How To Invest in the S&P 500 Today

The S&P 500 is an index comprised of 500 leading U.S. companies, and it powers some popular index funds.
Sep 22, 2022
How to Invest in the S&P 500

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Nerdy takeaways
  • The S&P 500 is a stock market index made up of about 500 publicly traded companies.

  • You cannot directly invest in the 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.

There are two main options for investing in the S&P 500: investing in individual stocks included in the S&P 500 index, or investing in S&P 500 funds.

But first, what is the S&P 500, exactly?

The S&P 500 is a stock market index made up of shares of 500 large, industry-leading U.S. companies. It is widely followed, and often considered a proxy for the overall health of the U.S. stock market. An index is a measure of its underlying stocks’ performance, so you cannot directly invest in the index itself.

Contrary to popular belief, the stocks forming the index are not the 500 biggest U.S. companies, but they are arguably some of the 500 most important 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 (number of outstanding shares multiplied by current market price). The larger the company, the greater its influence on the index.

How to invest in the S&P 500 in four steps:

To invest in the S&P 500 you can buy stocks of the individual companies in the index, or invest in index funds or exchange-traded funds that replicate the index. In order to buy either, you'll need to open a brokerage account to purchase those investments from.

  1. Open an investment account where you can purchase S&P 500 stocks or funds. It may be advantageous to consider what type of investment account you want to open, since some have significant tax benefits.

  2. Fund your account. You'll need to decide how much to invest, and this will depend on your investment goals.

  3. Choose your investments. Do you want to invest in individual stocks included in the S&P 500, or a fund that is representative of most of the index? Investing in an S&P 500 fund can instantly diversify your portfolio and is less risky. Here are some of the top-performing S&P 500 index funds.

  4. Buy your investments. Follow the instructions within your brokerage account to purchase. Stocks are purchased at the share price, so if you have $200 to invest, and a stock's share price is $100 per share, you would be able to purchase two shares. Funds may have investment minimums, but they tend to be low. Funds also have expense ratios, fees charged based on how much money you have invested.

“In my view, for most people, the best thing to do is own the S&P 500 index fund,” legendary investor Warren Buffett said at one of Berkshire Hathaway’s annual meetings.

» Learn more: What are ETFs?

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 things to consider.

If you are purchasing an S&P 500 index fund:

  • If your index fund has no minimum (more common), then you can usually purchase in any dollar amount. If your index fund has a minimum (less common), 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.

» Check out: S&P 500 index funds

If you are purchasing 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 (at the time of this writing, three of the major S&P 500 ETFs had share prices between $340 and $380 per share) 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.

» Check out: S&P 500 ETFs

If you are purchasing 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 close to $400 a share. Be sure to look at each stock's share price before you make a decision to buy.

What companies are included in the S&P 500?

Here are a few of the top companies by index weight in the S&P 500:

  • Apple.

  • Microsoft.

  • Amazon.

  • Alphabet Inc. (Class A).

  • Alphabet Inc. (Class C).

  • Tesla, Inc.

  • Berkshire Hathaway (Class B).

  • Johnson & Johnson.

  • UnitedHealth Group Inc.

  • NVIDIA Corp.

Should I 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, an investor must consider whether using an index fund (a passively managed mutual fund) or an ETF makes the most sense for them. The good news when weighing index funds versus ETFs is that there are solid S&P 500 options in each category, and all of these products leverage the diversity of the index itself.

Because the S&P 500 is weighted by each company's market capitalization, the larger companies in the index can sometimes have an outsize impact on the performance of the larger index. In other words, a big dip in price for Apple shares can create a dip in the index as a whole. Because of this, some investors prefer to buy the S&P 500 in an equal-weighted format, so that each company has the same impact on the index. This is meant to create an index that is more representative of the overall U.S. market.

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What do financial advisors think of the S&P 500?

“The S&P 500 is a key part of a diversified investing strategy,” says Tony Molina, a product evangelist at Wealthfront. "The U.S. has the largest economy and stock market in the world, and is one of the most resilient and active, especially when it comes to innovation. That’s why it’s a no-brainer to include the S&P 500 as part of your portfolio.”

Larger companies are generally more stable to invest in because they are well-established and widely followed. Thus, these stocks usually have less risk and lower volatility. The S&P 500 combines large companies across various industries, so investors access a broad, diversified mix of companies when investing in it.

Choosing an index fund or ETF can also help investors avoid — or at least minimize — the behavioral pitfalls from stock-picking, which is a losing strategy, says Dejan Ilijevski, an investment advisor at SCM Investment Services.

Ilijevski cites a study by professor Hendrik Bessembinder at Arizona State University

W. P. Carey School of Business. Do stocks outperform Treasury bills?. Accessed Aug 18, 2022.
that examined investments in publicly traded U.S. stocks between 1926 and 2016 and found that just over 4% of the companies accounted for the total wealth created.

“Picking those few individual winners is impossible,” Ilijevski says. "Your best bet is to own as much of the market with a fund that tracks the index.”

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, chartered financial analyst and director of the investment strategy group at Miracle Mile Advisors 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.

» Ready to get started? Read about the best-performing S&P 500 ETFs 

Neither the author nor editor held positions in the aforementioned investments at the time of publication.

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