When things are volatile and markets are down, it can actually give you some rare opportunities to invest at a discount. It’s these kinds of situations where something like the S&P 500 index looks much more attractive.
But what exactly is the S&P 500? This guide covers everything you need to know about this major US market tracker. We’ll cover all the basics, what stocks are in it, and how you can invest.
Keep reading for all the details or click on a link below to jump straight to a specific section…
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What does S&P stand for?
This stands for ‘Standard and Poor’s’. It’s basically just the name of a company that creates financial data. Terribly exciting.
The main areas S&P are involved in is credit ratings and index data.
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What is the S&P 500 index?
This is an index created by the firm that tracks 500 of the biggest and best companies in the US.
Whereas the FTSE 100 covers the top hundred firms in the UK, the S&P 500 tracks a much bigger range of companies.
When you hear people talk about the ‘US stock market’, most of the time they’re referring to the S&P 500 index.
It doesn’t track every company in America, there are thousands. But, it’s big enough to give investors a decent overview.
Checking the performance of the S&P 500 is like reviewing the vital signs of the US economy. It doesn’t tell the whole story, but it will let you know if American business is running hot or cold and whether it’s got a healthy beating heart.
The reason this is so useful is that things tend to trickle down. If 500 of the biggest US stocks are doing okay, this tends to have a domino effect elsewhere.
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Which stocks make up the S&P 500?
The stocks making up the S&P 500 will actually change over time. This is because to make it onto the most fashionable list, stocks have to be a certain size and meet specific criteria.
This allows the index to be useful in the long run, because any up-and-coming businesses can take the place of any old dinosaurs that stop making money.
So, every time there’s a Netflix ready to take the torch from a Blockbuster, this gets reflected in the index.
Here’s what the top ten S&P 500 stocks look like at the moment:
- Apple (AAPL)
- Microsoft (MSFT)
- Amazon (AMZN)
- Alphabet Class A (GOOGL)
- Alphabet Class C (GOOG)
- Tesla (TSLA)
- Berkshire Hathaway Class B (BRKB)
- NVIDIA (NVDA)
- Johnson & Johnson (JNJ)
- UnitedHealth (UNH)
It’s pretty much a who’s who of US companies. As you might notice, the top ten is tech-heavy. But that’s because these have been the best performers in recent times.
If another sector becomes more popular, the top spots will be vacated by these firms and replaced by others.
So, the index is self-cleaning, like a Roomba, but on a giant scale.
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What is an S&P 500 index fund?
This is the main way you can invest in the S&P 500.
By using an index fund, you can own a piece of every company in the index.
There are plenty of companies out there who offer index-tracking funds and ETFs (exchange-traded funds) that simply copy what’s in the index.
Here are a few of the most popular versions:
- iShares Core S&P 500 UCITS ETF (CSPX)
- Vanguard S&P 500 UCITS ETF (VUSA)
- Invesco S&P 500 UCITS ETF (SPXP)
- HSBC S&P 500 UCITS ETF (HSPX)
- SPDR S&P 500 UCITS ETF (SPY)
If you dig into each of these, you’ll notice slight differences in the performances. Because, each company updates its index list at different times. But overall, the returns will be very similar.
There are also more funds out there that track this index but aren’t called an ’S&P 500’ fund. This is just because they don’t want to have to pay a licensing fee to Standard and Poor’s.
So, they just call the fund something like ‘America’s Top 500’ instead.
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Is an S&P 500 index fund a good investment?
Here’s a quick rundown of the areas that make this index fund a great option:
- Returns – Historically, it’s been a pretty solid bet. The annual average return is around 10%.
- Cheap – Another great thing about an S&P 500 index fund is that the cost is usually low for investors.
- Diversification – Investing in 500 top companies gives you some diversity across different sectors and types of stocks.
One important thing to point out is that each S&P 500 index fund or ETF tracks the same index. So make sure you don’t pay more fees than you need to.
Each fund will have different costs. Always double-check them to make sure you’re not getting ripped off.
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What are the risks?
Although the average return looks great on paper, this figure doesn’t tell you everything.
- There’s been plenty of volatility over the years where the index has gone up and down in value, it doesn’t mean each year you’ll get exactly 10%.
- It’s also important to remember that what’s worked in the past won’t always repeat. Overall, the last hundred years have been pretty kind to the American economy.
- The US may not remain the world’s economic superpower forever. The dollar could decline and innovation could move elsewhere.
- This index fund concentrates solely on US companies. You get some decent diversification amongst the types of stocks, but the performance has close ties to what happens in America.
- The final drawback is that the index funds usually have a market-cap weighting. This means that the bulk of your investment goes to the top ten biggest companies. So, you don’t get as much exposure to the smaller firms that may have more room to grow.
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Why is the S&P 500 so popular?
It’s a cheap and simple way to get investing exposure to America’s top companies.
You can invest passively because you don’t have to pick any of the investments. After making an investment, you can sit back and relax.
The historical returns also make the S&P 500 an attractive place to try to grow your money. You’d have struggled to get consistent returns at this level with most other investments.
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How do you invest in the S&P 500?
Investing in the S&P 500 index is nice and straightforward, just follow these simple steps:
- Open a brokerage account with an investing platform such as eToro, AJ Bell, Interactive Investor or Charles Stanley.
- Decide which ‘brand’ of S&P 500 index fund or ETF you want to buy.
- Deposit money into your account and choose how much you want to invest.
- Buy shares in the fund and ideally keep topping up on a regular basis.
If you’d like a more detailed explanation on the exact steps of opening an investment account, check out this guide on how to create an account and buy shares with eToro.
When choosing a platform, it’s useful to use a platform like eToro because you get plenty of investment choice.
This can help you make sure you find the investment you’re looking for. And, build yourself a diversified investment portfolio with lots of different assets.
Lastly, if you want to stay up to date with everything happening in the world of investing, make sure you sign up to the MoneyMagpie fortnightly investing newsletter..
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This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.
