This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised and edited by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we may earn commissions from our partners’ links in this content. Learn more about AP Buyline here.
In a nutshell
The S&P 500 offers investors the opportunity to invest in 80% of the total U.S. stock market. All you need to do is buy fund shares, then relax and enjoy the ride.
- S&P 500 Index ETFs can be purchased for just a few dollars.
- There are no commissions or load fees with ETFs.
- You’ll be investing in a diversified portfolio of the largest companies in America.
Why you might invest in the S&P 500
The S&P 500 index is perhaps the most popular stock market index in the world. That’s because it has a broad representation of the entire market. More specifically, the index contains approximately 500 of the largest capitalization stocks publicly traded in the U.S., representing 80% of the total capitalization of all U.S. stock markets.
In reality, the index contains more than 500 companies since the specific number changes over time. The index is designed to incorporate the stock performance of the largest companies in America, frequently referred to as large capitalization stocks, or simply large caps. The index was first launched on March 4, 1957, though a predecessor index began on Jan. 3, 1928.
By investing in the S&P 500, you are taking advantage of the simplest way to invest in the biggest businesses in the country. As an index, the S&P 500 provides diversification across no fewer than 11 industry sectors. Those sectors, and the percentage each represents within the index, are as follows:
In that way, the S&P 500 gives investors a fully diversified portfolio that includes the major industry sectors within the U.S. economy. There is no need to purchase individual stocks to achieve the needed diversification within a stock allocation.
Investment performance
An even more compelling reason to invest in the S&P 500 is its performance. According to S&P Dow Jones Indices, a division of S&P Global, the index has produced a net total return (stock price growth plus dividends, net of fees) of 12.23% over the 10 years ended on June 21, 2024:
The return over the past decade is consistent with the often-quoted 10% return on the index, going back to its founding. However, it’s important to understand that the index does not consistently return 10% or 12% every year. The published returns are averaged over the full 10 years, which includes years when the index produced even higher returns, as well as negative ones.
The table below shows how much the performance of the index has varied in just the past 10 calendar years:
| Year | Total return | Price return | Net total return |
|---|---|---|---|
2023 | 26.29% | 24.23% | 25.67% |
2022 | -18.11% | -19.44% | -18.51% |
2021 | 28.71% | 26.89% | 28.16% |
2020 | 18.4% | 16.26% | 17.75% |
2019 | 31.49% | 28.88% | 30.7% |
2018 | -4.83% | -6.24% | -4.94% |
2017 | 21.83% | 19.42% | 21.1% |
2016 | 11.96% | 9.54% | 11.23% |
2015 | 1.38% | -0.73% | 0.75% |
2014 | 13.69% | 11.39% | 12.99% |
While the returns can vary significantly from one year to another, they have been remarkably consistent over many decades. For this reason, many investors choose to use the S&P 500 as the primary allocation for stocks within their portfolios. It relieves investors of the need to choose individual stocks and stock sectors, and to actively manage their stock portfolios.
Stocks in the S&P 500
The current number of companies held in the S&P 500 is 503. Collectively, those companies represent a total market capitalization of $47.5 trillion as of July 2024.
Though the index includes the stocks of more than 500 companies, they are not given equal weight within the index. (A discussion of how the index is calculated will follow in the next section.) For this reason, the largest companies in the index by capitalization represent a disproportionate percentage of the index value.
The S&P 500’s top 10 constituents by index weight
| Company | Symbol | Sector |
|---|---|---|
Microsoft | MSFT | Information technology |
Nvidia | NVDA | Information technology |
Apple | AAPL | Information technology |
Amazon | AMZN | Consumer discretionary |
Meta | META | Communication services |
Alphabet Class A | GOOGL | Communication services |
Alphabet Class C | GOOG | Communication services |
Berkshire Hathaway Class B | BRK.B | Financials |
Eli Lilly | LLY | Health care |
Broadcom | AVGO | Information technology |
Source: SPglobal.com
To give you an idea of how much individual stock market capitalization impacts the S&P 500 index, these 10 largest constituents represent 34.1% of the value of the entire index.
Apart from the 10 companies in this table, the S&P 500 includes most of the commonly known companies in the U.S., as well as a healthy number of those that are less well known.
