How to Invest in the S&P 500 in 2024: Index Funds and ETFs
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You cannot directly invest in the S&P 500 index itself.
You can buy individual stocks of companies in the S&P 500, or buy an S&P 500 index fund or ETF.
Index funds typically carry less risk than individual stocks.
The S&P 500 is a well-known stock market index — an index isn't an investment itself, but a list of companies that are related in some way or otherwise grouped together. You can't directly invest in a stock market index like the S&P 500, but you can invest in an index fund or exchange-traded fund that tracks the index.
The easiest way to invest in the S&P 500
An S&P 500 index fund or ETF is the simplest way to invest in the index. These funds aim to replicate the returns of the S&P 500 by tracking it, offering investors exposure to S&P 500 companies without the effort involved in purchasing the individual stock of each company.
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky than purchasing individual stocks directly. Because S&P 500 index funds or ETFs track the performance of the S&P 500, when that index does well, your investment will, too. (The opposite is also true, of course.)
You can purchase index funds and ETFs in a taxable brokerage account, or if you're investing for retirement, in a 401(k) or IRA, which come with added tax benefits.
Opening an investment account
If you don't already have a brokerage account, you'll need to open one to buy investments. You can use the money you deposit into the brokerage account to purchase S&P 500 stocks or funds, which will then be held within that account.
» Learn more: What is a brokerage account and how to open one
If your ultimate goal is investing for retirement, consider investing in the S&P 500 through a 401(k) or IRA, rather than a taxable brokerage account.
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» Learn more about some of the top-performing S&P 500 ETFs
What does it mean to invest in the S&P 500?
The S&P 500 is made up of about 500 large public U.S. companies. It is one of the stock market indexes often considered a proxy for the overall health of the U.S. stock market.
Contrary to popular belief, the stocks forming the index are not the 500 biggest U.S. companies, but they are arguably some of the most important U.S. companies: These stocks represent about 80% of the total U.S. stock market’s value.
The S&P 500 weights the stocks by market capitalization, or total market value (the number of outstanding shares multiplied by the stock's current market price). The larger the company, the greater its influence on the index.
How much does it cost to invest in the S&P 500?
If you want to invest in the S&P 500, there are a few costs to consider.
If you are investing in an S&P 500 index fund:
If your index fund has no minimum, you can usually purchase in any dollar amount. If your index fund has a minimum, then you have to purchase at least the minimum amount.
If your index fund has an expense ratio, you'll be charged that as a fee. An expense ratio is an annual fee expressed as a percentage of your investment. For example, if you invest $100, and your fund has an expense ratio of 0.04%, you'll pay an annual fee of $0.04.
» See the S&P 500 index funds with the lowest fees.
If you are investing in an S&P 500 ETF:
ETFs trade similarly to stocks and have a share price. Depending on your broker, you will either need to pay the full share price or you can buy fractional shares for any dollar amount.
Similarly to index funds, ETFs often have expense ratios, so make sure you see how much you'd be paying in fees to invest in a given ETF.
If you are investing in a stock within the S&P 500 index:
Stock costs vary significantly. Some stocks in the S&P 500 cost under $100, and others cost $500 a share or more. Be sure to look at each stock's share price before you make a decision to buy.
Top 20 performers in the S&P 500 index
This chart shows the top-performing stocks in the S&P 500, based on YTD returns.
Data is from Google Finance and may be delayed. For informational purposes only.
» Learn more about the top-performing stocks in the S&P 500
Should you invest in an S&P 500 index fund or S&P 500 ETF?
While all S&P 500 funds track the holdings of this index, there are several differences to consider — for example, ETFs can be bought and sold whenever the stock market is open, while index funds can only be bought and sold at a set price point at the end of each trading day.
The good news is that there are solid S&P 500 options in each category, and all of these products leverage the diversity of the index itself. Compare index funds versus ETFs to decide which one is right for you.
» Ready to start investing? See our picks of best brokerages for fund investors
Are there drawbacks to investing in the S&P 500?
While an S&P 500 ETF or index fund may be a worthwhile investment, there are caveats to consider.
Overall diversification
The S&P 500 consists of only large-cap U.S. stocks. Portfolio diversification encompasses buying mid- and small-cap companies along with large caps; allocating funds to international companies along with domestic ones; and including bonds, cash and potentially other asset classes with stocks.
Kevin Koehler, a chartered financial analyst based in Los Angeles, also notes drawbacks in the S&P 500 related to its market-cap weighting.
“As passive investing increases, investors are continually investing in S&P 500 funds, which has contributed to a ‘rich get richer’ problem, where the largest stocks are getting larger due to S&P 500 investing, rather than individual stock investing,” Koehler says. “This can lead to higher volatility, as active managers sell an individual stock on top of index funds selling a portion. The market could continuously be overvalued compared to its underlying value.”
But relative to the downsides of many investment types, the flaws of S&P 500 funds seem relatively minor, especially when used as a part of your overall portfolio and held for the longer term.
» Learn more about investment diversification
When should you invest in the S&P 500?
Tracey Dean, a certified financial planner in Salt Lake City, Utah, reminds clients not to worry about investing timing and whether they're entering the market at the top or bottom. Instead, Dean helps clients invest long-term and learn more about diversification, or spreading your dollars across a range of investments to reduce the risk you’re exposed to.
If you’ve got a long time until you need the money you’re investing (say, 20 or 30 years), “don't worry that we're at the top of the market right now,” Dean says. “They'll be another top or there'll be a bottom. That's the ebb and flow of and volatility of the markets."
No matter what’s happening in the market, now is a good time to invest if you’re investing for the long term.
» Learn more about whether to buy stocks amid uncertainty
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