How to Invest in the S&P 500 [And is it a Good Idea?] (2024)

When I started investing, the S&P 500 rate of return seemed like this bigger than life number that we should all be striving to beat.

What was most frustrating was that I could not figure out how to invest in the S&P 500. To me, it seemed that if this number was so important, why is it so hard to invest in it?

The good news is that understanding and investing in the S&P 500 is easier today than it ever has been.

What is the S&P 500

The S&P 500 is a market index that tracks the 500 largest publicly-traded companies in the United States.

Because these companies make up such a significant portion of the stock market, investors have used it as a benchmark for the market as a whole. Most other investments are compared to the S&P 500 to see whether they were “good” or “bad” over a specified period.

It most useful in that the stocks included in it are from a wide variety of industry sectors. Included in the index are shares from companies that specialize in technology, healthcare, energy, retail, financials, and a slew of other industries.

How big are these companies? The five of the top companies in the index are:

• Apple
• Microsoft
• Amazon
• Facebook
• Berkshire Hathaway

Those are some pretty big companies! Even companies that are near the bottom of the list are well known. Kohl’s retail stores are listed in the 490s, and everyone I run into has heard of them.

Ways to Invest in the S&P 500

You cannot invest directly in the S&P 500. It is used for tracking purposes only. However, there are ways to invest in a way that mirrors the index.

ETF

Exchange-traded funds are one of the easiest ways to invest in the stock market. There are index funds available that mirror the S&P 500 index.

ETFs are low cost and easy to trade. They can be purchased in the same way as individual stocks, which can be done through almost any brokerage account.

Ally Invest is a top option because they do not charge any fees for trading ETFs and they have multiple options for ETFs that follow the S&P 500 index.

Robo Advisors

Robo-advisors have allowed people to invest with many of the services you would get from a financial advisor while paying lower fees. Several even include the option of talking to a live person.

The accounts that are run by robo-advisors are widely diversified and will consist of many of the stocks in the S&P 500. If you talk to one of their advisors, you can get funds to follow the S&P 500.

The top robo-advisors for investing in the S&P 500 that also have live advisers are:

• Betterment
• Wealthsimple

Mutual Funds

Mutual funds are an excellent tool for diversifying in the stock market or other investments. Similar to ETFs, you can purchase index funds that mirror the performance of the S&P 500.

Mutual fund investments are typically done through a fund family like Vanguard or Fidelity. All major fund families will have an index fund that tracks with the S&P 500.

Individual Stocks

If you are willing to do the work and have the capital, you can always purchase the individual stocks that are in the S&P 500. As we mentioned above, there are more than 500 stocks to buy, so this isn’t practical for most people.

If you want to give it a shot, then Ally Invest will charge you zero fees for trading stocks.

Financial Advisor

If you prefer to work with an advisor that you can see face to face, they will be happy to help you invest in the S&P 500. You will likely pay more for the service, and get the same ETF or mutual funds as you would get by doing it yourself.

Types of Accounts

The most common accounts that people use when investing in the S&P 500 include:

IRAs

Individual retirement accounts are tax-advantaged retirement accounts. This means that the interest in these accounts grows tax-free.

Most people hold their IRA with a mutual fund company like Vanguard or a discount brokerage like Ally Invest or Fidelity. Either way, any self-managed account will have the option to invest in ETFs or mutual funds that track the S&P 500 index.

Employer-Sponsored Accounts

Employer-sponsored retirement accounts include 401(k), 403(b), and several other lesser-used options. Just like the IRA, these accounts have tax advantages to help people save for retirement.

Employer accounts are usually with a brokerage, so you will have an option to purchase index funds.

Standard Brokerage Accounts

If you are looking to have the maximum flexibility with your money, a discount brokerage account will be your best option. You will not have the tax advantages of a retirement account, but you can withdraw at any time.

When you are ready to withdraw funds, make sure you fully understand the tax implications. You don’t want to end up erasing all your gains with losses to the taxman.

History of the S&P 500

The S&P 500 was started in 1957 by financial giants Standard and Poor’s.

The index’s current owner is a company known as the S&P Dow Jones Indices. This is a joint venture between News Corp. (owner of Dow Jones), CME Group, and S&P Financial.

A fun tidbit on the index is that there are 505 stocks listed in the index, even though “500” is in the name. The reason is that there are a few companies that have two different types of stock and are listed twice on the index.

For example, Alphabet (owner of Google, Youtube, etc.) has both Class A shares and Class C shares listed in the index. These multiple listings pushed to managers of the index to expand to 505 in order to keep 500 different companies on the list.

S&P 500 Alternatives

While the S&P 500 is probably the most well-known index, several other good alternatives for investors include:

• Willshire 5000 – Containing the broadest index of publicly traded companies. It currently tracks more than 3,500 different stocks but did have 5,000 when it was started in 1974.
• Russel 3000 – As the name implies, the Russell 3,000 tracks the 3,000 largest publicly traded stocks in the U.S.
• Nasdaq 100 – A smaller index, the Nasdaq 100 tracks the 100 largest stocks listed on the Nasdaq that are not in the financial sector.

Final Thoughts on Investing in the S&P 500

Investing in the S&P 500 has been a good move for many investors. The hands-off approach to investing in index funds keeps people from pulling money out when the market crashes and then putting it back in at higher prices, locking in their losses.

The benefits of the S&P 500 is that it has shown a gain in 70% of the more than 60 years it has existed and gives you exposure to many different types of industries.

If you are new to investing and want a well established and easy way to invest your money, then an index fund that tracks the S&P 500 is well worth considering.