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.

How to invest in the S&P 500

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.

Risks and rewards

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.

Potential rewards of investing in the S&P 500

Investors in an S&P 500 index fund can gain several immediate advantages.

• They diversify their portfolios with a single, low-cost security.
• Rather than betting on a specific stock or industry, an individual instead owns “the market.” This strategy limits losses from exposure to a single company or industry.
• S&P 500 index funds have been a good investment over the long term, with annual returns of about 10% before inflation.
• Fees to own index funds are generally lower than other fund types.

Potential risks of investing in the S&P 500

S&P 500 index funds do come with risks.

• Although the index covers 500 big companies, the top 10—Microsoft, Apple, Amazon, and Tesla, among others—account for about 30% of the index’s value. These companies have performed well in recent years. But if they crash, the index will suffer proportionately.
• Investors give up control when they buy an S&P 500 index fund. Individuals can’t add or remove companies they may like or dislike. The components remain static unless index administrators change them during their quarterly reviews. During a downturn, investors can only ride out the decline or sell the fund.
• Investing in the S&P 500 eliminates exposure to mid-cap, small, and emerging companies that may be strong performers.
  

Mutual funds vs. exchange-traded funds

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.

• ETFs can be bought and sold throughout the trading day like stocks, whereas mutual funds are priced and trade once per day.
• Mutual funds generally charge higher management fees than ETFs and may require higher minimum investments or account balances. Both ETFs and mutual funds may be subject to brokerage trading commissions, but with mutual funds the brokerage commission is often hidden in the load fee, which can be bigger.
• Mutual funds and ETFs are subject to taxes on capital gains and dividend income. However, the structure of ETFs generally creates fewer taxable events.

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.

Where to buy S&P 500 index funds

Investors who understand fees and the services they cover have a leg up when deciding where to buy an S&P 500 index fund.

• Discount and online brokerages.

  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.

• Full-service brokerages.

  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.

• Investment companies.

  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.

• Financial advisors.

  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.

• Robo-advisors.

  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.

Buying an index fund

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:

1. Determine the trading symbol of the fund.
2. Access their brokerage account to ensure there’s enough money to cover the purchase, or fund the account.
3. Set up the purchase on the seller’s website, supplying the ticker and the dollar or share amount.
   

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.

Top 10 S&P 500 companies

The following shows the 10 biggest S&P 500 companies based on market capitalization as of December 10, 2021:

1. Apple
   2. Microsoft
   3. Alphabet (Google)
   4. Amazon.com
   5. Tesla
   6. Meta Platforms (Facebook)
   7. NVIDIA
   8. Berkshire Hathaway
   9. JPMorgan Chase
   10. Visa

The bottom line

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.