How to invest in the S&P 500 (2024)

If you’re an investor, or thinking of becoming one, you’ve almost certainly heard the term “S&P 500,” which is often shortened to “S&P.” When people ask how “the market” is doing, they’re usually referring to the S&P. But even if you already know this popular stock market term, do you know how to invest in the S&P 500?

What is the S&P 500?

The Standard & Poor’s 500 index, or S&P 500, is a stock market index tracking 500 of the biggest publicly traded companies in the United States.

These companies hail from 11 sectors and a wide range of industries, representing a broad cross-section of the American economy. The S&P 500 is generally considered one of the most reliable indicators of the overall health and direction of the US stock market.

Investors and analysts use the S&P 500 as a benchmark to gauge the performance of their investment portfolios, as well as the general state of the US economy. Because so many big US companies do business worldwide, the S&P 500 also has value as a gauge of the global economy.

How the S&P 500 works

Companies included in the S&P 500 are selected based on factors such as market capitalization, liquidity and financial viability.

The S&P 500 is maintained by the US Index Committee, which is part of S&P Dow Jones Indices. If you want to know how to invest in the S&P 500, there are a few basic things to understand.

The index is market-capitalization weighted, meaning that larger companies have a greater effect on its overall performance.

The most heavily weighted companies in the S&P 500 are likely familiar names. For example, CNN data show that, as of March 13, 2024, the top five S&P stocks by market cap are:

How to invest in the S&P 500

Because the S&P 500 is an index, you can’t invest directly in it. However, it’s not difficult to find publicly traded securities that allow you to invest in the S&P 500.

Investors have a lot of options when it comes to how to invest in the S&P 500, said Michael Reynolds, a chartered financial analyst (CFA) and vice president of investment strategy at Glenmede Investment Management in Philadelphia, Pennsylvania.

Those options include mutual funds, exchange-traded funds (ETFs) and separately managed accounts (SMAs). These all have their own benefits, said Reynolds.

“Mutual funds tracking the index are a dime a dozen, often available with very low fees. They’re designed for long-term investors and can only transact on mutual funds with end-of-day pricing,” he explained.

However, he cautioned that investors should be aware these vehicles could spit out capital gains to investors, leaving even buy-and-hold investors with a tax bill.

“Exchange-traded funds are essentially shares in a pool of companies, and they have the benefit of trading just like stocks. The upside of ETFs is more liquidity, meaning that investors can buy or sell them whenever the market is open,” Reynolds said.

An additional benefit is that ETFs usually avoid distributing capital gains to buy-and-hold investors.

“With that said, major S&P 500 ETFs have modestly higher fees than their mutual fund counterparts, so there are pros and cons to investing in S&P 500-listed mutual funds and ETFs,” Reynolds said.

Separately managed accounts

Another option for investing in the S&P 500 is through separately managed accounts, or SMAs. These may be the best option, said Reynolds, depending on an investor’s particular situation.

SMAs, he said, are essentially portfolios of assets professionally run on a custom basis specifically for a single investor’s benefit.

“They sometimes come with higher fees, but those fees can buy a few bells and whistles that more than offset the cost,” Reynolds said.

For example, SMAs may use proactive tax-loss harvesting techniques to provide tax breaks for the sole benefit of the investor, offsetting tax costs from other parts of the portfolio. That’s an advantage that mutual funds and ETFs don’t necessarily offer.

Investors could theoretically purchase the individual stocks that make up the S&P 500, but in reality, that’s more of a hassle than it’s worth.

“It would take extensive research and more intense monitoring to account for market caps and adjustments to the makeup of the index itself,” said Faron Daugs, a certified financial planner (CFP), wealth advisor and CEO at Harrison Wallace Financial Group in Libertyville, Illinois.

Steps to investing in the S&P 500

Here are a few simple steps to investing in S&P 500 funds:

1. Do your homework: Educate yourself about the S&P 500, its historical performance and its components so you understand its dynamics, and potential risks and rewards.
2. Choose an investment vehicle: Decide how you want to invest, whether through a mutual fund, ETF or other instrument such as an SMA. In general, mutual funds and ETFs are easier to invest in than an SMA, which requires an investment advisor who offers this service and is usually only available to high-net-worth investors.
3. Open an investment account: Select a reputable brokerage platform that offers access to the S&P 500. Companies such as Schwab, Fidelity or Vanguard offer their own proprietary S&P 500 index funds, as do many others. Create an account, complete the necessary paperwork and fund your account to begin investing.
4. Invest regularly: As with any investment, your S&P 500 investment will typically grow if you put in money consistently, using an approach such as dollar-cost averaging. This approach can help mitigate the effect of market fluctuations on your portfolio over time.
5. Monitor and rebalance: Keep track of your investments, including the S&P 500 fund of your choosing, and periodically rebalance your portfolio to maintain your desired asset allocation. Make sure your S&P 500 investment is balanced with your other portfolio holdings. Stay informed about market trends, and adjust your allocation as needed.

Costs associated with investing in the S&P 500

Because the S&P is a widely used index, S&P 500 investment funds tend to have low expense ratios, particularly when compared to actively managed funds. An S&P 500 index fund is an example of a passively managed fund, as it contains all of the stocks in the S&P 500 index in the same proportions as the index itself, whereas an actively managed fund is one that’s run by professional fund managers who use various strategies in an attempt to outperform an index.

