Key Takeaways
- The S&P 500 stock market index monitors the performance of 500 of the largest publicly traded companies in the United States.
- It is the most widely referenced stock index globally, serving as a tool for monitoring the U.S. market, benchmarking management performance and facilitating indexed-linked investing.
- You cannot invest in the S&P 500 directly, but you can do so via passive investment vehicles — in some cases, for less than $100.
What Is the S&P 500?
The S&P 500 is a stock market index that monitors the performance of 500 of the largest U.S. companies, commonly known as “blue chips.” Standard & Poor’s, a credit rating agency, introduced the S&P 500 in 1957, and it is widely regarded as a proxy for the entire U.S. stock market.
The index comprises large-cap stocks from various economic sectors, including technology, consumer discretionary, communication services and finance.
To be included in the S&P 500 index, a U.S. company must meet the following requirements:
- Be publicly traded and satisfy the Securities and Exchange Commission’s financial reporting requirements.
- Have a total market value of $12.7 billion or more.
- Be highly liquid, with at least 10% of outstanding shares trading publicly.
- Have positive earnings from the most recent quarter and the sum of the trailing four-quarter period.
Some of the well-known companies in the S&P 500 include Alphabet (Google’s parent company), Amazon, Apple, Coca-Cola, General Electric and Microsoft.
Investing in index funds and ETFs that track against the S&P 500 can be a wise investment that would help in your long-term financial goals. Contact a financial advisor to see if these funds would make sense for your financial situation.
Timothy Li, MBABusiness Finance Manager
Investing in the S&P 500
The S&P 500 is the most widely referenced stock index globally, frequently used to monitor the U.S. market, evaluate economic sentiment and benchmark investment management performance. Additionally, it facilitates indexed-linked investing.
Passive investing, also called indexing, is an efficient and low-cost method of replicating the returns of the S&P 500 or any other indexed market, rather than attempting to outperform it. Novice investors, experienced traders and institutional money managers widely use it.
Index Funds vs. ETFs
S&P 500 index-linked investing involves establishing an investment fund, usually an index mutual fund or exchange-traded fund (ETF), with positions that mirror the companies in the S&P 500. The fund is then adjusted depending on the performance of the various companies. This means buying more stock of outperforming companies and selling the stock of underperforming companies.
The result is an investment return that matches the performance of the S&P 500, minus a very modest management fee, typically between 0.2% and 0.7% per year. This is the essence of index investing — obtaining diversified exposure without the administrative complexity, high cost and unreliable performance associated with most actively managed strategies. Additionally, you can often invest for less than $100 per share.
Individual Stocks
Buying an index fund or ETF is not the only way of investing in the S&P 500. You could replicate the index by buying all 500 stocks that comprise the index, ensuring that the proportionality of the S&P 500 is matched. However, this is an expensive and cumbersome approach that requires ongoing rebalancing. It is far inferior to simply buying an index fund or ETF.
Benefits and Risks of Investing in the S&P 500
The benefit of investing in the S&P 500 is the potential for long-term growth that can exceed the rate of inflation and facilitate wealth accumulation. However, investing in the S&P 500 comes with inherent risks. This was exemplified during the Great Financial Recession, the early days of the COVID-19 pandemic and throughout 2022, as shown below.
The more than 19% decline was painful and nerve-wracking for many investors, particularly retirees. However, there are indexed-linked investment strategies that can facilitate upside exposure to the stock market without any downside risk, such as buying an indexed annuity.
How Does an Indexed Annuity Work?
Indexed annuities are financial contracts issued by insurance companies to individuals (contract owners) looking to save for retirement. The term of the contract can vary, but the typical indexed annuity functions as follows when interest crediting is linked to the S&P 500.
In exchange for an upfront payment, the issuer provides a guaranteed stream of future income payments to the named annuitant (usually the contract owner), with the opportunity for increases based on the performance of the S&P 500. When the S&P 500 performs well, the payments grow (up to stated limits).
When the S&P performs poorly, the payments stay flat or grow slightly if the contract specifies a guaranteed minimum rate of return. As long as the company issuing the contract is fiscally sound and the annuity is held through its surrender period, the investor’s principal is protected, and they will not lose any of their investment.
If you buy an indexed annuity, you are not directly investing in the stock market. Rather, the value of your annuity and the amount of future income payments are contractually tied to the market. The value increases when the market does well, and the growth is tax deferred.
Is Investing in the S&P 500 Right for You?
Investing in the S&P 500 can make sense for a range of individuals, from young workers to retirees. However, an S&P 500 investment should not be made on a standalone basis. Rather, it should be implemented as part of a diversified portfolio that offers the optimal mix of liquidity, capital preservation, income and growth.
The latter benefit is the objective of an S&P 500 investment, which makes it a critical aspect of many retirement plans, throughout all stages of life. It powers growth during one’s working years and it helps combat inflation and bolster portfolio value during retirement.
Retirees face a heightened degree of longevity risk, the possibility of living longer than expected and running out of money, without exposure to the S&P 500 or growth-oriented assets. No one wants this outcome, but not all investors have the same appetite for risk.
Many investors are uncomfortable with the volatility related to direct investment in an S&P 500 index fund or ETF and are willing to exchange some upside potential for downside protection. If this is the case for you, an indexed annuity could be a sensible investment.
That said, before putting your money into any type of investment vehicle, make sure you understand how it works and how it could impact your portfolio’s aggregate risk/return profile. If you lack experience in this area, you should consult with a fiduciary financial advisor. They can help you build your financial literacy and optimize your retirement plan.
Other Frequently Asked Questions About the S&P 500
Assuming no minimum investment requirement, it is possible to invest in the S&P 500 for less than $100 by using an ETF held within a brokerage account.
Anyone with a brokerage account can invest in the S&P 500. This goes for U.S. citizens and foreign investors. You can invest in the index via passive investment vehicles, such as index funds and ETFs. Alternatively, you could replicate the index by establishing positions in the constituent stocks; however, this is a costly and extremely cumbersome approach.
The S&P 500 is a stock market index that monitors the performance of 500 of the largest companies in the U.S., frequently known as “blue chips.” Some of the well-known companies in the S&P 500 include Alphabet (Google’s parent company), Amazon, Apple, Coca-Cola, General Electric and Microsoft.
