How to Invest in the S&P 500 Stock Market Index

The S&P 500 is an index that tracks the 500 of the largest publicly traded companies on American stock markets. One way to invest in the S&P 500 is by purchasing individual shares of all 500 companies in the index. While possible, this strategy is highly impractical and difficult to manage. A more realistic option is to buy shares of an exchange-traded fund (ETF) or mutual fund that tracks the index, such as the SPDR S&P 500 ETF (SPY) or Vanguard 500 Index Fund (VFIAX). These funds provide exposure to the entire index in a single, convenient investment.

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Why Invest In the S&P 500

The S&P 500 is often viewed as a barometer of the U.S. economy because it includes many of the country’s largest publicly traded companies across diverse industries. Investing in it provides exposure to a wide range of sectors, from technology and healthcare to consumer goods and energy, which can help reduce the risk that comes from concentrating too heavily in one area of the market.

Beyond diversification, the S&P 500 has a long track record of generating strong returns over extended periods. While there are short-term fluctuations, the index has historically delivered annualized gains that outpace many other asset classes. Since the index expanded to 500 companies in March 1957, the S&P 500 has averaged about 10.5% on an annualized basis.¹ This makes it a common choice for long-term investors seeking growth.

Another factor is liquidity. Funds that track the S&P 500 are among the most heavily traded investments, meaning it’s easy to buy and sell shares without significant price disruption. For investors who want broad market exposure, the index also serves as a benchmark to measure how other investments are performing.

How Does a Stock Make it into the S&P 500?

A company must meet specific criteria to be included in the S&P 500. These include having a market capitalization above a set threshold, U.S. headquarters, and a history of positive earnings. The company’s stock must also be highly liquid, meaning it trades frequently and in large volumes. A committee ultimately decides which companies are added or removed, aiming to maintain a representative snapshot of the U.S. large-cap market.

How to Invest in S&P 500 Funds

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 costs it would take to own stock in all 500 companies. Instead of researching, analyzing 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 is considered a microcosm of the U.S. economy.

Vanguard debuted the first mutual fund designed to mimic the S&P 500 Index in 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 through 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 401(k) programs and individual retirement accounts (IRA).

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 may 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, which offer 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 generate gains when the index declines.

Pros and Cons of Investing in S&P 500 Index Funds

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 time and effort required to invest in 500 of the market’s largest publicly traded companies. And since these funds are designed to track only the S&P 500, there’s less management involved, and as a result, 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 achieving outsized gains through an index fund can be minimal.

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 fund 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 strategic plan for your investment portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with 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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