How to invest in the S&P 500

Summary 

• The S&P 500 is comprised of 500 of the strongest companies in the U.S. economy; investing in the S&P 500 is an approach that takes advantage of that. 
• To invest in the S&P 500, you need to invest in a fund that tracks the S&P 500 index. 
• An ETF that tracks the S&P 500 makes a lot of sense, but there may be low-cost mutual fund options to look at as well. 
• Unbiased can connect you to a financial advisor to help you evaluate your options for investing in the S&P 500, as well as help you put together a financial plan and investment portfolio to meet your goals. 

What is S&P 500 investing?

The S&P 500 is an index tracking the stocks of 500 of the largest U.S. companies. It’s weighted based on the size of the company – the larger the company’s market cap, the larger the proportional influence in the index. 

As a whole, the S&P 500 represents 80 percent of the market and serves as a key economic indicator for the U.S. stock market. If you believe in the strength of the U.S. economy, you may want to consider investing in the S&P 500. 

You can’t directly invest in the S&P 500, but you can invest in an ETF or mutual fund that tracks the S&P 500 index. 

The ways to invest in the S&P 500

There are two main avenues for investing in the S&P 500:

• ETFs
• Mutual funds

The way you invest in the S&P 500 is through an ETF or mutual fund that mimics the performance of the S&P 500. 

These are considered index funds, which buy stocks from companies listed in the S&P 500 in the same proportion to which they’re weighted in the S&P 500. 

Put another way, companies with larger market caps have more weight than companies with smaller market caps. 

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

The costs of investing in the S&P 500 can be very low. Expense ratios tend to be very low for index fund investing, which is what you’re doing when you buy a fund that tracks the S&P 500. Common expense fund ratios for five of the top S&P 500 funds are listed below.

What are the advantages of investing in the S&P 500?

Investing in the S&P 500 has many advantages, including simplified investing, easy diversification, investing in the strongest companies in the US, and low-cost investing, which we’ll cover below. 

Simplifies investing

When you buy an index fund, you benefit from its simplicity. You don’t have to research individual stocks, place an order for each, and sell when they start to underperform. Buying shares in a fund will automatically do this for you. 

Easy diversification

Buying a fund that tracks the S&P 500 offers instant diversification in your portfolio. You buy one fund and get access to 500 companies. It’s also easy to find a fund. There are many to choose from and can be bought and sold throughout the day. 

Invest in the strongest companies in the US

The companies in the S&P 500 are the largest by market capitalization. The index is rebalanced quarterly, and stocks are added or dropped from the index based on quantitative factors. In other words, only the strongest stocks are included in the index. 

Low-cost investing

Index investing comes with very low expense ratios. More money makes its way back into your pockets. 

What are the disadvantages of investing in the S&P 500?

There are some downsides to investing in the S&P 500 that you should consider. 

Favors big companies

Since the index tracks the 500 largest U.S. companies, you won’t have exposure to small-cap U.S. stocks. You’ll only see growth with the largest companies in the U.S. 

Limited international investments

Although the S&P 500 does have some international companies that are large enough to generate significant revenue from global markets, for the most part, the S&P 500 represents the U.S. stock market. 

Volatility

Because the S&P 500 follows the largest companies, it’s more susceptible to large market swings. When the market as a whole is experiencing uncertainty, the S&P 500 can dip significantly.

Concentration risk

The S&P 500 is weighted by the market cap of the individual companies. The biggest companies are tech companies and make up a large part of the S&P 500. If the tech industry is confronting challenges and the market is down, the whole index will likely be down as well. 

How to invest in S&P 500: Step-by-step guide

Investing in the S&P 500 is straightforward if you know where to look. Here’s a step-by-step guide to ensure you’re investing in the right place. 

Step one: Open a brokerage or retirement account. 

You need an account to hold investments. You can hold it in a brokerage or retirement account, such as an IRA, Roth IRA, 401(k), or other IRA type. The main difference between account types is when and how they’re taxed, so it can be helpful to consult with a financial advisor and accountant to decide on which way you want to invest. 

There are many excellent providers, such as Fidelity, Charles Schwab, Vanguard, Betterment, Wealthfront, and others. You may already have a retirement account, and in that case, you may be able to select an S&P 500 index fund from the available options. 

Step two: Transfer money 

After opening a brokerage account, you’ll need to link a funding mechanism, such as a bank account or direct deposit. Having money in the account is a prerequisite to choosing an investment fund. 

Step three: Choose your fund

Look for an index fund that tracks the S&P 500. You may only have one choice if you’re looking for options with your employer’s plan. Look for a fund with a low expense ratio, as these tend to outperform identical funds. 

Step four: Invest with regular frequency

Consistently invest, and you’ll be pleasantly surprised by the results. Set up regular contributions, automated investing schedules, an app, or any other tool that helps you invest regularly. Watch your investments, ask for expert advice, and rebalance as needed. 

Should you invest in an S&P 500 index fund or ETF?

For clarification purposes, we’ll address the question, “Should you invest in an S&P 500 index fund or ETF?” 

Both ETFs and mutual funds can be index funds. When we talk about a fund being an index fund, we’re usually referring to the strategy – investing in the same stocks and in the same amount as the S&P 500.

Sometimes when people ask about investing in the S&P 500, what they really mean is: Should I invest in a mutual fund or an ETF that tracks the index? 

The short answer? They’re similar enough that you may just want to compare the expense ratio of each fund and choose the lowest one. Morningstar’s analysis shows a clear relationship between funds with lower expense ratios and better performance.  

Bottom line

Investing in the S&P 500 is straightforward, but you need to know where to look to take advantage of it. Investing in the 500 strongest U.S. companies can be a solid part of your investment portfolio. 

To put together a portfolio that aligns with your values and goals, you may want professional advice.