Comparison and Analysis Table
What is the 5 year average return for the S&P 500?
The S&P 500 5 year average return is 13.57%. Commonly referred to as “the market”, the S&P 500 is a collection of the 500 largest public companies in the United States. This index serves as the benchmark for both professional and individual investors to match or beat.
When entering into or working in the financial realm, you will no doubt run into the phrase “the market” which will be referring to the S&P 500. The next question will be “what is it’s return” and with that no more real thought will likely be placed on the subject.
The problem here is that if you’re a new investor, you’ve probably been given an unclear answer of what the S&P 500 is, how it works, and why its important. On the other hand, if you’re an experienced investor, the idea of the S&P 500 may be so routine that you may be glancing over some important factors you should be considering.
Regardless of which investor you are, we cover not only the S&P 500 annual returns but also the additional information you may need to know.
5 year average return for the S&P 500 – table
S&P 500 vs inflation 5 year average
In developed countries with stable currencies, knowing the percentage increase in an investments value is often “good enough” when deciding to invest or not. This pure look at a price increase or decrease is referred to as the “nominal return” value of the investment. When you hear commentators on financial television talking about returns of the S&P 500 or other investments, they are referring to nominal returns.
However, if a country goes through an uncertain economic time it’s currency may experience inflation. Practically speaking, inflation is the loss in purchasing power of an individual unit of the currency. For example, in the US annual inflation is typically low, around 2%. This means that $1 in the beginning of the year will effectively have $0.98 buying power even though it still say $1. Applying inflation to investing, we can factor in inflation to find the true returns on our investments, this is called “real return”. The real return is the effective increase of decrease of our investment after accounting for the change in purchasing power.
The S&P 500 5 year average inflation adjusted return is 11.80%.
Growth of $1,000 in S&P 500 over 5 years
So how would have you done the last 5 years if you invested in an index fund that tracks the S&P 500? Your initial $1,000 investment after 5 years would now be worth around $1,837.74 depending on how well the fund tracked the S&P 500 and it’s expense ratio.
What funds track the S&P 500? SPDR S&P 500 ETF Trust (SPY) is a well know ETF whose objective is to track the S&P 500. This is not the only fund though that tracks the S&P 500.
Largest Companies – Points of Understanding
In recent years the S&P 500 has been increasingly weighted towards a few very large tech companies. In fact, the 5 largest companies today account for nearly 20% of the value of the index. What this means for investors who use the S&P 500 in their investing strategy is that they too are being slanted towards these tech companies.
As these companies gain more and more prominence in the index, the level of balanced diversification of the index diminishes. Investors who are already heavily weighted towards tech and are using a S&P 500 index fund to add diversification should be aware of the diminished diversification they may be receiving.
For those who say investors shouldn’t try to beat the S&P 500 because it’s very unlikely. A case can be made against them simply by looking at the 5 largest companies in the S&P 500. The point here is that investors can benefit by adding exceptional companies to their portfolio which may allow them to outperform the market.
S&P 500 vs Apple 5 year average
Apple’s 5 year average return is 43.24%
S&P 500 vs Microsoft 5 year average
Microsoft’s 5 year average return is 32.94%
S&P 500 vs Amazon 5 year average
Amazon’s 5 year average return is 38.93%
S&P 500 vs Facebook 5 year average
Facebook’s 5 year average return is 25.45%
S&P 500 vs Alphabet 5 year average
Alphabets’s 5 year average return is 19.80%
Understanding the S&P 500 index
The Standard & Poor’s 500 index (S&P 500) is a market-cap weighted index of the 500 largest publicly-traded companies in the United States. This means that all companies in the index are both companies in the United States and publicly traded.
The market-cap part represents the value of the company to equity investors (common stock owners). To calculate market-cap, the total number of outstanding shares of a company are multiplied by the current share price. Since the S&P 500 is market-cap weighted, they will use these values to figure out the influence each company should have on the value of the index. To calculate the weighting of each company, the company’s market cap is divided by the total market cap of all 500 companies.
For example, if Apple has a market cap of $2 trillion and the total market cap of all the companies in the S&P 500 is $30 trillion ($2 trillion / $30 trillion). Apple would have an approximate 6.67% weighting on the index. This means Apple stock price will influence the index by approximately 6.67%.
It should be made clear that the S&P 500 is not a mutual fund or ETF but simply a mathematical representation.