In the latter case, the managers’ stock picking and turnover result in higher costs than you’ll see in an S&P 500 index fund.

“If you purchase an ETF or mutual fund through an online discount broker, you generally will be able to place the trade at very little to no cost,” said Daugs. “Internally, the expense ratios of these index-focused investments are very low, usually under 0.25%.

S&P 500 index fund versus S&P 500 ETF

Jeff Rose, a CFP and founder of Good Financial Cents, suggested looking for ETFs with minimal fees to keep more of your own money in your pocket. He points out that the costs of investing in the S&P 500 vary between mutual funds and ETFs.

For example, he said that the Vanguard S&P 500 ETF (VOO) has an expense ratio of 0.03%, translating to a $3 annual fee on a $10,000 investment. By contrast, the Vanguard 500 Index Fund Admiral Shares (VFIAX), a mutual fund, has a slightly higher expense ratio of 0.04%, or a $4 annual fee for the same investment amount.

“While the cost difference is minimal, investors should note that mutual funds often have minimum investment requirements, such as $3,000 for VFIAX, whereas ETFs can be bought by the share, providing greater accessibility for those with less to invest,” Rose said.

There’s another factor to consider, said Scott Bondurant, founder and CEO at Bondurant Investment Advisory in Evanston, Illinois. Consider whether your S&P 500 investment is held in a qualified retirement account or in a taxable brokerage account.

“For taxable investors, the ETF is better as you are only taxed on gains when you sell the index; for tax-exempt retirement accounts, both are great,” Bondurant said.

Top performers in the S&P 500 index

The S&P 500 is market-capitalization-weighted, meaning the larger companies have the most influence over index performance. According to Slickcharts, the top S&P year-to-date performers based on share price gains, as of the market close on March 12, 2024, are:

Keep in mind, however, that just because these are the top performers by price so far in 2024 doesn’t mean that these stocks are having the greatest influence on the S&P 500’s 2024 return.

These stocks come from the technology, utilities, communications services and industrials sectors. But investors should realize that the top performers change over time as sectors and industries go in and out of favor and as individual company prospects rise and fall.

For example, Nvidia, AMD and Meta are riding high on investor enthusiasm about artificial intelligence. Constellation Energy and Davita have surged based on their own unique catalysts.

“Most notably the technology and communication sectors stocks have been the top performers of the S&P 500 recently,” said Daugs.

He noted that Nvidia, Apple, Microsoft, Meta Platforms, Netflix (NFLX), Tesla (TSLA) and Amazon have been index bellwethers.

“However, as industries change, so do the top performers,” he said. “There were many years that stocks like Home Depot (HD) and Disney (DIS) performance helped boost the index’s overall return.”

Pros and cons of investing in the S&P 500

Over time, the S&P 500 has delivered strong returns to investors. Those who remained invested enjoyed the benefits of compounding, or the process of earning returns on the returns you’ve already accumulated.

“Since 1970, it has delivered an average 11% return per year, including dividends,” said Reynolds. “But it’s not a smooth ride with guaranteed returns of any kind, especially over the short term.”

While plenty of active managers try to beat the S&P 500, it’s a tough challenge.

According to the 2023 SPIVA US Scorecard published by S&P Dow Jones Indices, 88% of large-cap funds underperformed the S&P 500 over the past 15 years.

“Historically, investing in the S&P 500 was an easy and efficient way to diversify,” said Reynolds. “The S&P 500 has proven to be one of the hardest indexes for active managers to beat over the long term.”

However, with a small number of companies dominating index performance, some analysts are beginning to question whether the index has become too concentrated.

In 2023, for example, the so-called “Magnificent Seven” stocks — Alphabet (GOOGL), Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — collectively accounted for more than a quarter of S&P 500’s market capitalization.

“This level of concentration is not normal by historical standards and may warrant a more diversified approach,” said Reynolds.

How to balance your investment portfolio with the S&P 500

The S&P 500 represents just one asset class: Large-cap domestic stocks.

For that reason, when deciding how to invest in S&P 500 index funds, remember to balance S&P 500 holdings with other investments. That reduces your portfolio risk by diversifying across various asset classes, which in turn can potentially mitigate losses during market downturns.

The approach to diversification varies, depending on an investor’s risk tolerance, financial goals and time horizon.

“I choose to have some exposure to the S&P 500 but prefer to also gain exposure to other indexes and asset classes,” said John Jones, investment advisor representative at Heritage Financial in Newberry, Florida.

Jones said the equal-weighted S&P 500, which allocates all stocks equally, or a total stock market fund, which holds mid-caps and large-caps, would offer exposure to various market segments.

For most investors, the S&P 500 should be the cornerstone of their portfolio, said Reynolds, who added, “It shouldn’t be a one-man show.” He also said equity portfolios should be properly balanced with exposure to smaller companies in the US, along with opportunities from firms abroad.

“Diversification with exposure to smaller companies is especially important now that valuations on the S&P 500 appear extended but smaller and foreign markets are priced closer to fair value,” Reynolds said.

He added that investors can also balance risk levels by adding fixed-income like bonds and cash.“

Additionally, alternative investments such as private equity, real estate and hedge funds can simultaneously enhance returns while reducing risk via diversification,” Reynolds said.