The S&P 500 is a market index that tracks the 500 largest publicly traded companies on the market. S&P 500 stocks could provide a solid foundation for your portfolio. You can invest in individual stocks, or with the help of index funds or exchange-traded funds (ETFs). First, however, it helps to learn how to invest in these funds, why some investors prefer them, and their pros and cons. The more you understand the role the S&P 500 index can play in your portfolio, the better able you’ll be to make informed investment decisions that align with your current situation, goals and risk tolerance.
Do you have questions about managing your investment portfolio? Speak with a financial advisor today.
Why Invest In the S&P 500
Index funds are mutual funds or ETFs that track a specific financial market index, like the S&P 500. They can diversify an investment portfolio, offering a wide range of stocks from various companies.
You can invest in all 500 of the market’s biggest companies without an index fund, but it would require a lot of work and numerous transactions. An S&P 500 index fund or ETF allows you to invest in these companies and diversify your portfolio without all the unnecessary work and fees. Instead of researching, completing the analysis and tracking a specific company’s stock market performance, you can simply buy into an S&P index fund. That allows you to invest in 500 of the market’s top companies at the same time.
There are many different funds that track this particular index, each taking a different view of how to invest in S&P 500 shares. There are also other index funds that track other indices, such as the Dow Jones Industrial Average (DJIA). But the broad array of companies in the S&P 500 are considered a microcosm of the U.S. economy.
How Does a Stock Make it into the S&P 500?
Companies’ stocks are chosen to appear on the S&P 500 by a committee within S&P Group. They’re chosen based on many factors relating to their financial health including:
- Liquidity
- Market capitalization
- Monthly trading volume
How to Invest in S&P 500 Funds
Vanguard debuted the first mutual fund designed to mimic the S&P 500 Index n 1976. Roughly two decades later, the first ETF tracked the S&P 500 in similar fashion. Now, just about every major brokerage and fund company has an S&P 500 index fund.
You can likely invest in an index fund like the S&P 500 via your financial advisor or broker, since nearly all of them offer some variation of this particular index. If you want to try these index funds on the cheap, S&P 500 ETFs are available through discount brokers who trade them commission-free. However, that may require a minimum investment.
S&P-pegged mutual funds are another option and are available though both brokers and fund companies. You can manage funds through an advisor or a broker, or manage your own portfolio through a mutual fund provider. S&P 500 index funds are also available through employer 401k programs and individual retirement plans.
Be sure to research each fund, its fees and its past performance before you make your choice. While an ETF can be more susceptible to market fluctuations, mutual funds tend to be more static. Each option has different fees and risk levels.
Advanced S&P 500 Index Funds
While many investors will be well-served by passive index funds managed by others, active funds are also available. Those with more experience who want to customize their investments can try smart beta index funds with more flexibility.
Other active funds focus on S&P 500 companies, but also include shares from beyond the S&P 500. Leveraged funds or ETFs, meanwhile, can multiply returns, but also amplify losses. If you’d rather bet against the S&P, inverse funds and ETFs can bring in gains when the index dives.
S&P 500 Index Fund Pros and Cons
As mentioned, index funds such as S&P 500 funds can help an investor increase market exposure while enjoying steady growth and returns. They reduce the labor required to invest in the market’s top 500 publicly traded companies. And since these funds are designed to track only the S&P 500, there’s less management involved, and concurrently, lower fees.
But there are some drawbacks. For one, since these funds track a specific index or portion of the market, there is less flexibility. Second, even though index funds tend to have steady returns, these returns are modest. Therefore, your chances of winning big on the stock market via an index fund can be minimal.
While fees and commissions associated with indices can be lower, that isn’t always the case. If you aren’t investing much in an index fund, find out what your broker or financial advisor’s cut is.
Bottom Line
Investing in S&P 500 index funds is a great way to build a diversified portfolio and expand your investments. While you can invest in the entire S&P 500 index via an index fund, be sure to choose the right fun for you in terms of fees, fund performance (in other words, if it’s actually tracking the S&P index as it should) and minimum investments.
Investing Tips
- A financial advisor can help you build a plan around your investment portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you can’t choose between an S&P 500 index fund or a Nasdaq fund, you may still have some unresolved investment questions. SmartAsset’s investing guide for beginners can help you determine your goals, your risk tolerance and your investment’s vulnerability to inflation and capital gains tax.
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