[Editor’s note: “3 Different Ways for Newcomers to Buy S&P 500 Stocks” was previously published in December 2019. It has since been updated to include the most relevant information available.]
If you’re new to investing, one of the best ways you can dip your toe into the water is to buy a mutual fund or exchange-traded fund (ETF) that invests in all 505 of the S&P 500’s stocks.
Your first question: What is the S&P 500?Your second question: How come there are 505 stocks, not 500?Both are relatively painless questions to answer.
First, the S&P 500 represents 500 of the largest and most established companies listed on a U.S. stock exchange. You’re likely familiar with many of the index’s constituents.
The S&P 500’s largest company by market capitalization [share price multiplied by number of shares outstanding] is Microsoft(NASDAQ:MSFT) at $1.2 trillion.
Warren Buffett, one of the most successful investors of all time, has said that most investors should simplify their investments to deliver better long-term returns. He put itthis way in his 2013 annual letter to shareholders:
“My advice [to the trustee] couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) …I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”
Low costs and few moving parts win the game in the long run.
The second question requires much less legwork. There are 505 stocks in the index because some of the companies, such as Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), have more than one class of shares, which means Berkshire Hathaway counts as two holdings, not one.
Simple, right?
Now that I’ve answered the two questions, I better cut to the chase by providing readers with a short list of easy ways to buy S&P 500 stocks.
Option No. 1: The SPDR S&P 500 ETF (SPY)
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Launched in 1993, SPDR S&P 500 ETF (NYSEARCA:SPY) is the oldest ETF in the U.S. It also happens to be the biggest with $289 billion in assets.
As you probably expected, it has 500 holdings, but you may be surprised to hear that the SPY ETF currently pays investors a dividend yield of 1.90% to hold it. And that’s all for the expense ratio of 0.09%, or $9 per $10,000 invested per year.
However, remember what Buffett said about low-cost funds. It’s not the cheapest of the ETFs tracking the S&P 500, but it is the most popular. And it has stood the test of time.
Option No. 2: Vanguard S&P 500 ETF (VOO)
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Two of the next three largest U.S.-listed ETFs also invest in every one of the S&P 500 stocks — the Vanguard S&P 500 ETF (NYSEARCA:VOO) has $127 billion of net assets and charges 0.03%.
This used to be 0.04% until Vanguard cut the fees on three of its most popular products — including the VOO ETF.
As Vanguard’s literature points out, this fund is “more appropriate for long-term goals where your money’s growth is essential.” It makes a great base holding.
Option No. 3: Buy Buffett’s Stock (BRK.B)
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Berkshire Hathaway has often been compared to a very large mutual fund because it owns $222.65 billion worth of publicly traded stocks, most of them part of the S&P 500.
However, in addition to the equities, owners of the stock get a small piece of hundreds of private companies operating in all kinds of different sectors of the economy.
The best part: Buffett won’t charge investors annual fees to own his stock. He’ll just deliver long-term returns that handily beat the S&P 500.
From 1965 to 2017, Berkshire Hathaway stock’s generated a compound annual growth rate of 20.5%, more than double the S&P 500.
These three options plus mutual funds that track the S&P 500 index (they’re slightly more expensive than ETFs) will get the job done while letting investors who buy them sleep easier at night.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
FAQs
S&P 500 index funds trade through brokers and discount brokers and may be accessed directly from the fund companies. Investors may also access ETFs and mutual funds through employer 401(k) programs, individual retirement accounts (IRA), or roboadvisor platforms.
How should a beginner invest in the S&P 500? ›
Investing in the S&P 500
You can't directly invest in the index itself, but you can buy individual stocks of S&P 500 companies, or buy a S&P 500 index fund through a mutual fund or ETF. The latter is ideal for beginner investors since they provide broad market exposure and diversification at a low cost.
What is the strategy for investing in the S&P 500? ›
Investors holding S&P 500 index funds try to match the performance of the index, not to outperform it. Therefore, they can use the buy-and-hold strategy of investment, also known as passive management. There is no need to actively monitor the stock market movements and engage in intense intra-day trading.
