What is the S&P 500 and how does it work?
Updated: September 06, 2024
When you go for a physical exam, it's pretty easy to get a read on your well-being. After running through blood tests, asking a few personal questions and using standard tools like a stethoscope, your doctor can piece together a picture of your health and suggest a treatment plan. But what about figuring out the "health" of something more abstract, like the United States economy? Are there reliable ways to get a snapshot of American business or consumer trends?
While economists have many tools at their disposal, the S&P 500 is one of the most influential metrics on America's business sector. Not only is the S&P crucial for figuring out America's economic health, but it's also a cornerstone in countless global portfolios and a key indicator of investor sentiment. Anyone interested in economics and investing needs a solid foundation in the S&P 500's fundamentals.
What is the S&P 500?
Envision the S&P 500 as a basket full of the biggest businesses in the US. We're talking about the brands you're already familiar with, such as Apple, Disney and McDonald's. The S&P 500 puts 500 major US companies into one "folder" and takes their average price to provide a glimpse into the US economy.
To get a smidge more technical, the S&P 500 is a "large-cap index," meaning it monitors the price performance of 500 American companies with the largest market capitalizations (or "market caps"). The market cap is how much money is in a company's shares on the stock market, and it's calculated by multiplying the price per share by the total number of shares. Since the S&P 500 only focuses on the biggest of big publicly traded US companies, it gives a broad overview of mainstream America's economic status.
Where does the S&P 500 come from?
Here's a fun financial fact: The original version of the S&P 500 only had 233 US companies1. Interestingly, this "S&P 233" came out in 1923, making it super easy to remember on a pop quiz. It wasn't until 1957 that the modern version of the S&P 500 entered the stock market, and it has remained this way ever since.
But what is the "S&P" acronym affixed to this stock index? "S&P" is shorthand for the credit agency "Standard & Poor's" who created the S&P 500 index. To this day, S&P Global Inc. maintains not only the S&P 500 but other influential indices, including the S&P MidCap 400 and the S&P SmallCap 600.
S&P 500 10-year return
In January of 2014, the S&P 500 was trading at around 1,790 points, and within 10 years that number shot up by 170% to 4,8402. So, if you had invested $10,000 in a fund tracking the S&P 500 at the start of 2014, it would have grown to $27,000 within a decade.
S&P 500 average return
Despite turbulence throughout the years, the S&P 500 usually posts positive returns for patient investors. If we go back to 1957, the S&P 500 has an average yearly return of 10.7%3. Just keep in mind that this percentage is an average, and there are some years when the S&P 500 closes in the red. Still, on a long-term horizon, the S&P 500 has been in a growth trend, rising from the 490s4 in early 1957 to 2024's July highs of 5,600.
What does the S&P 500 measure?
The S&P 500 measures the stock performance of 500 large-cap, publicly traded American companies. However, this doesn't mean that S&P analysts simply take one share from every company and divide it by 500 to figure out an average price. Instead, the S&P 500 uses a weighting system to give greater influence to companies with a larger market cap. Basically, the wealthier a company is, the greater its percentage in the S&P 500's portfolio and the more influence it has over the direction of the index.
As for the types of companies the S&P 500 tracks, it uses the following 11 sectors5:
- Communication services
- Consumer discretionary
- Consumer staples
- Energy
- Financials
- Healthcare
- Industrials
- Information technology
- Materials
- Real estate
- Utilities
This diverse range of business segments — plus the large sample size of 500 — gives the S&P 500 a broad overview of the US economy.
Can you buy S&P 500 stock?
Since the S&P 500 is an indexing metric rather than a standalone company, you can't buy it directly on the stock market. So, what do people mean when they say they're "buying the S&P?" While you could buy shares in all publicly-traded stocks in the S&P 500, usually investors who want to get into the S&P 500 buy a managed fund tracking this index's performance.
In 1976, The Vanguard Group6 introduced the concept of investing in the S&P 500 through a mutual fund, and State Street Global Advisors7 took this one step further with its first S&P 500 exchange-traded fund (ETF) in 1993. Today, dozens of managed funds focus exclusively on following the S&P 500, each with unique features, trading hours and fee structures.
Whether investors buy into an S&P 500 mutual fund or ETF, they receive shares on the stock market that trade similarly to shares in a public company. The critical difference is that each of these S&P shares represents a "slice" of ownership in the firm's holdings, which mirrors the performance of the S&P 500 index.
Pros and cons of ETFs
Since State Street's SPY entered the stock market, S&P 500 ETFs continue to attract billions of dollars in inflows. While there are a lot of attractive features S&P 500 ETFs offer, they aren't the perfect fit for everyone's portfolio.
