s&p 500: How To Invest In And Earn Money?:- The S&P 500 Index is the leading benchmark for judging the performance of the US stock market. Funds that track this benchmark index provide a cornerstone to the portfolios of many regular buy-and-hold investors – and this makes understanding how to invest in the S&P 500 an essential skill to learn.
What is the S&P 500?
The S&P 500 is a stock market index that tracks the performance of 500 of the largest US public companies by market capitalization – or the total value of all of their outstanding shares. With a market capitalization of about $39 trillion, this index represents approximately 85% of the total US stock market capitalization.
Because of its sheer size, understanding the trend and performance of the S&P 500 can give you an instant read about the market’s performance in general. It also makes purchasing securities seeking to mimic the S&P 500 an excellent way to add a well-rounded variety of stocks to your portfolio.
“When you buy the S&P 500, you are 90% of the time likely to outperform an active portfolio manager in picking large-cap stocks,” says Joe Favoretto, managing partner at Landmark Wealth Management.
The best way to invest in the S&P 500 is to buy exchange-traded funds (ETFs) or index funds that track the index. There are differences between these two methods that we’ll look at below, but either way, these funds offer extremely low costs and superior diversification.
Invest in S&P 500 with an index fund
Index funds that track the S&P 500 index typically own most or all of the stocks included in the benchmark index so that they can simulate the index’s performance as closely as possible. Then they sell shares of the fund so that investors like you can buy exposure to hundreds of their component investments.
There are more than a few S&P 500 index funds, so here are the criteria you should use to make sure you choose the right option for your portfolio:
Expense ratio. Index funds are passively managed, which means that fund managers simply buy and sell shares to keep the fund’s asset allocation in line with the standard. There is no extensive research or trading that needs to be done. This keeps the expense ratios, the fees you pay to maintain your money, very low. Since nearly all S&P 500 index funds operate very similarly, it is important to choose a fund with the lowest possible expense ratio.
Minimum investment. Index funds have a different minimum investment, whether you buy them for taxable investment accounts or tax-privileged retirement accounts. As you evaluate the various S&P 500 index funds, make sure that the minimum purchase amounts match the amount you have to invest. After you’ve contemplated that initial hurdle, you’ll generally be able to buy fractional shares at whatever dollar value you want.
profit return. Dividends are one of the advantages of investing in the large-cap companies that make up the S&P 500. Be sure to compare the dividend yield offered by the different S&P 500 index funds as dividends can boost returns, even in depressed markets.
Date created. It is worth paying attention to the date of creation of the index fund. Options with a longer history can help you see how an index fund has survived bull markets and mitigate losses in bear markets.
Invest in the S&P 500 with an ETF
Like index funds, passive ETFs aim to replicate the performance of a market index such as the S&P 500. Managers buy a basket of securities to replicate the holdings of the benchmark index and then sell the shares to investors.
Here’s where ETFs differ: Shares issued by ETFs are like stocks, with values that fluctuate throughout the day. Meanwhile, index fund shares trade only once a day, when the markets close at the end of the day. For traditional buy-and-hold investors, the difference is minimal.
Interestingly, the first ETF launched in the US was the S&P 500, State Street SPDR S&P 500 ETF (SPY). Today, SPY remains the world’s largest ETF by assets and the most widely traded ETF.
You should choose the S&P 500 ETF based on several key factors that you might use to differentiate their index fund brothers:
Expense ratio. As with S&P 500 index funds, all S&P 500 ETFs have roughly the same performance. You should always choose the fund with the lowest expense ratio because higher costs do not guarantee better returns on the same index.
Liquidity. Buy-and-hold investors do not need to worry about the liquidity of the ETF. But if you are an active investor who trades in a taxable brokerage account, it is helpful to learn how ETF liquidity affects your strategy. Funds with higher average trading volumes are more liquid, funds with lower average trading volumes are less.
Date created. The more advanced the ETF, the more economic cycles it went through. The more boom and bust cycles a fund goes through, the more confident you are in the fund’s ability to maintain long-term performance.
profit return. Much like index funds, the dividend yield for S&P 500 ETFs is the percentage that the benchmark index companies pay out annually in dividends for every dollar they invest. When choosing an S&P 500 ETF, you will need to make sure that your dividend yield is at least in line with, if not higher, the best S&P 500 ETFs.
Other Considerations for Investing in the S&P 500
Don’t get stuck holding the S&P 500 as the majority of your portfolio. “There are other areas of the market that need it in order to build a diversified portfolio, such as SMEs and international stocks,” Favoretto says.
Building that diversified portfolio also means complementing the S&P 500 fund with bond holdings. Check out our list of the best total market bond index funds to learn how best to build your portfolio of two or three funds.
Can you invest in the S&P 500 with individual stocks?
The S&P 500 tracks the performance of nearly 500 different companies, from Apple (AAPL) to Xerox (XRX) — and there’s nothing stopping you from buying shares of each.
But Aviva Pinto, managing director of Wealthspire Advisors: “If you wanted all the S&P 500 shares, it would be very tedious and expensive to buy them this way.”
First and foremost, you’ll have to shell out a lot of cash to complete the full set of stocks that make up the S&P 500. To buy a share of just one of 10 of the biggest companies in the S&P 500, for example, can cost you more than $8,000.
And that’s without considering that the S&P 500 weights each company based on its market capitalization. This helps it to more accurately reflect the impact of the company’s size on the market as a whole. Duplicating an index’s weighting accurately would be a management nightmare for the individual investor – and keeping that weight on track as the market changes day in and day out would be an even bigger headache.
This is why both financial advisors recommend buying funds that track the S&P 500 index and provide one-stop shopping for those looking to invest in the index.