how to invest in the s&p 500

How To Invest in the S&P 500: A Beginner’s Guide for 2024

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The S&P 500 index tracks the 500 largest companies in the United States. You can’t invest in the index directly, but you can through a mutual fund, ETF, or stocks of the individual companies in the index. If you’re just getting started in investing or looking to expand your portfolio, our guide includes a detailed step-by-step process on how to invest in the S&P 500.

What is the S&P 500? 

The S&P 500 is an index that tracks the 500 leading companies by market capitalization in the U.S. While you can’t directly invest in the index itself, there are two broad options for investing in the S&P 500: through individual stocks or an index fund, such as a mutual fund or exchange-traded fund (ETF).

The S&P 500 is one of the most widely used indicators for the overall health of the U.S. stock market. The S&P 500 represents approximately 80% of the total US stock market capitalization.

The index is market capitalization-weighted, meaning that the weight of each company’s stock within the index is determined by its market value. Companies with larger market capitalizations have a greater impact on the index’s performance. For example, the weight of Apple, Amazon, and Tesla stocks are around 1-8% each in the index. The weight of some of the smallest companies’ stocks is around 0.01% of the index. 

What are the top 10 companies in the S&P 500?

Below are the top 10 companies in the S&P 500 by index weight as of June 2023:

  1. Apple
  2. Microsoft
  3. Amazon
  4. NVIDIA Corporation
  5. Alphabet (class A)
  6. Tesla
  7. Alphabet (class C)
  8. Meta Platforms Inc (class A)
  9. Berkshire Hathaway Inc. (class B)
  10. UnitedHealth Group Inc.
CompanySymbolWeight
AppleAAPL7.56
MicrosoftMSFT6.9
AmazonAMZN3.18
NVIDIA CorporationNVDA2.91
Alphabet (class A)GOOGL1.2
TeslaTSLA1.95
Alphabet (class C)GOOG1.73
Meta Platforms Inc (class A)META1.72
Berkshire Hathaway Inc. (class B)BRK.B1.64
UnitedHealth Group Inc.UNH1.22

Investing in the S&P 500

The S&P 500 index reflects the weighted performance of the 500 stocks in the index. You can’t invest directly in the index, but you can purchase an S&P 500 index fund through mutual funds or ETFs. These index funds strive to mimic the performance of the S&P 500 market index.

A mutual fund pools money from multiple investors to create a diversified portfolio of securities such as stocks, bonds, or other assets. An ETF (Exchange-Traded Fund) is an investment fund that is traded on stock exchanges, similar to individual stocks.

How to invest in the S&P 500

If you want to invest in the S&P 500, you can buy stocks of the individual companies in the index, or invest in mutual funds or exchange-traded funds (ETFs) that replicate the index. To buy either, you’ll need to open a brokerage account to purchase those investments.

1. Predetermine your strategy:

Before investing, it’s important to come up with an investment strategy. Why are you investing, how long do you want to invest for, and how much risk are you willing to take on? If you think that S&P 500 fits into your investment strategy then the next step is to open an investment account. 

2. Open an investment account:

To purchase S&P 500 stocks or funds, you will need to open a brokerage account (if you don’t already have one).

This investment account could be a retirement account like a traditional IRA or Roth IRA, an employer-sponsored 401(k) or similar, or a taxable brokerage account.

There are many brokerage firms to choose from. Some popular options include Vanguard, Fidelity, Charles Schwab, or TD Ameritrade. Compare the brokerage fees, commission structures, account minimums, and available research tools. 

3. Fund your investment account:

Money can be transferred from your bank account, or via check, to your brokerage account. After you’ve done that, you will need to determine how much you want to invest. This amount will depend on your personal investment goals and financial strategy.

4. Choose your investments:

Do you want to invest in individual stocks included in the S&P 500, or do you want to invest in mutual funds or ETFs that replicate the index?

  • Mutual funds: Mutual funds track most, if not all, of the stocks from the 500 companies in the S&P. They try to match the performance of the index as closely as possible.

