Table of Contents
How to invest in the S&P 500
Risks and rewards
Mutual funds vs. exchange-traded funds
Where to buy S&P 500 index funds
Buying an index fund
Top 10 S&P 500 companies
The bottom line
Jun 21, 2022
6 min read
Investors can’t buy a piece of the S&P 500 itself. Rather, they can buy shares of index funds that track the S&P 500 index, which is made up of individual companies.
The Standard & Poor’s 500 Index measures the share performance of 500 of the largest US companies. It’s one of the most widely quoted stock market indexes, representing about 80% of the total value of US equities. Because of its size and scope, investors often view the S&P 500 as a proxy for the overall stock market.
The S&P 500 is an index made up of individual companies. As such, investors can’t buy a piece of the S&P 500 itself. Rather, they can buy shares of index funds that track the S&P 500 index. These funds mirror the constituents of the index, their weightings, and their price movements. The fund’s value reflects the aggregate performance of its members—for better or worse.
S&P 500 index funds are widely available. Investment firms, brokerages, financial advisors, and even some banks offer them. Whoever the seller is, S&P index funds have one defining characteristic: By design, they all mirror the makeup of the S&P 500 Index.
While past performance isn’t a guarantee of future returns, the S&P 500 has a strong track record of delivering gains over the long term.
Investors in an S&P 500 index fund can gain several immediate advantages.
S&P 500 index funds do come with risks.
Investors can choose between two types of funds that mirror the makeup of the S&P 500 Index—mutual funds and exchange-traded funds (ETFs). Both are passive vehicles, meaning a manager does not pick the stocks as they would in an actively managed fund.
Mutual funds and ETFs have several key differences.
In general, ETFs have lower expense ratios, which show how much a manager charges relative to the assets in the fund. But fees for a passively managed index mutual fund should be quite low as well.
Investors who understand fees and the services they cover have a leg up when deciding where to buy an S&P 500 index fund.
These firms allow individuals to buy and trade for low fees. Most operate through online platforms and may charge nothing to trade a stock or ETF. They generally don’t offer investment advice.
These brokers provide professional advice on buying and trading. Advisors answer client questions and assist in financial planning. They often charge fees based on an individual’s invested assets and may require higher account minimums.
These firms manage, sell, and market funds. They typically offer investment services for a fee. They often brand and sell their own products and may also sell those of competitors.
These professionals provide personal advice, often one-on-one, for a fee. Financial advisors may sell products from a specific company and steer clients in that direction. They may also act as brokers.
These new investment firms act like traditional advisors in managing money, directing investment selections, and providing financial services. Robo-advisors rely on algorithms, trading apps, and other non-human communication. Most charge an annual fee based on a client’s account balance.
Since all S&P 500 index funds mirror the index itself and should deliver the same returns, the choice of where to buy usually comes down to fees and service.
Once an investor has weighed the risks and rewards, decided between a mutual fund and an ETF, and chosen a company that sells S&P 500 index funds, the next step is setting up a brokerage account. These act like a bank account for investment assets.
Most brokerage firms, financial institutions, and many banks offer online brokerage accounts. They take about 15 minutes to set up and some require no initial deposit. A person transfers money into the account from a bank, another brokerage account, or a check.
People who seek more guidance may opt for a managed brokerage account from a human or robo investment advisor.
To buy, investors should follow these three simple steps:
Investors can use any of a number of different types of orders to buy a fund. Market orders mean the purchase is made at the current best price. Limit orders let the investor set a range within which to make a purchase or sale. Stop orders let investors put ceilings on how much they pay.
Some brokers allow investors to make recurring purchases on a schedule—an automated way to work toward investing goals.
The following shows the 10 biggest S&P 500 companies based on market capitalization as of December 10, 2021:
Investing in S&P 500 index funds removes the guesswork of choosing individual stocks. Instead, investors own the market. These funds have performed well over long periods, but have suffered sharp declines during times of stress.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
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Does the S&P 500 Pay Dividends?
The S&P 500 Index tracks 500 of the largest companies that trade on major US stock exchanges. More than 80% of these companies pay dividends.
What Is the S&P 500 & How Does It Work?
The S&P 500, short for the Standard & Poor’s 500 Index, is a stock market index that consists of 500 of the largest publicly traded companies operating in the U.S.
Is the S&P 500 a Good Investment?
The S&P 500 is typically regarded as the benchmark for US equities and has produced average annual returns of about 10%, or a bit more than 7%, adjusted for inflation.
What Companies Are in the S&P 500?
Companies are invited to join the S&P 500 based on their market capitalizations and other criteria that indicate their financial stability.
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