How to Invest in the S&P 500 Index

Follow these simple steps to start investing in the biggest index on Wall Street.

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September 2022 hasn't been kind to the S&P 500. It just had one of its worst weeks of the year (from September 12th-16th) and has now declined a total of 19.25% in 2022. While that can make checking your portfolio balance a painful experience, it also means that long-term investors have a great opportunity to invest in the S&P 500 index while it's essentially “on sale.”

Thankfully, you don't have to buy every single stock in the S&P 500 individually. Instead, you can invest in all the stocks in the index with one purchase via a mutual fund or exchange-traded fund (ETF).

Before 1975, if you wanted to buy the 500 stocks in the S&P 500, you would have had to buy each stock individually. Vanguard founder John Bogle introduced the first-ever index fund in that pivotal year, which tracked the S&P 500.

These days, there are many S&P 500 index funds to choose from. Read on to find out everything you need to know about how to invest in the S&P 500 index.

What Is the S&P Index?

Short for Standard & Poor's 500, this index tracks the performance of 500 of the most significant publicly traded stocks in the U.S. While there are many other index funds, the S&P 500 is perhaps the most famous stock market index in the United States.

A committee meets to choose the stocks in the index, and they don't necessarily have to be the biggest 500 companies. The committee looks at things like market capitalization, liquidity, sector, and other criteria. To qualify, a company must be a large-cap company with a minimum $14.6 billion market cap (as of March 2022).

Further Reading: How to Invest In Index Funds

How to Invest in the S&P 500 Index

The S&P 500 isn't the only index in the U.S. but it's a great place to start investing.

That's because it includes most of the biggest companies in the U.S. And since S&P 500 index funds don't need fund managers to pick and choose the underlying stocks, they tend to have much lower fees than actively-managed mutual funds.

If you're looking to invest in the S&P 500, then follow these steps:

1. Open a Brokerage Account.

online brokerIf you want to invest in the S&P 500, you'll first need a brokerage account. This could be a retirement account like a traditional IRA or Roth IRA, an employer-sponsored 401(k) or similar, or your own traditional, taxable brokerage account.

There are many brokerages to choose from. Look at fees for buying and selling mutual funds and ETFs if you open a new account intending to invest in the S&P 500. Many brokerages offer their own family of funds or a group of partner funds with no mutual fund trading fees.

Most of the top stock brokers today now offer commission-free trading for U.S.-listed stocks, options, and ETFs. They all provide investors with research and educational tools so that even rank beginners can figure out what to do. Here's a quick comparison of three top platforms.

HighlightsE*TRADEAlly InvestTD Ameritrade
Rating9.5/109/109/10
Min. Investment$0$0$0
Stock Trades$0/trade$0/trade$0/trade
Options Trades$0.65/contract$0.50/contract$0.65/contract
Crypto Trades
Mutual Funds
Virtual Trading

2. Choose Between Mutual Funds or ETFs.

how to invest in mutual fundsYou can buy S&P 500 index funds as either mutual funds or ETFs. Both track the same index and work similarly, but there are some key differences you should know about.

  1. Mutual funds are intended to be owned for a relatively long period of time. They trade only once per day, after the market close. Some have a minimum investment amount and a minimum length of time to invest. And early withdrawals can lead to penalties. On the positive side, you can buy and sell mutual funds in round dollar amounts.
  2. ETFs are bought and sold like a stock. The price constantly changes throughout the day as traders buy and sell. Most major discount brokerage firms allow you to trade all ETFs free. There is no minimum time to hold or minimum purchase amount aside from a single share price. ETFs may have lower expense ratios in some cases as well and can be purchased via brokers like Public.com, which is known for its low fees and zero commissions.

For most people, ETFs will be a more attractive way to get started investing in the S&P 500. However, mutual funds have their benefits too. It's up to you to decide which is a better fit for your portfolio.

3. Pick Your Favorite S&P 500 Fund.

FundOnce you decide between ETFs and mutual funds, you can start comparing more specific details to pick your favorite fund. Look at any costs and fees to start. You don't want to overpay when you can get essentially the same thing from multiple sources.

Here are the fees for the popular mutual funds:

  • Schwab charges 0.02% for the Schwab S&P 500 Index Fund (SWPPX), with a $100 minimum.
  • Fidelity charges just 0.015% for its Spartan S&P 500 Index Investor Class shares (FXAIX), with no minimum investment.
  • The Vanguard 500 Index Fund (VFINX) has a 0.14% fee and a $3,000 minimum.

And here are the fees in the world of ETFs:

  • The Vanguard S&P 500 ETF (VOO) costs 0.03%.
  • iShares Core S&P 500 (IVV) costs 0.03% per year.
  • The biggest and oldest S&P 500 ETF is the SPDR S&P 500 ETF (SPY) from State Street Global Advisors with a 0.0945% expense ratio.