  • ETFs: ETFs allow investors to pool their money in a fund made up of stocks, bonds, and other assets. They are traded like stocks which means that their share prices can fluctuate throughout the trading day.

  • Individual stocks: An alternative way of investing in the S&P 500 is to buy individual stocks in companies listed in the index. This would mean buying and owning individual shares of companies like Facebook, Apple, or Amazon.

    Once you have decided which investment is best for you, then you can search for the stock, ETF, or mutual fund by name or ticker symbol.

5. Buy your investments

Once the funds in your brokerage account have cleared, you can purchase an S&P 500 index fund in just a few clicks. Simply search for the desired S&P 500 stock, index fund, or ETF by name or ticker symbol. The easiest way to distinguish mutual funds and ETFs is that mutual funds have five ticker symbols, while most ETFs have three.

  • Buy S&P 500 Mutual Fund: After you select the S&P 500 mutual fund that suits your investment goals, follow the platform’s instructions to make the purchase. You will need to specify the investment amount and other details such as the fund’s ticker symbol and the number of shares or dollar amount that you want to invest.

    The price of the mutual fund will depend on its value at the close of the stock market. Mutual funds generally have an investment minimum. However, once you have invested the minimum amount, then you can invest however much you want in the future.

  • Buy S&P 500 ETF: You can buy a single share of an S&P 500 ETF or multiple shares. When buying ETFs you have two options. You can either choose a market order, which means you’ll purchase the fund at its current price, or a limit order, which lets you set a price at which the trade will be executed (if the fund hits that price).

    ETFs can be purchased at specific prices when the stock market is open (9:30 am to 4 pm EST). ETFs don’t have minimum initial investment requirements beyond the price of one share.

  • Buy individual stocks: Individual stocks within the S&P 500 can be purchased at the share price. For example, if you have $400 to invest, and a stock’s share price is $100 per share, you would be able to purchase four shares.

    After your trade is complete, you are the owner of shares of the S&P 500.

6. Set up automatic recurring transfers:

Setting up automatic recurring transfers to your brokerage account can be a great way to grow your net worth over time. 

7.  Monitor Your Investment:

Keep track of your S&P 500 investment by logging into your brokerage account. However, it’s important to remember that investing in the S&P 500 is generally recommended as a long-term investment strategy so be prepared for significant fluctuations over time (up to +/- 37% in any given yeaKeep track of your S&P 500 investment by logging into your brokerage account. However, it’s important to remember that investing in the S&P 500 is generally recommended as a long-term investment strategy so be prepared for significant fluctuations over time (up to +/- 37% in any given year).
 

What are some differences between mutual funds and ETFs?

Mutual funds and ETFs are very similar, but there are differences that investors should be aware of. 

  • Cost: ETFs usually have a slightly lower cost, compared to mutual funds. ETFs often aim to passively track an index and tend to have lower management fees. Mutual funds, especially actively managed ones, may have higher expense ratios due to the costs associated with active management.

  • Investment minimums: Mutual funds will usually have a minimum amount to invest. For example, Vanguard requires a minimum amount of $3,000 to invest in mutual funds. ETFs can be purchased in single shares. If you have a limited amount to invest, ETFs may make investing in the S&P 500 easier for you.

  • Liquidity: When you sell a mutual fund, it takes 1 business day to clear, before you can withdraw. ETFs take 3 business days to clear.

  • Trading flexibility: You can buy/sell ETFs at specific prices when the stock market is open. The prices you can buy/sell the mutual fund will depend on its value at the close of the stock market.

  • Tax Efficiency: ETFs are generally considered more tax-efficient compared to mutual funds. ETFs have the ability to manage capital gains more efficiently. The creation and redemption process can help minimize taxable events, reducing potential capital gains tax liabilities for shareholders. In contrast, mutual funds may generate capital gains through the buying and selling of securities within the fund. This could result in taxable distributions for shareholders.
Mutual fundsETFs
CostSome mutual funds, especially actively managed ones, may have higher expense ratios due to the costs associated with active management.Often aim to passively track an index and tend to have lower management fees.
Investment minimumsMutual funds will usually have a minimum amount to invest. For example, Vanguard requires a minimum amount of $3,000 to invest in mutual funds.ETFs can be purchased in single shares.
LiquidityWhen you sell it takes 1 day to clear.When you sell it takes 3 days to clear.
Trading flexibilityThe prices you can buy/sell the mutual fund will depend on its value at the close of the stock market.You can buy/sell ETFs at specific prices when the stock market is open.
Tax efficiencyGenerally considered less tax-efficient because they may generate capital gains through the buying and selling of securities within the fund.Generally considered more tax-efficient.

