What is the S&P 500?

About the S&P 500 index

The Standard & Poor’s 500 Index was first created in 1923 as the Composite Index. It was tracking 90 stocks by 1926 and eventually expanded to include 500 top stocks by 1957. In 1941, Henry Varnum Poor’s company merged with Standard Statistics to form “Standard and Poor’s Corporation.” By 1957, they renamed the index the Standard & Poor’s 500 Index, or “S&P 500” for short.

The S&P 500 includes the largest 500 U.S. publicly traded companies and 11 different market sectors. Since the largest companies are included, many stock market analysts refer to the S&P 500 as “the stock market” when discussing current stock market performance.

As of July 2023, the top 10 companies (by market cap) in the S&P 500 were:

1. Apple Inc. (AAPL)
2. Microsoft Corp (MSFT)
3. Alphabet Inc. (GOOG)
4. Amazon.com Inc (AMZN)
5. Nvidia Corp (NVDA)
6. Tesla, Inc. (TSLA)
7. Meta Platforms, Inc. (META)
8. Berkshire Hathaway (BRK)
9. Visa Inc. (V)
10. JPMorgan Chase & Co. (JPM)

What the S&P 500 measures

The performance of the S&P 500 is based on the average performance of the companies it is measuring. This means that the returns for each company are measured and weighed into the total index.

The S&P 500 is a market-cap weighted index, meaning the index measures a larger percentage of high market-cap companies, and a smaller percentage of lower market-cap companies. The market capitalization of each company is measured by multiplying the share price by the number of outstanding shares.

Companies such as Apple, Microsoft and Tesla are weighted much heavier than smaller companies in the index, so their share price has more influence on the S&P 500 index performance.

Over the last 90 years, the S&P 500 has returned around 10% annually. This historical performance is pointed to as the standard for investors who choose to invest in index funds — though it’s important to remember that historical performance does not indicate future results.

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S&P 500 vs. other indices

While the S&P 500 is the most referenced index by the financial industry, it is not the only popular stock market index. There are several other indices that measure the performance of a different set of investments.

S&P 500 vs. Nasdaq

The Nasdaq is its own trading marketplace for securities, though it mostly includes growth and technology-focused companies. There are several stocks on the Nasdaq that are also included in the S&P 500, including many of the top 10 stocks (i.e., Tesla, Microsoft, Apple, Google, Amazon).

There are several indices within the Nasdaq, with the Nasdaq 100 being the most popular.

S&P 500 vs. Dow Jones

The Dow Jones Industrial Average (DJIA) is a well-known stock market index that measures the performance of 30 “blue-chip” stocks, typically household names and companies that are seen as some of the most stable large companies in the U.S. The Dow Jones includes companies such as Boeing, Johnson & Johnson, Caterpillar, American Express and Intel Corp.

As compared to the S&P 500’s list of companies, the Dow Jones index is very concentrated, with the performance dictated by a smaller number of companies. This can lead to more volatility for the index, and a lack of diversification for investors.

The Dow Jones is also not weighted by market capitalization, but rather by share price. This means that companies within the index that have a higher share price are more heavily weighted than those with lower share prices.

As far as performance goes, the S&P 500 has historically returned around 10% annually, while the Dow Jones has averaged around 8.90% annually.

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How to invest in the S&P 500

“You can invest in the S&P 500 by purchasing what is called an index fund. This is a mutual fund or exchange-traded fund (ETF) that owns the underlying stock within the S&P 500 index,” explained Jesse Carlucci, chief investment officer at Arrow Investment Management.

“The S&P 500 has been one of the most consistent investments in the U.S. for decades. Over the past 30 years, it has produced an average return of well over 10%. However, because it owns stock, it can be very volatile during periods of uncertainty or recession.”

While many index funds are mutual funds that require a high minimum investment (up to $1,000 or more), you can purchase the ETF equivalent for the price of one share. This can lower the barrier to entry for investors who don’t have thousands to invest.

An example of an S&P 500 index fund is Vanguard 500 Index Fund Admiral Shares (VFIAX). This fund has a minimum investment of $3,000 and very low fees for investors (0.04% expense ratio). But the ETF equivalent of this fund is Vanguard’s VOO fund, which has a much lower share price (close to $400 as of November 2023). And many investing apps will allow you to purchase fractional shares, letting you invest with as little as $1.

Investing in an S&P 500 index fund gives instant diversification, as you are investing in 500 different companies at the same time. In addition, there is not active management in the fund, because the stocks held within the fund simply mirror the index. This is a passive investment strategy and lowers management fees (known as “expense ratios”) significantly, allowing you to keep more of your investment returns.

The S&P 500 has long been the benchmark for fund managers to try to beat and for investors to aim for when projecting future investment returns. But this has proven a difficult task, and most active fund managers and active investors fail to beat the S&P 500 performance over long periods of time.

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Bottom line

The S&P 500 is the most important stock market index in the U.S. It measures the top 500 companies in the U.S., with its performance seen as the benchmark for how the overall U.S. stock market is doing. You can invest in the S&P 500 by purchasing an S&P 500 index fund or ETF.

S&P 500 index funds are a favorite of passive long-term investors due to their high average returns and low management fees. But as with any stock market investments, there is a risk of loss, so it’s important to know your investment objectives, timelines and risk tolerance before choosing to invest.