Pros
-
Simple and passive investment strategy: S&P 500 ETFs take the guesswork out of investing in the US economy. By tracking the S&P 500 index, these ETFs give investors broad market exposure without the complexities of constantly re-balancing positions
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Long track record: Although the S&P 500 swings in price day to day, it has a track record for rewarding long-term investors going back to the 1950s
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Accessibility and liquidity: S&P 500 ETFs swap hands during regular trading hours and are available on most of the world's leading brokerage platforms. Plus, the high average trading volume for S&P 500 ETFs increases the odds orders fill quickly and at favorable rates
-
Diversification: The S&P 500 offers investments across multiple sectors, meaning investors aren't overly reliant on any single aspect of the US economy. This balanced approach helps minimize volatility and increase the odds of consistent returns over the long term
Cons
-
Limited growth prospects: The companies in the S&P 500 already dominate its respective fields, so there isn't as much room to grow versus small or midcap stocks
-
Weighting bias: Although the S&P 500 includes 11 sectors, its weighting system tends to overexpose investors to big tech companies because they tend to have the highest market caps
-
No international exposure: Buying an S&P 500 index is a bet on American businesses, which puts investors at risk of US-specific economic issues, policy decisions, or political changes
-
Modest yields: While dividends from ETFs provide passive income, these returns might be lower than higher-risk ETFs or individual high-dividend stocks
How many S&P 500 index funds are there?
Following Vanguard's lead, America's largest investment firms and fund issuers now offer its own S&P 500 index funds as competition. While this is excellent news for investors who crave choices, it makes picking the "right" S&P 500 fund extra time-consuming as you consider factors like fees and the minimum deposits. However, a few S&P 500 index funds stand out for its high concentration of wealth.
- Vanguard 500 Index Fund - Admiral Shares (VFIAX): We'll start our list with the S&P 500 mutual fund that changed the game for US investors. The Vanguard 500 Index Fund - Admiral Shares8 (VFIAX) has a history dating back to 1976, and it remains a solid option for long-term investors interested in S&P 500 exposure. While VFIAX doesn't offer some of the conveniences in ETFs, such as daily trading or low minimums, it's still popular for its competitive expense ratio, unparalleled historical performance and Vanguard's high reputation for security.
- SPDR S&P 500 ETF Trust (SPY): While not the first S&P 500-focused fund, State Street's SPDR S&P 500 ETF Trust (SPY) is the oldest S&P 500 ETF and one of the most actively traded9 ETFs in the world. While the VFIAX and the SPY track the same index and have a solid reputation in the stock market, the SPY introduced convenient features like daily trading and a lower minimum requirement. Plus, thanks to the SPY's popularity among global traders, it has high liquidity, wide accessibility and tight bid-ask spreads.
- Fidelity 500 Index Fund (FXAIX): The asset manager Fidelity also has a mutual fund for the S&P 500 simply called the Fidelity 500 Index Fund (FXAIX). While not much differs between the FXAIX and the VFIAX in terms of its overall structure, there are distinctions between the quoted expense ratios, plus the FXAIX doesn't have a minimum investment compared with the VFIAX's $3,000 deposit.
- iShares Core S&P 500 ETF (IVV): Blackrock's iShares Core S&P 500 ETF (IVV) gives investors access to the S&P 500 index with the same conveniences introduced on the SPY. While not as old or liquid as the SPY, IVV shares have the backing of the world's largest asset manager10, and sometimes they offer competitive expense ratios for investors interested in a bargain.
S&P 500 competitors
The S&P 500 often dominates news reports and plays a prominent role in many portfolios, but other US indices offer unique opportunities for investors. For instance, S&P Global manages a few competing US stock indices, each with different requirements for the companies on these lists. For example, the S&P MidCap 40011 focuses on 400 American companies with slightly lower market caps than those in the S&P 500, which offers a balance of more significant growth potential with relative stability. The S&P SmallCap 60012, however, is focused on up-and-coming US companies with tremendous growth potential but also the highest level of risk.
But it's not just Standard & Poor's that offers indices monitoring the stock market. The Dow Jones Industrial Average (DJIA) has been tracking US companies for far longer, dating back to 189613. While DJIA index funds are widely tracked and readily available, they offer a different degree of diversification since this index only tracks 30 large US companies. Also, instead of weighing companies by market cap, the DJIA is a "price-weighted" index, meaning companies with higher stock prices have a greater sway. Still, due to its size, history and reputation, the DJIA is another popular alternative to the S&P 500 index.
Lastly, the Nasdaq 10014 is one of the more recent stock indices, but it has become a staple for technology-focused investors. As the name suggests, this index focuses on 100 companies in the Nasdaq Stock Market, which has a strong reputation for carrying shares in high-tech stocks like Apple, Microsoft and Amazon. Since the Nasdaq 100 is so tech-heavy, it tends to be more associated with innovation and growth versus the S&P 500's broad sampling of the US economy. Therefore, investors only interested in the latest innovations in fields like AI, robotics and software development are a better fit for the Nasdaq 100, while those who want more diversification tend to favor the S&P 500.
What companies are in S&P 500 and how do they get added?
The S&P 500 explicitly focuses on large-cap companies in the USA, which translates to an undiluted market cap of at least $15.8 billion15, according to S&P Global's 2024 updates. But it's not enough for a company to be worth $15.8 billion to get added to this illustrious 500 club.
Leaders at S&P Global review the recent earnings history of each potential company and only include those with recent positive earnings and consistent, high-quality reports in the past four quarters.
