How to invest in the S&P 500

Key points

  • The S&P 500 is a stock index of the largest U.S. companies.
  • You can buy individual stocks included in the S&P 500 or invest in S&P 500 funds. 
  • Consider the pros and cons of investing in the S&P 500 to determine how it fits into your strategy.

Constructing your portfolio can be daunting, especially if you’re new to investing. Diversification is key because it can mitigate some of the risks of the stock market. But diversifying your holdings on your own can be complicated. 

One way to simplify your approach and achieve your goal of a diversified portfolio is to invest in the S&P 500. Investing in the index exposes you to a broad range of U.S. stocks and provides a good representation of the stock market. 

But how can you invest in the S&P 500? And what are the benefits and drawbacks to consider? Here’s what you need to know before getting started. 

What is the S&P 500?

The S&P 500 is an index of roughly 500 leading U.S. companies’ stocks. Created in 1957, the S&P 500 was the first stock index weighted by market capitalization. That means while each company in the index contributes to the index’s performance, each company’s representation in and influence on the index is based on the company’s market capitalization, or the total value of all outstanding shares. 

As a result, companies like Apple will have more weight in the S&P 500 than companies like Advance Auto Parts. 

The S&P 500 is arguably the most influential stock index in the world. It represents roughly 80% of the total U.S. stock market capitalization and is considered the best indicator of the overall health and performance of U.S. large-cap stocks, or stocks with market capitalizations of at least $10 billion. 

The index is managed by S&P Dow Jones Indices, a subsidiary of S&P Global Inc.

Companies in the S&P 500

There are currently 504 holdings in the S&P 500 index. Some of the more well-known companies listed in the index are:

  • Apple (AAPL).
  • Microsoft (MSFT).
  • Amazon (AMZN). 
  • Tesla (TSLA).
  • Exxon Mobil (XOM).
  • Visa (V).
  • Home Depot (HD).
  • Coca-Cola Company (KO).
  • Walmart (WMT).
  • McDonald’s (MCD).

The S&P 500 undergoes regular updates to its list of members. An update can occur when a company in the index no longer meets market capitalization or other requirements. 

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

To invest in the S&P 500, you’ll need the right type of account. Here’s how to get started.

1. Open a brokerage account

Before you can buy individual stocks or funds, you’ll need an investment account with a broker. Online brokers typically offer accounts with no minimum deposit requirements or trading fees for stocks and funds. 

If you’re investing for retirement, you may want to open an individual retirement account. If you’re investing for other purposes, you may opt for a taxable brokerage account instead. Shop around and compare the top online brokers to find the best option.

2. Fund the account

Once set up, you can connect your bank account to your brokerage account and transfer money. Depending on your current financial situation and investment goals, decide how much to start with and how much you want to invest regularly going forward.

3. Research investments

Take your time to research your investment options. For example, you may wish to buy individual stocks in the index or a fund that tracks them. More on that later.

You may also want to consider other investment options, such as other stock indexes, bonds or precious metals. 

4. Buy investments

Once you decide which stocks or funds you want, follow your broker’s process to buy them. If you want to buy individual stocks or exchange-traded funds, ensure you have enough to purchase a share — or a fractional share if available. 

There may be a minimum investment amount for mutual funds, so make sure you have enough funds in your account to make the trade.

Best ways to invest in the S&P 500

You can invest in the S&P 500 in a few ways, each with its benefits and drawbacks.

1. Individual stocks

One way to invest in the S&P 500 is to buy individual stocks in the index. Many online brokers allow you to buy fractional shares of stocks for $1 each. This approach can give you more control over how your money is invested. 

That said, buying hundreds of individual stocks can be incredibly time-consuming. And if you decide to keep up with the regular changes to the S&P 500, frequent trades could result in higher tax rates if you hold a stock for less than a year. 

2. Exchange-traded funds

S&P 500 ETFs are index funds that track the performance of the S&P 500 by either purchasing all the stocks in the index or purchasing the stocks that provide a representative sample of the index. When you buy shares of an ETF, you’ll effectively own all the underlying stocks — or at least many of them.

“This eliminates the need to individually purchase and manage all the constituent stocks of the index,” says Derek DiManno, a certified financial planner and founder of Flagship Asset Services.

ETFs trade on major stock exchanges, so buying an ETF is similar to buying an individual stock. You may even buy fractional shares of an ETF.