How the S&P 500 index is calculated
The S&P 500 index uses a weighting method known as a float-adjusted market cap weighted strategy.
This is unlike an equal weight strategy, in which each of the 500-plus companies would be given an equal share within the index. Instead, greater weight is given to companies with higher market capitalization.
Market capitalization is determined by multiplying the current market value of one share of a stock by the number of outstanding shares. For example, if a company has 100 million shares outstanding, and the current market price of its stock is $100, its market capitalization is $10 billion.
The market capitalization method is considered a more effective way of tracking the market because of the wide disparity in those capitalizations. For example, the smallest market capitalization company in the index is just over $5 billion, while the largest is more than $3 trillion. Therefore, the impact on index performance is greater with the company with the largest capitalization.
How to invest in the S&P 500 with an index fund
Given that the S&P 500 is an index, investing through an index fund is the most popular choice. Unlike actively managed funds, in which the fund manager attempts to outperform the market by buying and selling shares frequently, an index fund merely tracks the performance of the underlying index. That means an S&P 500 index fund is unlikely to either outperform or underperform the S&P 500 index significantly in any single year.
When you invest in an index fund, you generally will not pay sales fees either to the fund manager or the investment broker. However, index funds have expense ratios, which are deducted from the share balance of the position you hold. These fees can vary, but most are fairly low. The average expense ratio for index-equity mutual funds in 2022 was 0.05% — down from 0.06% in 2021 and 0.27% in 1996, according to the Investment Company Institute (ICI).
If an S&P 500 index fund has a total return of 15% and a 0.50% expense ratio, your net return for the year will be 14.5%. By contrast, a fund with an expense ratio of 0.05% will hardly make a dent in your net return. For that reason, you should favor funds with lower expense ratios.
Popular S&P 500 index-based mutual funds include VFIAX (Admiral Shares from Vanguard), SWPPX (Schwab), and FXAIX (Fidelity). These funds can also be purchased through the fund family or from investment brokers.
One factor to consider when purchasing index-based mutual funds is the required minimum investment. Not all mutual funds have a minimum to invest, but some do. For example, many Vanguard index funds, including VFIAX, have a $3,000 minimum investment.
| Index fund | Expense ratio |
|---|---|
VFIAX (Vanguard) | 0.04% |
FXAIX (Fidelity) | 0.015% |
SWPPX (Schwab) | 0.02% |
How to invest in the S&P 500 with ETFs
Index funds can be either exchange-traded funds (ETFs) or mutual funds, but they are most commonly ETFs. These funds have several advantages over mutual funds. First is that they trade like stocks, and can be bought and sold throughout the trading day. By contrast, mutual funds settle at the end of the day.
Second, mutual funds often have minimum initial investments, while ETFs are available for the cost of a single share or even a fraction of a share. Third, not only do ETFs charge no load fees, but they are also available through investment brokers with no commissions. Many brokers do charge a small commission on mutual funds transactions.
ETFs do have expense ratios, but most are fairly low. The average expense ratio for index-equity mutual funds in 2022 was 0.05% — down from 0.06% in 2021 and 0.27% in 1996, according to the Investment Company Institute (ICI). The average expense ratio for index-equity ETFs was 0.15%, according to the ICI.
Popular ETFs that track the S&P 500 include VOO (Vanguard), and SPY and SPLG from State Street Global advisers (SSGA). These funds can be purchased either directly through the issuing company or from investment brokers. Similar to index funds, expense ratios for ETFs are so low as to not be a major concern.
| ETF | Expense ratio |
|---|---|
VOO (Vanguard) | 0.03% |
SPY (SSGA) | 0.0945% |
SPLG (SSGA) | 0.02% |
How much does it cost to invest in the S&P 500?
The answer to this question depends on the fund you want to invest in. Each will have its own minimum investment requirement.
Mutual funds typically require a flat dollar minimum, which can be $500 to $1,000 or more. ETFs allow you to invest for as little as the price of a single share of the fund, or even a fraction of a share. Known as fractional shares, this method enables you to purchase a sliver of a single share, such as $1 in an ETF share normally valued at $100.
