The Standard & Poor’s 500 is an index of the 500 largest companies traded on US stock exchanges and is a widely-used barometer of the overall health of the US stock market.
The S&P 500 index includes the US mega-cap technology companies and, as a result, has delivered some impressive gains for investors over the last few years. Investors looking for exposure to the S&P 500 have the option of buying shares in individual companies, or more broadly in passively-managed index funds.
Here’s our lowdown on investing in the S&P 500.
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What is the Standard & Poor’s 500?
Created in 1957, the S&P 500 is an index of 500 leading US companies as measured by their size or ‘market capitalisation’, or market cap. Market cap is calculated by multiplying the share price of a particular company, by the number of company shares in circulation.
Accounting for 80% of the worth of US listed companies, the S&P 500 is considered to be one of the best gauges of the US stock market.
According to financial information provider S&P Global, the average market cap of an S&P 500 company is $75 billion. The universe of stocks is a wide one, however, with companies ranging in size from $4 billion to a colossal $2.8 trillion.
Which companies are in the S&P 500?
Technology stocks dominate the S&P 500. Apple accounts for around 7% of the overall index by market cap, while the five largest companies in the index equate to about a quarter of the overall total as shown in the table below:
| Company | Ticker | Weighting | ||
|---|---|---|---|---|
| Apple | AAPL | 7.3% | ||
| Microsoft | MSFT | 7.0% | ||
| Amazon | AMZN | 3.9% | ||
| NVIDIA | NVDA | 3.2% | ||
| Alphabet | GOOGL | 4.4% | ||
| Tesla | TSLA | 2.0% | ||
| Meta Platforms | META | 2.3% | ||
| Berkshire Hathaway | BRK | 2.0% | ||
| Basis of weighting calculation: market capitalisation as at 5 January 2024, divided by the total market capitalisation of the S&P 500 as at 5 January 2024 Source: S&P Global | ||||
Some of the largest companies at the head of the index, but outside the technology sector, include investment group Berkshire Hathaway, healthcare companies UnitedHealth Group and Johnson & Johnson, and the energy giant Exxon Mobil.
How has the S&P 500 performed?
The performance of the S&P 500 over the last five years is shown in Figure 1 below:
The price attached to the index is based on the combined market capitalisations of all of the companies in the index divided by a value which originally set the index to a base level of 100.
The S&P 500 rose steadily until a sharp fall in early 2020 at the start of the pandemic. Thereafter, the index doubled in value in just under two years, reaching an all-time high of over 4,800 in January 2022.
However, the S&P 500 fell by nearly 20% in 2022 due to the challenging macroeconomic environment. Soaring inflation led to a rise in interest rates, depressing the valuation of growth stocks and triggering a slowdown in advertising.
Last year, the S&P 500 bounced back surprisingly strongly and finished 2023 just over 24% higher than at the start.
How to invest directly in the S&P 500
In theory, investors could buy shares in any or every company in the S&P 500. However, this requires a substantial investment as it would currently cost over $2,800 to buy just one share in each of the top 10 companies.
Share trading fees would also make this a prohibitively expensive option, along with the need to rebalance holdings to adjust for changes in companies’ relative market capitalisations.
Bear in mind that investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms.
You could lose money in sterling even if the stock price rises in its currency of origin. Stocks listed on overseas exchanges may also be subject to additional dealing and exchange rate charges, or have other tax implications, and may not provide the same, or any, regulatory protection in the UK.
As a result, investing indirectly in the S&P 500 is a cheaper and more practical option, either by buying an index fund or exchange-traded fund (ETF).
Investing indirectly via an index fund
Index or tracker funds try to replicate the performance of an index by buying and selling all of the shares within it in proportion to their respective market capitalisations.
These ‘passive’ funds, which are effectively managed by a computer algorithm, differ from ‘active’ funds where a fund management team tries to outperform an index through active stock-picking.
