The S&P 500 Etf: A Smart, Stable Investment Choice

The S&P 500 is a stock market index that tracks the performance of 500 of the largest U.S. public companies by market capitalization. It is considered a good indicator of the health of the U.S. stock market and the economy. Investing in the S&P 500 can be a good way to gain exposure to a diverse range of well-established U.S. companies and benefit from the long-term growth of the U.S. economy.

There are two main ways to invest in the S&P 500: through index funds or exchange-traded funds (ETFs). Index funds are passively managed funds that aim to replicate the performance of the S&P 500 index by holding most or all of the stocks included in the index. ETFs, on the other hand, are traded on exchanges like stocks and can be bought and sold throughout the trading day. Both options offer low costs, diversification, and access to some of the world's largest and most dynamic companies.

When choosing between S&P 500 index funds and ETFs, investors should consider factors such as expense ratios, dividend yields, liquidity, and investment minimums. It's also important to remember that while the S&P 500 can be a core holding in a portfolio, it should not be the only investment, as diversifying into other areas such as small-cap, mid-cap, and international stocks, as well as bonds, is important for a well-rounded portfolio.

Instant diversification

The S&P 500 ETF offers a simple and cost-effective way to achieve instant diversification. The ETF is designed to track the performance of the S&P 500 index, which is considered a snapshot of the US economy. The financial institution managing the ETF buys stock in every company listed in the index, using the same weighting. This means that your investment rises and falls with the S&P 500.

The S&P 500 ETF provides instant diversification across a multitude of sectors. For example, the Vanguard S&P 500 ETF (VOO) includes companies from the information technology, healthcare, consumer discretionary, financials, and industrials sectors, to name a few.

Additionally, the S&P 500 ETF offers instant diversification in terms of company size. The index includes a range of large-cap US stocks, which are some of the most important and established companies in the US market.

The instant diversification provided by the S&P 500 ETF is a significant advantage for investors seeking a simple, low-cost, and well-diversified investment option.

Passive investing

How it Works

The S&P 500 is an index of 500 large US companies, which together represent about 80% of the total US stock market's value. Passive investing in the S&P 500 means buying into funds that aim to replicate the performance of this index.

ETFs

ETFs are traded on exchanges, like stocks, and they can be bought and sold at any time during the trading day. The first ETF ever created used the S&P 500 as its benchmark, and it remains one of the largest ETFs in the world. ETFs that track the S&P 500 tend to have lower expense ratios compared to the industry average.

Index Funds

Index funds are similar to ETFs in that they aim to replicate the performance of the S&P 500, but they are only traded at the end of each trading day. They are passively managed, meaning fund managers simply buy and sell stocks to keep the fund's asset allocation in line with the index. This results in very low expense ratios.

Benefits

Criticisms

Some critics argue that passive investing may create inefficient markets and reduce market elasticity. There are also concerns about the level of influence that large index funds have on the market and individual companies.

Low fees

One of the most important factors in your total return is cost. When it comes to index funds like the S&P 500, one of the most important factors in your total return is cost.

The S&P 500 ETF with the lowest fees is the iShares Core S&P 500 ETF (IVV) (tied with the Vanguard S&P 500 ETF (VOO) and the SPDR Portfolio S&P 500 ETF (SPLG)). The iShares Core S&P 500 ETF has an expense ratio of 0.03%, which means that for every $10,000 invested, fees would equal $3 annually. The Vanguard S&P 500 ETF also has an expense ratio of 0.03%. The SPDR Portfolio S&P 500 ETF has an expense ratio of 0.03%.

The SPDR S&P 500 ETF (SPY) is the most liquid S&P 500 ETF. Liquidity indicates how easy it is to buy or sell an ETF, with higher liquidity generally translating to lower trading costs. While trading costs are not a concern for investors holding ETFs long-term, active traders favour highly liquid funds to minimize costs. The SPDR S&P 500 ETF has an expense ratio of 0.0945%, which is more than triple that of the iShares Core S&P 500 ETF and the Vanguard S&P 500 ETF.