ETFs can be purchased through popular investment brokers. Most brokers charge nothing to buy or sell ETF shares.
The situation may be different with mutual funds. Not only do many brokers charge small commissions to buy and sell mutual funds, but the fund itself may have what are known as load fees — a sales charge representing a percentage of the dollar amount of your investment. A mutual fund may charge between 1% and 3% of your investment as a load. However, most mutual funds charge no load fees on index-based funds, like the S&P 500.
Risks of Investing in the S&P 500
As popular as investing in the S&P 500 is, there are some downsides:
- Limited diversification: The S&P 500 includes only large-cap companies. It does not include medium- or small-cap firms, which may sometimes outperform large-caps. The index excludes companies outside the U.S., which means it doesn’t offer geographic diversification.
- Positive returns are not guaranteed: The S&P 500 is often held up to be the gold standard of stock market investing, but returns are not guaranteed. Because the index is the most common measure of the market, its performance is tied to the market. Should the market crash or experience a prolonged bear market, an investment in the index will also fall.
- Heavy reliance on the performance of the largest companies: The 10 largest component companies of the index represent more than one-third of its total valuation, meaning the index is heavily dependent on the performance of this small number of companies.
Alternatives to the S&P 500
Given the impressive returns of the S&P 500 index, it can be tempting to put most or all of your portfolio into funds that track this single investment. However, even as successful as the S&P 500 has historically been, there have been years — and even multiple consecutive years — when the index has had lackluster returns. That’s why it’s important to diversify beyond stocks in the S&P 500.
At least some of your portfolio should be held in lower-risk investments, like bonds. These could provide a more secure investment during times when stocks are declining.
You may also want to consider alternative investments. For example, gold and silver have a long history of performing well during times of accelerated inflation. Before you do, it is important to learn how to invest in precious metals.
You should also be aware that the size of your investment portfolio can impact investment allocations. For example, if you’re considering how to invest $50,000, you may want to have a somewhat smaller stock allocation to mitigate the risk of loss. A larger portfolio may allow for a more substantial stock investment and alternatives.
If you are unsure how to properly allocate your portfolio, consult a financial adviser.
The AP Buyline roundup
If you plan to invest in stocks, investing in the S&P 500 is one of the most time-honored ways to do it. Over the long term, the index offers consistent returns, with lower risk than actively managed funds. They can also be purchased with very little money, and with no commissions.
Once again, if you’re unsure exactly how to proceed or how much to invest, be sure to consult with a qualified financial adviser.
Frequently asked questions (FAQs)
Can I lose money investing in the S&P 500?
Yes. Though the index has been remarkably consistent in providing an average annual return in the neighborhood of 10%, there is considerable variation year by year. For example, the index can rise 10% one year and decline 20% the next. If you need to sell your position during the down year, you’ll take a loss on your investment.
How much should I invest in the S&P 500?
Perhaps the better question is how much should I invest in the stock market? The answer depends on a combination of factors, including your age, time horizon and risk tolerance. Fortunately, you can determine a reasonable stock allocation by taking advantage of the Vanguard Investor Questionnaire. You’ll be asked a series of questions designed to create the proper portfolio allocation for your investor profile. It will give you an approximation of recommended allocations between stock and bond investments.
You can use the recommended stock allocation to determine the percentage of your portfolio that should be invested in the S&P 500. If you’re not comfortable determining the right stock allocation yourself, you should consult with a financial adviser.
What is the minimum amount needed to invest in the S&P 500?
Each fund can set its own minimum investment. A mutual fund can set a flat dollar minimum, such as $1,000 or even $3,000 or more. If the fund is an ETF, the minimum will be either the price of one share of stock in the fund or fractional shares. With fractional shares, you can purchase small slices of whole shares. For example, you may be able to purchase one-tenth of a $50 ETF share for just $5.
How do dividends work with S&P 500 investments?
If you are investing in an S&P 500 fund, you can receive dividends in cash or reinvest them. If reinvested, dividends will be used to purchase additional shares in the S&P 500 fund you are invested in.
This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised and edited by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we may earn commissions from our partners’ links in this content. Learn more about AP Buyline here.