As a result, passive funds tend to charge a lower annual management fee than active funds. According to trading platform AJ Bell, the average fee for North American passive funds is only 0.1% compared to 0.9% for active funds.Or, put another way, the average annual fee for £1,000 invested in a North American index fund would be £1, compared to £9 for an active fund.
The highest-performing index fund over the last five years is the HSBC American Index fund with a total return of 86% according to Trustnet. It has also delivered a one-year total return of 13% and has an ongoing (annual) charges figure of 0.06%.
Investing indirectly via an ETF
As with index funds, passively-managed exchange-traded funds (ETFs) aim to duplicate the performance of an index such as the S&P 500.
A wide choice of exist. Some track the whole index while others focus on niches, such as companies that pay high dividends or ones occupying a particular sector, such as financials.
The highest-performing ETF over the last five years is the iShares S&P 500 Information Technology Sector UCITS ETF, with a total return of 170% according to Trustnet. It has achieved an impressive one-year return of 33% and has an annual management charge of 0.15%.
Alastair Power, investment research manager at Redmayne Bentley, highlights two ETFs for consideration by investors looking for exposure to the S&P 500 index:
- The Vanguard S&P 500 UCITS ETF offers a full physical replication strategy with a low annual cost of 0.07%. Mr Power comments: “The fund’s ability to generate additional returns through stock lending and tracking outperformance has produced a return of 58% against the benchmark’s 56% for the five-year period to 30 September 2023.” Stock lending can increase fund returns by loaning shares temporarily to another investor in return for a fee.
- The iShares S&P 500 GBP Hedged UCITS ETF also provides exposure to the benchmark, together with a US dollar to GBP hedge. Hedging smooths fluctuations in exchange rates, in this case, to reduce the risk for UK investors of holding dollar investments. Mr Power comments: “At a cost of 0.20%, it comes in higher than the Vanguard ETF but does enable investors to protect returns should sterling recover against the dollar.”
Investing via trading derivatives
Though higher risk than index-tracker funds, it’s also possible to invest in the S&P 500 via financial derivatives, as follows:
- Spread betting: investors bet a sum of money per point of movement in the index, either by going ‘short’ (hoping that the index falls) or going ‘long’ (hoping that the index rises).
- Contract for differences (CFDs): these work on a similar principle to spread betting by speculating on the underlying movement in the S&P 500 index, either by going short or long.
Both products allow investors to trade using ‘leverage’, in other words, borrowing money from the trading platform in addition to their own funds. This provides the opportunity to make higher profits, but also higher losses if the index moves in the opposite direction.
Pros and cons of investing in the S&P 500
During times of market volatility, a recurring piece of investment advice is to lean towards stocks representing large, high-quality companies. Historically, major firms with proven earnings and strong balance sheets tend to provide stability, consistent returns, and dividends (regular payments to shareholders paid out of annual profits). Many help comprise the S&P 500 stock index.
As we’ve seen, the index is made up of a broad sweep of hundreds of companies. But, by its nature, the S&P 500 only features large companies. So, on the downside, investors keen to gain exposure to smaller companies, which historically produce higher returns, need to look elsewhere.
The ongoing charge of the tech-based, so-called ‘mega-cap’ stocks, also means that much of the value of the S&P 500 is now weighted in the corporate hands of comparatively few companies. This could make some investors uneasy.
Is it worth investing in the Standard & Poor’s 500?
Investors will likely be weighing up whether the recent fall in the price of the index is an opportunity to ‘buy on the dip’ or whether volatility will remain firmly on the menu given macroeconomic conditions.
The index continues to face headwinds with the Federal Reserve (the central bank in the US) indicating that a further hike in the base rate before the year-end is ‘more likely than not’. As a result, fears are mounting that the US will enter a recession rather than the hoped-for ‘soft landing’, despite low unemployment and falling inflation.
Redmayne Bentley’s Mr Power comments: “Holding an optimistic outlook for the S&P 500 at the turn of the year proved fruitful on the back of strong performance in the technology sector. The index has moved lower in recent weeks on the back of rising yields for longer-dated bonds in reaction to fears of interest rates remaining higher for longer. Despite this, the chances for the index to close the year above the $4,100 level projected back in January look good.
