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- The S&P 500 is a broad-based stock market index, consisting of the 500 largest U.S. public companies.
- The diversity and size of the companies it tracks make the S&P a proxy for the entire stock market.
- You can use the index as a reference point to gauge performance of other assets.
People often say "the stock market is up," or "the market is down." But the stock market is an amorphous thing, encompassing thousands of equities and dozens of stock exchanges. What they actually mean is a particular stock market index, or group of publicly traded companies, is up or down.
And if they're in the U.S., odds are that index is the S&P 500.
Named for the number of companies on its list, the S&P 500 is "a broad-based index that includes the cross-section of economic sectors like information technology, healthcare and consumer discretionary, as well as major companies in the financial, energy, industrial, and consumer durable sectors," says Solomon Tadesse, who heads North American equity quantitative research at Société Générale.
"As such, the S&P 500 is a good proxy of the U.S. equity market and, by implication, the economy and its near-term trends."
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Understanding the S&P 500
Understanding the S&P 500 can be important for investors. Here's everything you need to know about this influential index.
What is the S&P 500?
Developed by Standard & Poor's (now S&P Global), the S&P 500 launched in 1957. But its status as a proxy for the U.S. equity market was cemented in 1968, when the S&P 500 became one of the indicators used by The Conference Board, the business membership and research organization, to forecast economic trends.
It's what's known as a weighted index, meaning companies with a higher market capitalization (the total value of all their stock shares), carry more clout in the calculations, so the overall index correlates more closely to the broader market.
The index's relative level — or the collective worth of the stock shares within it — is expressed in points. In July 2024, it stood at more than 5,500. So if the S&P 500 experienced a 10% climb from this point, it would mean an overall index gain of 550 points.
How the S&P 500 works
Selection criteria for companies
To be in the S&P 500, companies need to meet some specific requirements:
- Be based in the U.S. (though it can have overseas operations)
- Be a corporation and offer common shares of stock
- Have a market capitalization of at least $18 billion
- Trade on a major U.S. exchange (this includes NYSE, Nasdaq Global Market, Cboe BZX)
- Have shares that are highly liquid
- Have positive earnings in the most recent quarter, and have positive earnings when adding up last four quarters
Market capitalization and weighting
The S&P 500 is what's known as a weighted index, meaning companies with a higher market capitalization (the total value of all their stock shares), carry more clout in the calculations, so the overall index correlates more closely to the broader market.
This can lead to substantial concentration, meaning that a small number of stocks can account for a significant fraction of the S&P 500's value. In early 2024, 10 stocks accounted for over 30% of the benchmark index's value, according to figures from major investment bank Goldman Sachs.
Rebalancing and adjustments
The S&P 500 undergoes rebalancing once a quarter, a process that can result in it adding new companies and discarding old ones. Securities that have entered the markets as a result of an initial public offering (IPO), for example, can potentially join the S&P 500.
Alternatively, if a company changed its domicile so that it is based in the U.S., it is eligible to join this benchmark index. In addition, companies that have exited bankruptcy, as well as organizations that change their legal structure to be a corporation that offers shares of common stock, can become a part of the S&P 500.
Importance of the S&P 500
Benchmark for U.S. stock market performance
The S&P 500 is frequently used as a proxy for the value of the entire stock market, since the stocks it contains account for roughly 80% of the total value of stocks that are publicly available for trading. Many investors use it as a benchmark when evaluating their performance.
Economic indicator
Many think of the S&P 500 as not only a good way of measuring the strength of the stock market, but also the health of the economy overall. Market observers might interpret notable gains in this benchmark index as being a bullish sign for the economy, while notable declines might portend weakness in business conditions.
It is worth noting that the value of the S&P 500 is calculated many times during every trading day, while more traditional economic indicators, for example GDP and the unemployment rate, are lagging indicators, meaning they provide information on things that have already happened.
U.S. GDP, for example, is issued for every quarter, although the Bureau of Economic Analysis, which calculates this data, provides three different estimates for every quarter.
Investor sentiment
The S&P 500 can serve as a proxy for the sentiment of investors. CNN Business has something called the Fear & Greed Index, which uses several different measures, including one based on the S&P 500, to determine how fearful or greedy the markets are.
More specifically, the Fear & Greed Index examines the S&P 500's value and compares it to its 125-day moving average (MA). If the index's recent values have been consistently higher than than the aforementioned MA, the situation indicates bullish momentum.
Alternatively, if the S&P 500's recent values are lower than the 125-day MA, it points to the nervousness of investors.
How to invest in the S&P 500
Index funds
You can't invest directly in the S&P 500 — it'd be like trying to buy a list of groceries, instead of the groceries themselves. Instead, you invest in the S&P 500 through index funds. They're like baskets that contain all the groceries on the S&P list.