ETFs have become popular because of their relatively low fees, but there are differences among them that can add up. For example, the SPDR S&P 500 ETF has a relatively high expense ratio of 0.0945%. While this is still low compared to that of a mutual fund, it is much higher than that of other S&P 500 ETFs.

Expense ratios can significantly impact a long-term investor's total returns. For example, an investor who puts $10,000 in a fund that returns 10% every year will pay $336 in fees to a fund with a 0.5% expense ratio. The same investor would pay $1,682 in fees if they put the same money in a fund with a 2.5% expense ratio.

When choosing an S&P 500 ETF, it is important to consider the fees that will be paid. While all S&P 500 ETFs track the holdings of this index, there are several differences to consider. ETFs can be bought and sold whenever the stock market is open, while index funds can only be bought and sold at a set price point at the end of each trading day.

The Fidelity ZERO Large Cap Index mutual fund is another fund that is similar to the S&P 500, but does not officially track it. The fund tracks the Fidelity U.S. Large Cap Index. The fund has an expense ratio of 0%, meaning that for every $10,000 invested, fees would equal $0 annually.

Overall, S&P 500 ETFs are a cost-effective way to get exposure to a number of stocks.

Easy to buy

The S&P 500 is a stock market index that tracks the performance of 500 of the largest U.S. public companies by market capitalization. It is considered a good indicator of the performance of the U.S. stock market as a whole.

You cannot directly invest in the S&P 500 index itself, but you can buy individual stocks of companies in the S&P 500, or invest in an S&P 500 index fund or ETF.

Buying individual stocks

If you want to buy individual stocks in the S&P 500, you would need to purchase shares in each company. This can be a costly and time-consuming process, as the S&P 500 includes 500 different companies, from Apple to Xerox. It would also be very difficult to accurately duplicate the index weighting, which is based on market capitalization.

Buying an S&P 500 index fund or ETF

The easiest way to invest in the S&P 500 is to buy an S&P 500 index fund or ETF. These funds aim to replicate the returns of the S&P 500 by tracking it, offering investors exposure to S&P 500 companies without the effort involved in purchasing the individual stock of each company.

You can purchase index funds and ETFs in a taxable brokerage account, or in a tax-advantaged retirement account such as a 401(k) or IRA.

If you don't already have a brokerage account, you will need to open one to buy investments. You can use the money you deposit into the brokerage account to purchase S&P 500 stocks or funds, which will then be held within that account.

There are a variety of S&P 500 index funds and ETFs to choose from, with small differences in expense ratios, trading volume, and dividend yield.

• SPDR S&P 500 ETF Trust (SPY)
• IShares Core S&P 500 ETF (IVV)
• Vanguard S&P 500 ETF (VOO)
• Fidelity 500 Index Fund (FXAIX)
• Schwab S&P 500 Index Fund (SWPPX)

Long-term returns

The S&P 500 is a stock market index that tracks the performance of 500 of the largest U.S. public companies by market capitalisation. It is one of the most widely followed proxies for the U.S. stock market and a bellwether for many major funds and portfolio managers.

The S&P 500 has delivered an average annual return of around 10% since its inception in 1928. Over the past 30 years, the S&P 500 index has delivered a compound average annual growth rate of 10.7% per year.

From 1950 to 2023, the S&P 500 yielded an annualised average return of 11.34%. The average annualised return since adopting 500 stocks in 1957 through to the end of 2023 is 10.26%.

If you had invested $10,000 in the S&P 500 on the first trading day of January 2001, it would have been worth around $55,331 by the end of 2023.

The S&P 500 is a good long-term investment because it is well-diversified by sector. It includes stocks in all major areas, meaning that declines in some sectors may be offset by gains in others.

Billionaire investor Warren Buffett has said that an S&P 500 index fund is the best investment most people can make. In his will, he ordered that his children's inheritance be placed in an S&P 500 index fund because the "long-term results from this policy will be superior to those attained by most investors".

However, it is important to remember that past performance is not an indicator of future results.

Frequently asked questions