Another significant criterion for S&P 500 companies is "public float," which refers to the amount of a company's shares available to the general public. To avoid including companies with a significant private stake, the S&P 500 only allows businesses that have at least 50%16 of its shares on the public market.
S&P Global constantly monitors the companies in the S&P 500 for these criteria and adjusts its weight or swaps them out if they no longer meet the requirements. Since the S&P 500 is such a big deal, it's common to hear news reports in financial publications whenever there's a shakeup.
Top 20 companies in S&P 500 by weight
In the S&P 500, each stock takes up a different percentage of the total holdings depending on its "weight." All this means is that companies with a higher market cap have greater influence over the price of the S&P 500. S&P Global constantly monitors the market cap of individual companies and divides each one by the market cap in the S&P 500 to determine the appropriate weight for each stock. Companies with higher market caps, like Apple and Microsoft, tend to have an outsized influence on the S&P 500 due to their market dominance, but these numbers constantly fluctuate depending on market demand17.
| # | Company | Symbol | Portfolio weight % |
|---|---|---|---|
| 1 | Apple | AAPL | 6.95% |
| 2 | Microsoft | MSFT | 6.71% |
| 3 | Nvidia | NVDA | 6.48% |
| 4 | Amazon.com | AMZN | 3.49% |
| 5 | Meta Platforms | META | 2.53% |
| 6 | Alphabet Inc. | GOOGL and GOOG | 2.03% and 1.71% |
| 7 | Berkshire Hathaway, Class B | BRK.B | 1.71% |
| 8 | Eli Lilly & Co. | LLY | 1.59% |
| 9 | Broadcom Inc. | AVGO | 1.55% |
| 10 | JPMorgan Chase & Co. | JPM | 1.3% |
| 11 | Tesla Inc. | TSLA | 1.27% |
| 12 | UnitedHealth Group Inc. | UNH | 1.14% |
| 13 | Exxon Mobil Corp. | XOM | 1.14% |
| 14 | Visa Inc. | V | 0.9% |
| 15 | Procter & Gamble Company | PG | 0.85% |
| 16 | Costco Wholesale Corp. | COST | 0.83% |
| 17 | Mastercard Inc. | MA | 0.83% |
| 18 | Johnson & Johnson | JNJ | 0.82% |
| 19 | Home Depot, Inc. | HD | 0.77% |
| 20 | AbbVie, Inc. | ABBV | 0.73% |
What is the best S&P 500 index fund?
Every S&P 500 index fund does the same thing (i.e., track the S&P 500 index), but each offers different features depending on their fund manager. For instance, ETFs provide greater liquidity, while mutual funds may have lower expense ratios. Investors looking for the "best" S&P 500 index fund consider the different fees, dividends and reputations of each product and compare them against their personal investing goals. For more details on how to pick S&P 500 index funds, check out Moneywise's guide to the Best S&P 500 ETFs for 2024.
S&P 500 ETF vs mutual fund
When choosing an S&P 500 index fund, investors face one big question: mutual fund or ETF? While both of these funds offer price exposure to the S&P 500 index, they do so in distinct ways that may or may not be suitable for someone's goals.
| How do they differ? | S&P 500 ETF | S&P 500 mutual fund |
|---|---|---|
| Liquidity | Available for buying and selling during regular trading hours | Only trades once per day on trading days, making them less suited for active trading |
| Minimum investment | Typically no minimum requirements, and may offer fractional shares | Higher chance for minimum deposit, but this isn’t always the case |
| Ideal investment horizon | Works for both short-term and long-term portfolios thanks to their transferability during regular trading hours | Best reserved for a long-term investment horizon due to its lower liquidity |
| Tax implications | Often the tax-efficient option thanks to lower capital gains distributions | Might distribute capital gains more frequently and trigger extra tax implications for investors |
| Costs | Commonly has low expense ratios | While there’s usually a greater chance of higher expense ratios, mutual funds aren’t always high cost versus ETFs |
| Pricing | Swings depending on market volatility similar to stocks of individual companies | Set once per day according to the portfolio’s net asset value (NAV) |
Where to invest in S&P 500
If a brokerage offers access to the US stock market, chances are they have S&P 500 index funds. Although S&P 500 ETFs and mutual funds are readily accessible, you'll get access to different features — and pay different commission fees — depending on the trading platform you use.
If you’re an active investor or options trader looking for a way to save money on trades, you may want to check out discount broker tastytrade. The online service has some of the lowest prices around.
Acorns is an investing service and savings tool rolled into one. This microsavings app makes investing almost painless because you're spending only pennies at a time.
Interactive Brokers offers low trading fees and robust trading tools — major assets to day traders and other DIY investors. Lower-volume traders will also appreciate that they can access commission-free trading through the IBKR Lite plan.
FAQs
Eric Esposito is a freelance contributor on MoneyWise with an interest in financial markets, investing, and trading. In addition to MoneyWise, Eric’s work can be found on financial publications such as WallStreetZen and CoinDesk. When not researching the latest stock market trends, Eric enjoys biking, walking his dog, and spending time with family in Central Florida. Eric holds a BA in English from Quinnipiac University.
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