How to Invest in the S&P 500 (and Access the Biggest 500 U.S. Companies)

There is no shortage of ways to invest out there. You could invest your money in dozens of asset types, but many might require a solid level of research and investment experience to invest properly.

However, other assets might only require minimal experience, and allow you to copy a market sector's performance with ease. One example is investing in assets that mimic the performance of the S&P 500.

But what exactly is the S&P 500? And how and why would you invest in it? The answers here might help guide you toward investment decisions that fit your needs.

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What is the S&P 500?

The Standard & Poor’s 500, or S&P 500, is a stock market index that follows the stock prices of roughly 500 of the largest companies in the U.S. by value. It gives investors a quick snapshot in the form of a score reflecting how these companies are generally performing as a group.

The actual number of companies on the benchmark may vary slightly. The exact number is 504 companies as of May 2022. However, the number always stays close to 500 companies. Those companies represent about 80% of the entire U.S. stock market.

The index was introduced in 1957 and has been jointly managed by S&P Global, the CME Group, and News Corp since 2012. S&P Global estimates that it tracks the performance of assets with a total value or market capitalization of about $13.5 trillion.

Why you might invest in the S&P 500

When figuring out how to invest money, the S&P 500 might be a good starting point exactly because it includes the biggest 500 companies in the U.S. stock market. Although the performance of these companies isn’t guaranteed, their market cap and dominance over the U.S. economy might provide lower risk compared to smaller companies or alternative assets.

However, you can’t invest money directly into the S&P 500 because it’s simply an index that tracks these large-cap companies. So, how would you invest in it?

How to invest in the S&P 500

Although you don’t invest directly in the S&P 500 index, there are several ways to invest in it indirectly. You’ll first need to open an investment account. Once your account is ready, you could invest in a product that follows the index, such as exchange-traded funds (ETFs), index funds, or futures contracts.

Open an investment account

If you want to invest in the S&P 500, the first step is to open an account with an online broker or investment app. You’d use this account to buy and hold your investments, including any assets linked to the S&P 500 index.

Many of the best online brokers and the best investment apps have low fees. Some even offer zero trading commissions, which makes it cost-efficient to begin investing.

You could also use robo-advisors if you want to do less leg work and have your money automatically managed for you. However, robo-advisors often don’t allow you to choose the assets in which your money would be invested. A robo-advisor would likely include some large-cap stocks, including some of the biggest 500 public U.S. companies, but you wouldn’t be able to control that yourself.

Invest in an S&P 500 ETF

Once you have your investment account ready, you could indirectly invest in the S&P 500 by investing in an S&P 500 exchange-traded fund. An S&P 500 ETF is an exchange-traded fund that includes shares of the 500 companies listed on the index, which allows it to mimic its performance.

Simply search for these funds through your online broker or investment app. For instance, you could search for the SPDR S&P 500 ETF (SPY) or the iShares Core S&P 500 ETF (IVV), two popular S&P 500 ETFs that are often available.

ETFs are a popular investment choice for investors because each ETF is listed on an exchange, which allows it to be traded at any time the market is open. They also often have a low cost of management, especially when tracking a market index such as the S&P 500. An ETF manager would occasionally adjust the makeup of the S&P ETF to reflect the makeup of the index, but it wouldn’t require the level of active management of some other funds.

Invest in an S&P 500 index fund

An index fund is a sum of money pooled together by investors to invest in companies listed on a market index, such as the S&P 500 or the Dow Jones Industrial Average. Index funds often use automation to adjust the assets they include to continuously copy the composition of the indexes they follow.

The main difference between an ETF and an index fund is when they can be traded. Investors can trade ETFs any time the market is open, whereas index funds trade once at the end of the trading day.

However, investing in an S&P 500 index fund is simple, as the process is similar to investing in ETFs. Using your brokerage account or investment platform, you could look up an index fund such as the Vanguard 500 Index Fund Admiral Shares (VFIAX) or the Schwab S&P 500 Index Fund (SWPPX).

Once you pull up the index fund you’d like to invest in, you could place an order to put your money into the fund. Remember that index funds trade once daily after the markets close.

Buy S&P 500 futures

Buying S&P 500 futures is another method of investing in the S&P.; Futures are contracts to buy an asset at a specific price at a particular future date, which allows you to speculate on future price movements of an asset.

Learning how to trade futures that are linked to the performance of the S&P 500 might require a good level of investing experience. However, some futures, such as the E-mini S&P 500, trade on stock exchanges, which allows you to buy them by looking up their name and placing an order.

Keep in mind that futures are speculative investment instruments that often require advanced investment experience and might not be suitable for beginners. That’s why they’re used mainly by advanced individual investors and fund managers.

What companies are in the S&P 500?

The S&P 500 tracks the performance of the largest 500 public U.S. companies. The 10 largest companies actually make up more than 25% of the index. These 10 companies are:

1. Apple Inc.

With a market value of more than $2.2 trillion as of June 30, 2022, Apple (AAPL) is the largest publicly traded U.S. company. Whether you are a customer or not, the iPhone, MacBook, and other Apple devices and software have become ubiquitous in the U.S. and beyond.