What is the cheapest way to invest in the S&P 500? ›
Costs associated with investing in the S&P 500
“If you purchase an ETF or mutual fund through an online discount broker, you generally will be able to place the trade at very little to no cost,” said Daugs. “Internally, the expense ratios of these index-focused investments are very low, usually under 0.25%.
How to buy stocks for beginners? ›
To invest in stocks, open an online brokerage account, add money to the account, and purchase stocks or stock-based funds from there. You can also invest in stocks through a robo-advisor or a financial advisor.
How should a beginner invest in stocks start with this ETF? ›
ETFs allow you to invest in a wide range of companies or industries with a single investment, and they are a great way for beginning investors to get acclimated to the stock market. If you're looking to get started investing, look no further than the Vanguard S&P 500 ETF (NYSEMKT: VOO).
Should I invest $10,000 in S&P 500? ›
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
What is the safest way to invest in S&P? ›
An index fund or exchange-traded fund (ETF) that benchmarks to the S&P 500 allows investors to gain exposure to all those stocks. ETFs focus on passive index replication, giving investors access to every security within a particular index. Index ETFs are generally low-cost and trade throughout the day just like stocks.
What is the best day to invest in the S&P 500? ›
However, some traders and investors believe that markets tend to trend downward on Mondays. This can mean much lower returns on Monday than there were to be had on Friday, making Monday traditionally known as a good day of the week to snaffle up potentially undervalued stocks and indices.
Why is the S&P 500 not a good investment? ›
The S&P 500 weighting system gives a small number of companies major influence, which could have an undue negative effect on the index if one or a few of them run into trouble. The index does not expose investors to small or emerging companies with the potential for market-beating growth.
While the two ETFs follow the same strategy, they earn different ratings. VOO earns a top rating of Gold, while SPY earns the next best rating of Silver. Almahasneh says the reason is fees. VOO charges 0.03%, while SPY charges 0.09%.
Which S&P 500 ETF has the lowest fee? ›
Expense ratios. VOO and IVV boast the lowest management fee at 0.03%, about one-third of the SPY ETF. While the difference between a 0.03%, and 0.0945% expense ratio may seem trivial, such fees can really add up. For every $10,000 invested, these respective fees equal $3 and $9.45 annually.
Should I invest in both Nasdaq and S&P? ›
So, if you are looking to own a more diversified basket of stocks, the S&P 500 will be the right fit for you. However, those who are comfortable with the slightly higher risk for the extra returns that investing in Nasdaq 100 based fund might generate will be better off with Nasdaq 100.
How much money do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
What is the best stock to buy for beginners? ›
Best Stocks To Invest In 2024 For Beginners
- UnitedHealth Group Incorporated (NYSE:UNH) Number of Hedge Fund Holders: 104. Quarterly Revenue Growth: 14.10% ...
- JPMorgan Chase & Co. (NYSE:JPM) Number of Hedge Fund Holders: 109. ...
- Advanced Micro Devices, Inc. (NASDAQ:AMD) ...
- Adobe Inc. (NASDAQ:ADBE) ...
- Salesforce, Inc. (NYSE:CRM)
One rule of thumb is to own between 20 to 30 stocks, but this number can change depending on how diverse you want your portfolio to be, and how much time you have to manage your investments. It may be easier to manage fewer stocks, but having more stocks can diversify and potentially protect your portfolio from risk.
Is it smart to invest in the S&P 500? ›
For investors who want to get in on the action, the good news is that investing in a fund that tracks the S&P 500 index is an easily accessible strategy. But experts say it also deserves a word of caution: Past performance is not indicative of future returns.
Is $500 enough to start investing in stocks? ›
One of the biggest misconceptions about investing is that you need a ton of money. That's not true at all. You can start with a fraction of a share and add to it when you can. Even $500 is more than enough, and it can grow to thousands of dollars if you pick a good investment and give it time.
Is it profitable to invest in S&P 500? ›
If you're buying a stock index fund or almost any broadly diversified stock fund such as one based on the S&P 500, it can be a good time to buy if you're prepared to hold it for the long term. That's because the market tends to rise over time, as the economy grows and corporate profits increase.
What is the average return on investment for the S&P 500? ›
Since 1957, the S&P 500's average annual rate of return has been approximately 10.5% (through March 2023) and around 6.6% after adjusting for inflation.
