Oct 13, 2022
How To Invest in the S&P 500: A Beginner’s Guide for 2023
|Investing in the S&P 500|
The S&P 500 is an index that tracks the 500 largest companies in the U.S. by market capitalization. You can’t directly invest in the index itself, but you can buy individual stocks of S&P 500 companies, or buy an S&P 500 index fund or ETF. The latter is ideal for beginner investors since they provide broad market exposure and diversification at a low cost.
The S&P 500 is an index that tracks the 500 leading companies by market capitalization in the U.S. While you can’t directly invest in the index itself, there are two broad options for investing in the S&P 500: through individual stocks or through a fund, such as an index fund or exchange-traded fund (ETF).
In this article, we’ll cover the following:
- What is the S&P 500?
- How to invest in the S&P 500: index ETFs vs. index mutual funds
- Investing in the S&P 500 with an index fund
- Investing in the S&P 500 with an ETF
- Pros and cons of investing in the S&P 500
- How to invest in the S&P 500: FAQs
Read on to learn how to invest in the S&P 500.
What is the S&P 500?
If the stock market is a giant jigsaw puzzle, you can think of an index as a magnifying glass. In the case of the S&P, the magnifying glass offers a closer look at the 500 biggest, most prominent pieces of the puzzle, giving you a clearer picture of the stock market as a whole.
A stock market index, then, is a measurement of a market. Specifically, an index is a tool (like a magnifying glass) used to examine what’s happening in a stock market. The S&P 500 is one of the most widely used proxies for the overall health of the stock market—the stocks forming the S&P 500 represent roughly 80% of the market’s available market capitalization.
The S&P 500 includes companies across the spectrum, from energy to health care. Here are the top 10 companies in the S&P 500 by index weight:
- Alphabet (class A)
- Alphabet (class C)
- Berkshire Hathaway Inc. (class B)
- UnitedHealth Group Inc.
- Johnson & Johnson
- ExxonMobil Corporation
Most of these companies fall into three main sectors: information technology (28% of the S&P), consumer discretionary (12%), and communication services (8.4%). These three sectors account for almost half of the S&P 500.
So, how do you invest in the S&P 500? For new investors, the best way is through an ETF or index fund. While there are some differences between the two that we’ll explain below, funds are a low-cost way to gain exposure to the S&P 500 and provide instant diversification to your portfolio.
|Investor tip: When learning how to invest in the S&P 500, we recommend buying a fund over hand-picking individual stocks. Here’s why: passively buying and holding an index can produce better results than individual stocks. |
A buy-and-hold strategy also minimizes the effects of market volatility and increases your odds of seeing the positive returns the market has historically provided—from 1950 to 2021, the S&P 500 has yielded an annualized average return of 11.53%.
How to invest in the S&P 500: index funds vs. ETFs
Since the S&P 500 is simply a measure of its underlying stocks’ performance, you can’t invest in it directly—instead, you can invest with an index fund or ETF that strives to match the performance of the market index.
An index fund is a basket of hundreds of stocks, securities, and other assets within a single fund. Instead of purchasing a single stock, funds give you exposure to all the different shares it contains, providing instant diversification for your portfolio.
ETFs and index funds both aim to mimic the performance of an index like the S&P 500, but there are a few differences between the two.
Investing in the S&P 500 with an index fund
Index funds that track the S&P 500 usually include most (if not all) of the stocks from the 500 companies comprising the S&P. This is so they can match the performance of the index as closely as possible.
There are many S&P 500 index funds to choose from, but the following criteria can help guide your selection:
- Minimum investment: index funds will have varying minimum investments, so be sure to check that the minimum amount aligns with how much you have to invest.
- Expense ratio: since index funds are passively managed, the expense ratio (the ongoing cost of holding the investment) tends to be low. Look for a fund with the lowest expense ratio.
- Dividend yield: if your index fund comes with dividends, which many do, be sure to compare the dividend yield (the amount investors are paid in dividends) of different funds you’re considering. Some may be higher than others, and capitalizing on dividends is a great way to boost returns.
Purchasing an S&P 500 index fund is a fairly simple process. Here’s how to do it:
- Open an investment account: you can sign up with a traditional brokerage like Fidelity or through a robo-advisor like Stash.
- Add funds: decide how much capital you’re able to invest and add the funds to your account.
- Choose and buy your index fund: once you’ve decided on an index fund, purchase it through your brokerage account.