Here’s more on how to invest in Apple.

2. Microsoft Corp

Microsoft (MSFT) is just shy of Apple with a market value of $1.90 trillion as of June 30. You may know Microsoft because of Windows, but these days, Microsoft makes the bulk of its revenue from Microsoft Office and its server and cloud services.

3. Alphabet, Inc.

Alphabet (GOOGL) is the parent company of Google, the tech behemoth known for its search engine, Google Workspace, and various other products and services. Alphabet is valued at nearly $1.4 trillion as of June 30.

4. Amazon.com, Inc.

Amazon (AMZN) has become one of the largest retailers in the U.S. over the past couple of decades, and its stock price has risen to reflect that. Today, Amazon is worth more than $1 trillion as of June 30.

Although the average consumer knows Amazon for its retail operations, the company makes most of its money through Amazon Web Services (AWS). AWS is a cloud computing provider that offers computing power, storage, and databases.

Read our explanation of how to buy Amazon stock.

5. Tesla, Inc.

The company that revolutionized the electric car in the U.S. became one of the largest public companies in the stock market. Tesla (TSLA) is worth more than $690 billion as of June 30 and makes most of its money selling its lower-priced Model 3 and Model Y vehicles.

Find out how to invest in Tesla with as little as $1.

6. Berkshire Hathaway, Inc.

Owned by one of America’s most successful and well-known investors, Warren Buffett, Berkshire Hathaway (BRK-B) is worth over $600 billion as of June 30. The company wholly owns several other large and well-known companies, including Duracell, Geico, and Kraft Heinz.

7. Johnson & Johnson

Johnson & Johnson (JNJ) develops medical devices, pharmaceuticals, and other consumer goods. It owns several brands, such as Band-Aid, Neutrogena, and Tylenol. The company is valued at more than $480 billion as of June 30.

8. UnitedHealth Group, Inc.

UnitedHealth Group (UNH) is the country's largest publicly traded health insurer at a value slightly above $460 billion as of June 30. The company provides health insurance in the United States and has a global branch serving over 7.5 million people in 150 countries.

9. Meta Platforms, Inc.

Meta Platforms, formerly known as Facebook, is the current parent company of Facebook and Instagram. Meta is a tech conglomerate based in Menlo Park, California, and it’s currently valued at more than $435 billion as of June 30. The company owns WhatsApp, Oculus, and several other apps and services.

10. Nvidia Corp

Nvidia (NVDA) is a technology company that produces graphics cards and gaming laptops. It also offers cloud computing services, networking, and other products. The market value of the company currently stands at more than $377 billion as of June 30.

Learn how to buy Nvidia stock.

Things to consider when investing

Investing might be a good way to put your money to work. However, there are a few factors you should consider when investing. Things such as fees, taxes, and the diversification of your assets are among the most important things to keep in mind.

1. Pay attention to the fees

The fees you pay might make a big difference when investing in ETFs and index funds. The good news is that the average fees declined dramatically in the past decade or two.

The average expense ratio for stock index funds fell from 0.27% in 1996 to 0.06% in 2020. You should always seek the lowest fees. Before investing in an ETF or index fund, review the fees and ensure there are no extra hidden fees.

Although you might still see fees above 1% for funds that a human actively manages — as opposed to an automated software — you should consider that fees this high significantly reduce your returns in the long term.

2. Consider your capital gains tax

When you sell investments and make a profit, you might owe the IRS capital gains taxes on your profit. Some investments, such as those in a Roth IRA, allow you to avoid this situation.

However, if you have to pay capital gains taxes, know that any investments held for less than one year are often taxed at a less favorable rate, known as the short-term capital gains tax rate. On the other hand, investments held for more than one year are taxed at a more favorable long-term rate.

Learn more about long-term versus short-term capital gains taxes.

3. Invest in more than one ETF

Investing in more than one ETF allows you to diversify your assets by placing your eggs in more than one basket.

Diversifying the assets you own by including several ETFs, individual stocks, bonds, and more helps you reduce volatility and risk. Some ETFs that might add investment diversification are bond, international, commodity, and real estate ETFs.

Learn how to diversify your portfolio.

FAQs

Bottom line

The S&P 500 is a stock index that tracks the performance of the biggest 500 publicly traded companies in the U.S. Because it’s a market index that simply indicates the performance of its assets, you can’t directly buy, sell, or invest in it.

However, there are several ways to invest in the market’s performance of companies listed on the S&P 500. For example, you could invest in S&P 500 ETFs, index funds, or futures. Investing in these assets essentially connects your investment’s value, in varying degrees, to the performance of the largest 500 companies in the U.S.

If you plan to invest in assets that are linked to the S&P 500, be sure to diversify your portfolio and understand your potential capital gains tax liability. You should also monitor your fees and remember that past performance doesn’t guarantee future results. Lastly, you could consult a financial advisor to establish an investment strategy.

FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.

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