If you know how to invest in S&P 500 stocks, they could provide a solid foundation for your portfolio. The S&P 500 is a market index tracking the 500 largest publicly-traded companies on the market. You can learn how to invest in S&P 500 shares with help from index funds. First, however, you should learn how to invest in these funds. Discover what their pros and cons are, and which index fund is right for you.
Why Invest In an S&P Index
Index funds are mutual funds or exchange-traded funds (ETFs) that track a specific financial market index, like the S&P 500. They can diversify and investment portfolio with a wide range of stocks from various companies.
You can invest in all 500 of the market’s biggest companies without an index fund. However, it would require a lot of work and several transactions. An S&P index allows you to invest in these companies and diversify your portfolio without 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.
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, and monthly trading volume.
There are many different funds that track this particular index, with each taking a different view of how to invest in S&P shares. There are 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 to Invest In S&P 500 Funds
Back in 1976, Vanguard debuted first mutual fund designed to mimic the S&P 500 Index. 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 on of 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 available though both brokers and fund companies. You can manage funds through advisor or a broker or manage your own portfolio through a mutual fund provider. S&P 500 indes funds are also available through employer 401k programs and individual retirement plans.
Be sure to do your research each fund, its fees, and past performance before you choose one. 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.
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. In addition, since these funds are designed to track only the S&P 500, there is 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.
The 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 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.
- An S&P 500 index fund can be a strong addition to your portfolio, but a financial advisor can tell you if it’s a good fit. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will 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. The SmartAsset investing guide can help you determine your goals, your risk tolerance, and your investment’s vulnerability to inflation and capital gains tax.
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