that tracks 500 of the largest publicly-traded stocks in the United States. With an S&P fund, you’ll have instant diversification and have access to some of the best stocks in the market.
And rather than picking a handful of these stocks that you think may perform well, why not own them all?
So in this article, I’m going to give you everything you need to know about investing in the S&P 500. By the end of the article, you should have a solid understanding of the S&P 500, how to invest in it (and why you should), and some of the best funds to get you started.
What is the S&P 500?
First, I want to unpack what the S&P 500 actually is. 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 actually 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.
So you can quickly see that more companies tracked gives a better overall view of total market performance. That’s not to say the Dow and NASDAQ aren’t worthwhile, but it does allude to why there are so many S&P 500 funds available.
S&P 500 companies ranking by weight
Below, I am going to list the top companies in the S&P 500. This is merely to give you a sense of the companies that dominate the top of the list. You can always look up a complete list of companies in the S&P 500 if you’re interested.
One thing to note is that some companies – such as Google (through their parent company, Alphabet) – have a variety of share classes. For instance, Alphabet Class A gives shareholders voting rights, while Class C doesn’t. Berkshire Hathaway does the same thing.
That said, here are the top companies in the S&P 500 and their corresponding portfolio weights:
- Microsoft Corp. (MSFT) – 6.0%.
- Apple Inc. (AAPL) – 5.8%.
- Amazon.com Inc. (AMZN) – 4.5%.
- Facebook Inc. (FB) – 2.1%.
- Alphabet Inc. Class A Shares (GOOGL) – 1.7%.
- Alphabet Inc. Class C Shares (GOOG) – 1.6%.
- Johnson & Johnson (JNJ) – 1.5%.
- Berkshire Hathaway Inc. (BRK.B) – 1.4%.
- Visa Inc. (V) – 1.3%.
- Procter & Gamble (PG) – 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).
So 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. Both index funds and ETFs are similar, but there are minor differences. Index funds will 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. 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.
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. The same goes for robo-advisors. My robo-advisor has IVV – which is an S&P 500 ETF, for example, but I can’t buy VTSAX – a Vanguard S&P 500 index fund.
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.
Mutual funds that track a specific index are rarer since they’re usually actively managed. What you’ll tend to see if you see an S&P 500 mutual fund is the same 500 companies but weighted much differently based on the fund managers’ preferences. I generally recommend sticking to index funds and ETFs.
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, such as JL Collins, 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 1) cost and 2) 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).
So the one thing you’ll 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 VTSAX 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.
While I don’t recommend S&P 500 mutual funds that are actively managed (since they’re more expensive and often don’t have the same composition or weights of an index fund), you should pay attention to the expense ratio, minimum buy-in, and sales load – which is a commission charged to you when you buy or sell shares of that fund (I personally think it’s a waste of money).
Thankfully, when you go for an ETF or index fund that tracks the S&P 500, it’ll be very cheap, and when comparing funds, you’ll be picking pennies (i.e., one fund may charge 0.08% instead of 0.04%). If you’re just starting out, I would focus on the lowest cost option available to you.
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. I’ll get more into this below.
Most online brokers now are ridiculously easy to get started with and take only a few minutes to open online, fund, and start trading. That said, there are a few brokers that I recommend for different types of investors.
The first is E*TRADE. E*TRADE is by far the best online brokerage you can use (in my humble opinion). They offer the most robust tools and resources for researching and analyzing stocks and ETFs. And recently, they’ve joined the rest of many online brokers and are offering no-commission stock and ETF trades.
That being said, E*TRADE is going to be overwhelming for new investors who don’t need all the bells and whistles. If you’re simply looking for ETFs, E*TRADE may be a bit overpowering and confusing to navigate. But if you plan on eventually picking individual stocks, it’s the best.
If you want to buy into big-name stocks like Google or Amazon, but you don’t have thousands to spend per share, Public can help. Public allows fractional investing, which means you can buy part of a share and add some of those high-dollar stocks to your portfolio.
But Public has a few other features that make it appealing. The easy-to-use interface helps you track down stocks and monitor the market. Public also offers a social feature that lets you connect with other investors to improve your strategy.
Finally, my third recommendation is Robinhood. Robinhood’s main offering is its app, which makes trading fast and easy. Yes, you can trade using your desktop via their web-based interface, but Robinhood is ideal for mobile traders. For example, you can research, pick, and buy a stock in a matter of seconds with just a few taps on the app.
The Robinhood news feed feature is also really useful. By giving you quick financial updates, it allows you to do research effectively in very little time. In turn, this makes buying a stock or ETF (which is free, by the way) fast and easy. You’re also able to listen to earnings calls, view analyst recommendations, and more with the Robinhood app. While this might seem overpowering for just buying an S&P 500 index fund, it should give you confidence that you’re selecting the right fund since you have access to so many features. Plus, if you decide you want to buy an individual stock later, you can do that too.Advertiser Disclosure – This advertisement contains information and materials provided by Robinhood Financial LLC and its affiliates (“Robinhood”) and MoneyUnder30, a third party not affiliated with Robinhood. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Securities offered through Robinhood Financial LLC and Robinhood Securities LLC, which are members of FINRA and SIPC. MoneyUnder30 is not a member of FINRA or SIPC.”
Step 3 – Determine your investment amount and invest
Now that you’ve picked an online brokerage 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.
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.
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 it’s performance, among other data.
With most brokers, there’s a pretty clear way to buy that fund – usually a “buy” button somewhere. For example, with the Robinhood app, there’s a big green button in the lower right corner of my screen that says “Buy” – it’s almost impossible to miss.
From there, you’ll set how many shares you want to buy. Note that if you’re buying an index fund like VTSAX (offered directly through Vanguard), 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).
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.
More advanced options
My recommendation is to pick a passive index fund and stick with it. But if you have an itch for more advanced investment options in the S&P 500, you can find them. Smart beta indexes are funds that manipulate the S&P 500 a bit.
One example is the S&P 500 Equal Weight Index Fund (RSP), which gives a higher weighting to smaller stocks within the S&P 500 to even it out. Or some funds lean heavier on dividend-paying stocks within the S&P 500. So you’re still getting exposure to the index, but it looks a bit different.
And I mentioned this earlier, but there are actively managed funds where a fund manager will manipulate the composition of the S&P 500 stocks in the fund to cater to their investment strategy. Expense ratios will be higher for these funds, and I’m not convinced they provide that much of an edge over a passive fund. So tread lightly and do your research before going down this path.
Which S&P 500 funds should I invest in?
Below are a few funds to check out that’ll get you started investing in the S&P 500.
- 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 close to $270 billion in total assets. The expense ratio is 0.09%.
- Vanguard 500 Index Investor Share Class (VFINX) – This is a mutual fund that mirrors the S&P 500 and its weights, almost identically. It’s actively managed, so the expense ratio is higher at 0.14%, but it’s worth a look if you want humans pulling the strings behind your fund.
- 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 $10,000 and an expense ratio of 0.16%. However, it has shown strong performance since its inception in 1992 (in 2019, it returned over 31%).
- 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 (0.04% expense ratio). It’s offered through many online brokerages 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.