What are the lowest-cost S&P 500 index funds?

The lowest-cost S&P 500 fund is the Fidelity ZERO Large Cap Index (FNILX) with an expense ratio of 0%. Below are some of the lowest-cost S&P 500 index funds.

FundExpense ratioFund type
Fidelity ZERO Large Cap Index (FNILX)0%Mutual fund
Fidelity 500 Index Fund (FXAIX)0.02%Mutual fund
Schwab S&P 500 Index Fund (SWPPX)0.02%Mutual fund
iShares Core S&P 500 ETF (IVV)0.03%ETF
SPDR Portfolio S&P 500 ETF (SPLG)0.03%ETF
Vanguard S&P 500 ETF (VOO)0.03%ETF
Vanguard 500 Index Fund Admiral Shares (VFIAX)0.04%Mutual fund

Should I invest in the S&P 500 with mutual funds or ETFs? 

Deciding whether to invest in the S&P 500 through an ETF or mutual fund depends on your individual preferences, investment goals, and circumstances. One of the main differences between index-based ETFs and mutual funds is that ETFs tend to require a lower minimum investment to get started. Therefore, if you are a new investor without much capital to invest upfront then an ETF may be most suitable for you. 

Remember, it’s always a good idea to consult with a financial advisor or do thorough research before making any investment decisions. A financial advisor can provide personalized guidance based on your financial situation and goals.

Curious about where your next dollar should go? Download our guide to help you decide!

 

Can you invest in the S&P 500 with individual stocks?

Yes, you can hand-select individual stocks of companies you want to invest in. Investing in individual stocks can provide more flexibility and control over your portfolio compared to investing through ETFs or mutual funds. However, investing in a single company will increase the risk and volatility of your investment.

We generally do not recommend this to the average investor. The S&P 500 allows you to invest in the 500 largest companies in the U.S. at a much lower cost than trying to buy their stocks individually.

 

Pros and cons of investing in the S&P 500

Investing in the S&P 500 is a popular way to build wealth for new and seasoned investors. Think about how long it would take for you to do your research on each stock. After all that time and effort, you may find the investment performance may be well below the results that could be obtained merely by investing in an S&P 500 index fund or ETF. It’s very difficult to time the market. Here are some pros and cons of investing in the S&P 500.

 

Pros  of investing in the S&P 500

Consistent long-term returns: Although returns in any single year can vary, the S&P 500 has historically provided healthy returns over the long term. The average yearly return of the S&P 500 is 10.36% over the last 100 years. It has demonstrated consistent growth and has been a reliable investment choice for many investors.

Instant diversification: The S&P 500 represents a diversified portfolio of 500 large, well-established companies across various sectors. If one business within the S&P 500 loses value, your entire portfolio won’t be significantly affected.

No intricate analysis required: investing in the S&P 500 through an index fund or ETF means that you don’t have to spend hours analyzing stocks in an attempt to beat the market. 

 

Cons of investing in the S&P 500

Dominated by large-cap companies: The S&P 500 is mainly dominated by large-cap companies. This means that you won’t have much exposure to small-cap or mid-cap stocks. These small-cap stocks may grow much faster than large-cap stocks.

Short-term volatility: Investors must be able to handle short-term price swings. For example, the index lost almost one-third of its value in the space of a few weeks in March 2020.  It’s essential to have a long-term investment horizon and be prepared for short-term fluctuations.

No exposure to international companies: The S&P 500 only includes U.S.-based companies. Therefore you won’t have much stock exposure to companies in other parts of the world.