ETFs are primarily passive investments, tracking an index. The fund’s manager may make adjustments to its holdings. That means you don’t control how your portfolio is weighted. If the fund realizes a gain, it must pass it on to shareholders.

Because they’re actively managed, ETFs typically come with fees called expense ratios, which are often very low. 

3. Mutual funds

Mutual funds work similarly to ETFs, investing in a basket of financial securities. The main difference is that mutual funds don’t trade on stock exchanges.

Mutual fund expense ratios are typically higher than ETF expense ratios because mutual funds require more management. But you can find low-fee options. 

S&P 500 index fund vs. ETF

An index fund is a portfolio of securities designed to imitate a specific market index and earn the same return as that index. While the term “index fund” has historically been used to describe mutual funds that mimic indexes, index funds today can come in the form of mutual funds or ETFs.

What costs to expect when investing

Most online brokers no longer charge commissions on trades of stocks, mutual funds or ETFs. But you may incur other costs:

  • Expense ratios: ETFs and mutual funds charge expense ratios, which help cover the fund’s annual operating expenses.
  • Loads: Some mutual funds charge a front-end or back-end load when you buy or sell your share of the fund. These loads typically range from 1% to 2% of your contribution.
  • Taxes: When you sell shares of a stock or fund for a gain, you typically must pay taxes on that gain. If you hold the stock or fund for less than a year, it’s a short-term capital gain and subject to your ordinary income tax rate. But if you hold it for over a year, you may be subject to a long-term capital gains tax rate.  

Advantages of investing in the S&P 500

There are several reasons to consider investing in the S&P 500, either through individual stocks or through a fund:

  • Easy way to diversify: Diversifying your portfolio is crucial to mitigating some of the risks inherent in individual stocks. When you invest in a broad range of stocks like the S&P 500, you can find a better balance between risk and return potential. If you opt for an ETF or mutual fund, you can diversify your portfolio with just one trade. 
  • Relatively inexpensive: Tracking an index on your own or through a fund can help you avoid some of the costly fees associated with an actively managed portfolio. In some cases, active investment managers charge 1% or more of your portfolio’s value every year in fees.
    Tax efficient: While you or your fund manager will need to make adjustments to keep up with changes to the S&P 500, there won’t be as much churn in your portfolio, which can help keep tax costs down.

Disadvantages of investing in the S&P 500

Although there are some clear benefits to investing in the S&P 500, there are also some potential downsides:

  • Potential weighting issues: Because the S&P 500 is weighted by market capitalization, the technology sector, which includes many of the largest companies in the U.S., gets a lot of weight in the index. If you want tech stocks to impact your portfolio less, you may want to consider other ways to diversify.
  • You could miss out on certain opportunities: S&P 500 portfolios do a great job tracking the market’s returns. But there aren’t any opportunities to beat the market. While avoiding trying to time the market is generally best, you may want to look for opportunities outside your index fund.
  • It doesn’t include other assets or stock segments: While investing in the S&P 500 is a great way to diversify your stock holdings, the index includes only large-cap stocks. “You’re not invested in medium-sized U.S. companies, smaller U.S. companies or international companies,” says Kendall Meade, a certified financial planner with SoFi. It also doesn’t include other assets such as bonds, commodities and real estate.

Frequently asked questions (FAQs)

Yes, it’s possible to invest in each of the S&P 500’s companies individually. But the process can be time-consuming and, with brokers that don’t offer fractional shares, expensive.

With an ETF or mutual fund, you just have to purchase one fund rather than each individual stock, says Meade.

An index fund can come in the form of either a mutual fund or an ETF. Between ETFs and mutual funds, ETFs typically have lower expense ratios and more flexibility with how much you can invest.

“It makes sense to invest in an ETF when you prefer flexibility in trading throughout the day, as ETFs trade on exchanges like stocks,” DiManno adds.

In contrast, mutual funds may be better if you want to set up automatic investments or withdrawals in and out of your fund.

There’s no requirement for you to be a U.S. citizen to invest in the S&P 500. You can buy these types of funds outside the U.S. For example, if you’re in the U.K., you can purchase the UBS S&P 500 Index through broker Hargreaves Lansdown.

Overall, ensure you understand the documentation requirements to set up an account that allows you to invest in an S&P 500 fund.