If you don’t have a lot of capital to invest upfront, be sure to shop around for brokerage accounts that meet your needs and align with your budget—there are many available that offer low-fee trading options.
Investing in the S&P 500 with an ETF
Like index funds, ETFs allow investors to pool their money in a fund made up of stocks, bonds, and other assets. Unlike index funds, however, which can only be traded once a day at the end of each trading day, ETFs can be traded like a stock—meaning their share prices can fluctuate throughout the trading day.
There are different types of ETFs, and not all of them track a particular index. Some ETFs correspond to a particular sector, industry, or market. To invest in the S&P 500 with an ETF, you’d want to purchase an index-based ETF. The key factors to pay attention to aren’t much different from that of an index fund:
- Minimum investment: in many cases, ETFs will have a lower minimum investment than index funds—sometimes, you might only need to pay the amount of a single share to get started.
- Expense ratio: always compare expense ratios for ETFs you’re considering, and look for one with the lowest expense ratio possible.
- Dividend yield: compare the dividend yields of ETFs you’re considering, and ensure it’s as high as possible to boost your returns.
Follow these steps to buy an ETF:
- Open an investment account: you can sign up with a traditional brokerage or through a robo-advisor like Stash, where you’ll find many ETFs to choose from.
- Add funds: decide how much capital you’re able to invest and add the funds to your account.
- Choose and buy your ETF: once you’ve decided on an ETF, purchase it through your brokerage account. Be sure to use the key criteria listed earlier to compare expense ratios and dividend yields.
Pros and cons of investing in the S&P 500
Investing in the S&P 500 is a popular way to build wealth for new and seasoned investors alike, and for good reason—in the case of an S&P 500 index fund or ETF, you gain exposure to the world’s leading companies without spending hours researching individual stocks. If you’re still on the fence, here’s a look at the main pros and cons of investing in the S&P 500.
In general, the benefits of investing in the S&P 500 outweigh the disadvantages.
- Consistent long-term returns: the S&P 500 has historically provided consistent annual returns over the long term—from 1950 to 2021, it has yielded an annualized average return of 11.53%.
- Instant diversification: if you invest with an index fund, you gain exposure to an array of companies, industries, and sectors that instantly diversify your portfolio.
- No research or prior investment knowledge required: investing in the S&P 500 through an index fund or ETF means no intensive stock-picking research is required.
While the benefits of investing in the S&P 500 outshine the drawbacks, there are still a few to be aware of.
- Dominated by large-cap companies: since mainly large-cap companies dominate the S&P 500, it won’t provide exposure to many small-cap or mid-cap stocks, even when investing in S&P index funds.
- Short-term volatility: while the S&P 500 historically provides strong annual returns over the long term, it’s not immune to market volatility. Investors must be able to stomach short-term price swings and even sustained periods of market downturn, like we’re currently experiencing due to the recession.
- No exposure to international companies: since the S&P 500 only includes U.S.-based companies, it won’t provide stock exposure to companies in other parts of the world. This is less of a concern for new investors, but spreading your portfolio across different regions is another diversification strategy.
When held for the long term, an S&P 500 investment can be a core holding of any portfolio—particularly for new investors looking to build wealth for the future. With exposure to some of the most dynamic companies in the U.S. and a history of strong returns over time, there’s no reason to put off investing in the S&P 500.
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FAQs about how to invest in the S&P 500
Still have questions about how to invest in the S&P 500 index? Find answers below.
Should I invest in the S&P 500 through an ETF or index fund?
One of the main differences between ETFs and index funds is that ETFs tend to require a lower minimum investment to get started. For new investors without much capital to invest upfront, an S&P 500 ETF is a low-cost option.
What is the minimum investment for the S&P 500?
For an S&P 500 index fund, many come with no minimum investment. For an S&P 500 ETF, you might need to pay the full price of a single share, which is generally upwards of $100—but some robo-advisors like Stash offer fractional shares for as little as $5.
If you’re investing in individual stocks, you’ll just need to pay the cost of the share, which varies by company—you’ll find some for under $100 and others for $350+.
Can you invest in the S&P 500 with individual stocks?
Yes. If you don’t want an index fund or ETF, you can hand-select individual stocks of companies you want to invest in. Keep in mind that investing in a single company increases the risk and volatility of your investment, and will require thoughtful research and stock performance analysis.
Can you invest in the S&P 500 as a non-U.S. investor?
Yes. While the S&P 500 is an index of U.S. companies only, there are no restrictions as to who can invest in it.