Expensive Valuation: The S&P 500 price-to-earnings ratio (PE ratio) is close to an all-time high, at 25.77.  The median S&P 500 PE ratio is 14.93. Past studies have shown that the S&P 500 PE ratio tends to revert to the mean. If you believe this, expect lower returns from the S&P 500 moving forward.

No Guarantees: While the S&P 500 has a track record of delivering strong returns, past performance does not guarantee future results. The stock market is influenced by various factors, including economic conditions, geopolitical events, and market sentiment. There is always a degree of uncertainty with investing in the S&P 500 and there are no guarantees of positive returns.

ProsCons
Exposure to 500 leading companies in the U.S.Weighed heavily toward large companies
History of high returns if held long-termNo exposure to small-cap companies. Small-cap companies can produce high returns
Allows beginners to passively invest with index fundsNo exposure to international companies
Instantly diversify your investment portfolioSignificant short-term volatility
No research or prior investment knowledge requiredReturns are not guaranteed

How much does it cost to invest in the S&P 500?

S&P 500 index funds have some of the lowest expense ratios on the market. Many S&P 500 index funds charge less than 0.10% annually. This means that if you chose an S&P index fund that had an expense ratio of 0.10%, you would only pay $10 annually for every $10,000 you have invested in that fund.

Expense ratio fees for mutual funds and ETFs are marginal nowadays. For example,  the Vanguard 500 Index Fund Admiral Shares (VFIAX) has an expense ratio of 0.04% and the Vanguard S&P 500 ETF (VOO) has an expense ratio of 0.03%.

What is the minimum investment for the S&P 500?

The minimum investment required to participate in the S&P 500 can vary depending on the investment vehicle you choose.

  1. Exchange-Traded Funds (ETFs): ETFs that track the S&P 500 typically have no minimum investment requirement. Investors can purchase shares of an S&P 500 ETF on a stock exchange just like they would buy individual stocks. The market determines the price per share which can be as low as a few dollars.

  2. Mutual Funds: The minimum investment for S&P 500 mutual funds can vary significantly. Some mutual funds may have minimum initial investment requirements ranging from a few hundred to several thousand dollars. Some mutual fund companies offer lower minimums or even waive them if you set up an automatic investment plan.

  3. Individual Stocks: Investing directly in individual stocks within the S&P 500 requires purchasing shares of each company separately. The price per share will depend on the specific company’s stock price. Some brokerage firms or investment providers will have their specific requirements or minimums for investing in the S&P 500. Check with them directly for the most up-to-date and accurate information. 

Can non-U.S. citizens invest in the S&P 500?

Yes, non-U.S. citizens can invest in the S&P 500. While the S&P 500 is an index of U.S. companies only, it is accessible to international investors. It is important to note that there may be specific rules and regulations depending on which country the investor resides. Non-U.S. investors should consult with a financial advisor to understand any legal or regulatory requirements.

What is the 10-Year average return on the S&P 500?

The 10-year average annual return on the S&P 500 has been about 12% per year (as of June 29, 2023). 
returns for s&p 500

What is an S&P 500 ESG Index?

S&P 500 ESG (Environmental, Social, and Governance) Indexes apply ethical criteria to the way companies in the S&P 500 operate and adjust the makeup of the index accordingly. A vetting process will be used by each ESG index to ensure that large companies that operate by its ethos are included on the list and those that don’t are not. This allows investors to invest in companies that they believe in while still diversifying their investments.

 

Is investing in the S&P 500 a good idea?

Although the S&P 500 (and the stock market in general) has historically rewarded patient investors who buy and hold for a long time, its performance cannot be guaranteed. It’s best to consult with your financial advisor to determine if the S&P 500 is right for your investment strategy. 

Investing in the S&P 500 in 2024

Overall, the S&P 500 may be a great way to diversify your portfolio as part of your long-term investment strategy.  Choosing between ETFs,  mutual funds, or individual stocks, depends on your situation. If you’re interested in a comprehensive financial plan, including stock market recommendations, schedule a free discovery call today.

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.

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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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