4. Enter Your Trade.

When you're ready, log into your brokerage account and enter the trade. We recommend using Ally Invest, as it takes just a few minutes to enter a trade using its mobile app, website, or more advanced trading platform.

Ally Invest Trading
A screenshot of what it looks like to buy the VOO exchange-traded fund at Ally Invest

5. You're an Index Fund Owner!

investment performanceIt's that simple. Opening and funding a brokerage account is a quick and easy process. Once the funds have cleared, you can buy an S&P 500 index fund in just a few clicks. As long as you understand the risks of investing, it's an excellent first investment and a fun way to get your feet wet in the stock market.

Should You Invest in the S&P 500?

While we don't recommend any specific investments at Investor Junkie, there are certainly a lot of benefits to investing in the S&P 500. For one, the index offers broad exposure to the companies throughout the U.S. And historically, the index has had great returns for investors, averaging about 10% annually.

Investing in an index or exchange-traded fund can also help you avoid the risks that come with individual stock picking. With the S&P 500, you'll be exposed to a lot of great companies over a variety of sectors, which is great if you're looking to diversify your portfolio.

How Does the S&P 500 Compare to the DOW?

The Dow Jones Industrial Average (DJIA or Dow) is another stock market index that is closely followed by investors and analysts. Here’s how it compares to the S&P 500 Index.

First, the DOW tracks a significantly smaller selection of stocks — only 30 of the largest U.S. companies are included. It also excludes the utilities and transportation sectors, whereas the S&P 500 includes all sectors. This means that DJIA-tracking funds provide less diversification than S&P 500 index funds.

Second, the Dow is different from the S&P 500 Index in how it weights the companies that are included on its list. The S&P 500 is a float-market-cap-weighted index while the Dow Jones Industrial Average is price-weighted.

The chart below shows how SPY and DIA have performed over the past 5 years.

As you can see, the Dow outperformed the S&P 500 pre-pandemic, while the S&P 500 has provided better returns since around mid-2020.

How Does the S&P 500 Compare to the Nasdaq?

When someone talks about investing in “The Nasdaq” they could mean one of two things.

On one hand, they could be referring to the Nasdaq Composite Index, which tracks every company that’s listed on the tech-heavy Nasdaq stock exchange. On the other hand, they could mean the popular Nasdaq-100 Index which, as you may have guessed it, tracks 100 of the largest companies listed on the Nasdaq.

Both the Nasdaq 100 and Nasdaq Composite are market-cap weighted like the S&P 500. However, the Nasdaq 100 doesn’t include any financial companies. Here’s how SPX and QQQ (a popular Nasdaq-100 index fund) have performed over the past 5 years.

S&P 500 vs Nasdaq-100

As the chart shows, the Nasdaq-100 enjoyed tremendous growth throughout 2020 and most of 2021. This makes sense as this was during the height of pandemic lockdowns when many Nasdaq-listed tech stocks were experiencing explosive growth. However, the Nasdaq-100’s decline in 2022 has so far been steeper than the S&P 500’s.

How Does the S&P 500 Compare to the Total Stock Market Index?

The key difference between the S&P 500 and the total stock market index is that the S&P 500 only includes large cap stocks, while the total stock market index includes large cap, mid cap, and small cap stocks. For this reason, the total stock market index is often seen as a more representative measure of the stock market than the S&P 500.

However, in reality, these indexes have provided nearly identical stock market performance over time. Over the past five years, the S&P 500 has provided an annualized return of 10.20% compared to the 9.55% return of the S&P Total Stock Market Index (TMI).

S&P 500 vs Total Stock Market Index chart

Pros & Cons of Investing in the S&P 500

Pros

  • Large exposure to a variety of companies
  • Historically high returns
  • Good for investors who don't want to pick individual stocks

Cons

  • Can only invest in large-cap companies
  • Index gives higher weight to companies with bigger market caps
  • Like any stock investing, can be highly volatile

Conclusion

Investing in the S&P 500 can be a great option if you want exposure to some of the biggest companies in the U.S. It's one of the best-known indexes and most of the best stock brokers offer low-cost S&P 500 mutual funds and ETFs.

But while the S&P 500 is a great foundational investment choice for most portfolios, you may want to consider adding other investments as well such as a Total Stock Market Index fund, a Small-Cap fund, or even some individual stocks. Learn more about how diversify your portfolio >>>

Eric Rosenberg

Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time. He has in-depth experience writing about banking, credit cards, investing and other financial topics and is an avid travel hacker. When away from the keyboard, Eric enjoys exploring the world, flying small airplanes, discovering new craft beers and spending time with his wife and little girls.

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