Billionaire investor Warren Buffett has said “for most people, the best thing to do is to own the S&P 500 index.” So what is the S&P 500 and how do you invest?
You can’t invest directly in the S&P 500, as it only tracks the performance of its constituent stocks. But there are a couple ways you can invest in S&P 500 companies.
The easiest way to invest in the S&P 500 is to invest in either an exchange-traded fund (ETF) or mutual fund that tracks the S&P 500. Funds that track an index like the S&P 500 are known as index funds.
Index funds are designed to track the performance of and achieve approximately the same return as an underlying index, in this case the S&P 500. S&P 500 index funds will have exposure to the top constituents — Apple, Microsoft, Amazon, etc. These funds are a great way to add instant diversification to your portfolio at a low cost.
Since most S&P 500 index funds should in theory achieve nearly similar returns, a fund’s performance may not be the most important factor when deciding which to invest in. Investors should pay closer attention to expenses, which are what will vary the most between funds.
| Fund | Expense ratio | Fund type |
|---|---|---|
| Fidelity 500 Index Fund (FXAIX) | 0.015% | Mutual fund |
| Schwab S&P 500 Index Fund (SWPPX) | 0.020% | 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 |
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 the FAANG companies like Facebook (Meta), Apple, Amazon and so on.
The S&P 500 is a market capitalization-weighted stock market index of over 500 leading US companies in the most prominent industries of the US economy, traded on either the New York Stock Exchange (NYSE) or Nasdaq.
The index was first introduced in 1957. Today, the S&P 500 covers approximately 80% of available market cap and is widely regarded as the best single measure of US stock market performance.
The S&P 500 includes some of the most recognizable and popular stocks in the world. The top ten constituents make up nearly 27% of the entire S&P 500, with Apple alone representing 6% of the total index. This is why when Apple is down, the entire index feels it. The top 10 constituents of the S&P 500 by index weight as of November 30, 2022, are:
| Constituent | Sector |
|---|---|
| Apple (AAPL) | Information technology |
| Microsoft (MSFT) | Information technology |
| Amazon.com (AMZN) | Consumer discretionary |
| Alphabet A (GOOGL) | Consumer discretionary |
| Berkshire Hathaway B (BRK-B) | Financials |
| Alphabet C (GOOG) | Communication Services |
| Tesla (TSLA) | Communication Services |
| Unitedhealth Group (UNH) | Health care |
| Johnson & Johnson (JNJ) | Health care |
| Exxon Mobil Corp (XOM) | Energy |
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