An index fund is a type of financial vehicle designed to mimic a particular market index. It pools investors' money to purchase a portfolio of stocks or other securities. In the case of S&P 500 index funds, the stocks are those of the companies listed in the S&P 500.
Most index funds are "passively managed," meaning the investment professionals overseeing them don't trade the holdings very much. Their goal is to duplicate the index's make-up and performance, instead of trying to beat it. Index funds appeal to long-term-oriented, buy-and-hold investors, who like to let their assets grow on auto-pilot.
All the leading brokerages and financial services companies offer S&P 500 index funds at traditional firms:
- Charles Schwab
- Fidelity Investments
- Vanguard
Through online brokerages:
- Robinhood
- Stash
And with some of the best robo-advisors:
- Wealthfront
- Betterment
Some of the leading S&P 500 index funds include:
- Vanguard 500 Index Fund Admiral Shares
- State Street Global Advisors' SPDR S&P 500 ETF Trust
- Fidelity 500 Index Fund
- Vanguard Total Stock Market Index Fund Admiral Shares
- iShares Core S&P 500 ETF
Exchange-traded funds (ETFs)
Another way you can invest in the index is by purchasing exchange-traded funds (ETFs). These S&P 500 ETFs basically provide exposure to a basket of assets, in this case the stocks contained in the S&P 500.
ETFs trade like stocks, so you can purchase them throughout the trading day. One factor you should keep in mind is that while an ETF may be designed to track an index like the S&P 500, it doesn't always do so, and failure to accurately mimic or follow an index is known as tracking error.
Individual stocks
Another way you can invest in the S&P 500 is by purchasing the individual stocks. As stated earlier, seven stocks account for over 30% of the value of this index, so you can gain exposure to a large section of the S&P 500 with a relatively low number of transactions.
However, if you want to gain exposure to this index through acquiring individual stocks, you should keep transaction related fees like commissions in mind. The fees associated with buying these individual shares can quickly add up, eating into your returns.
Benefits of investing in the S&P 500
Diversification
Investing in the S&P 500 can quickly grant you exposure to a diversified group of stocks, as this particular index represents roughly 80% of the U.S. stock market.
Historical performance
It is helpful to be familiar with the S&P 500's historical performance.
The index has returned an average of roughly 10% per year since being created in the 1950s. However, not all years represented increases, as some of them came with sharp declines. In 2002, for example, the index dropped over 23%, and in 2008, it fell close to 40%.
Low expense ratios
There are myriad funds you can use to invest in the S&P 500, and many of them have low fees. Index funds, in particular, are known for having very low expense ratios, which is the fee that the financial institution offering the fund charges every year to manage it.
Risks of investing in the S&P 500
Market risk
The value of the S&P 500 is susceptible to market risk, meaning that it can fluctuate if the overall conditions of the broader market changes. Should the entire stock market suffer notable losses, the S&P 500 would decline.
Economic downturns
Should economic conditions trend lower, that will frequently cause stocks in general to lose value. Stock prices are based around expectations of future profitability, and business earnings decline during recessions. Investors may also become nervous and engage in panic selling should the economy fall into recession.
On the plus side, U.S. expansions last longer, on average, than recessions. The US entered a period of GDP growth in 1991, for example, that lasted 120 months. Starting in 2009, it entered its longest expansion in history, which went on for 128 months.
In contrast, the recessions that took place before the aforementioned expansions lasted 8 and 16 months, respectively.
Overexposure to large companies
Some market observers have voiced concerns that the value of the S&P 500 is concentrated in the shares of too few companies, according to a Goldman Sachs report released in March 2024.
However, the authors who put together the aforementioned report singled out several periods over the last 100 years where US stocks exhibited very high concentrations, and noted that in the 12 months following these crucial points, these stocks were more likely to rally than decline.
S&P 500 FAQs
What is the S&P 500?
The S&P 500 is a benchmark index that measures the value of 500 large stocks that represent ownership in major U.S. companies.
How is the S&P 500 calculated?
The S&P 500 is calculated using the prices of its individual component stocks. The S&P 500 is weighted, meaning that the larger companies contribute more to the total value of the index than the smaller ones.
Why is the S&P 500 important?
The S&P 500 is widely considered a key benchmark representing the value of the stock market. It also serves as an indicator of the health of the overall economy.
How can I invest in the S&P 500?
You can invest in the S&P 500 in many different ways, including index funds and ETFs, as well as purchasing shares of the individual companies that constitute the index.
What are the benefits of investing in the S&P 500?
The S&P 500 has experienced strong performance over time, and gaining exposure to this index will provide broad diversification to U.S. stocks.
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