With a raft of earnings announcements over the next few weeks, investors will be crossing their fingers that robust results trigger a fourth-quarter rally in the large-cap index.
Mr Power adds: “Heading into 2024, chances are we’ll have seen a quarter of stable base rates and bond yields starting to stabilise. With equity markets showing significant sensitivity to rates movements through 2023, it’s reasonable to expect stabilisation to enable markets to shift focus to operational performances rather than macroeconomic factors.
“Remaining cautious, a $4,300 landing point for the S&P 500 in 2024 is on the low side of current estimates, but a lot can happen in 12 months.”
Looking at the bigger picture, investors should look to diversify their portfolio across a range of different assets and sectors to reduce the overall risk and volatility of their portfolio.And investing in equities, such as the S&P 500 index, should also be seen as a long-term investment of at least five years, to smooth out stock market cycles.
How much does it cost to invest in the S&P 500?
As explained above in the section on investing indirectly in the S&P 500 via investment funds and ETFs, investors can gain access to the index using passive or tracker investments comparatively cheaply with funds in this sector regularly charging considerably less than 1%. A fund charging, say, 0.3% would therefore cost an investor £3 on an outlay of, say, £1,000.
How does the S&P 500 compare to other major indices?
While the S&P 500 provides a diversified basket of US stocks, investors may also wish to consider other US indices.
The Dow Jones Industrial Average index comprises large-cap stocks but there’s only 30 stocks in this index and it excludes the likes of Amazon, Alphabet, Tesla and Meta.It’s a price-weighted index based on the share price of companies, rather than their market capitalisation (as for the S&P 500).
Another option is the Nasdaq Composite Index, comprising over 3,500 stocks listed on the Nasdaq stock exchange, and covering a wider range of market capitalisations than the S&P 500.
The Nasdaq Composite is weighted by market cap with the largest constituent companies being Apple, Microsoft and Amazon (as with the S&P 500). However, unlike the S&P 500, it excludes any companies listed on the New York Stock Exchange (rather than the Nasdaq).
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Frequently Asked Questions (FAQs)
What is a stock market index?
A stock market index aims to track the aggregative performance of a selected group of companies and is often used as a barometer for the wider stock market.
An index may be based on the stock market as a whole, such as the S&P 500 or the FTSE 100, or around particular sectors such as the Nasdaq 100 Technology Sector.
Each index has its own method of selecting the constituent companies, such as all of the companies listed on a particular stock exchange, selection by an expert committee or the use of weighting criteria.
Two of the most common methods of weighting are:
- Market-cap: this means the larger-cap companies have a greater impact on the index
- Price-weighted: the companies with the highest share prices have the most impact on the index, irrespective of their market cap
Being added to a higher index tends to have a positive effect on a company’s share price as index tracker funds will be required to buy its shares to replicate the index. However, the opposite is true for ‘relegated’ companies who may suffer a ‘double hit’ to their share price.
Is it a suitable investment for overseas investors?
Building a diversified portfolio helps investors manage risk by spreading their investments across different companies, sectors and countries. This works on the principle of the underperformance of one investment being (hopefully) offset by outperformance in another.
According to Statista, US stock markets currently account for 40% of global stock markets by value. As a result, overseas investors looking to build a diversified portfolio are likely to want exposure to the US, either through a tracker fund (based on an index such as the S&P 500) or a broader-based global fund.
However, overseas investors should also bear in mind the foreign exchange risk from holding investments denominated in US dollars. If the dollar weakens against their home currency, their US investments will be worth less in their home currency equivalent.
Do S&P 500 ETFs and funds pay a dividend?
In short, yes. Investments based on the S&P 500 index will pay dividends if the underlying companies themselves pay dividends. That said, the index is heavily weighted towards large US tech companies, who often pay low or no dividends.
However, it’s worth understanding the difference between ‘income’ and ‘accumulation’ units if both are offered by the fund. Dividends are paid out in cash to investors for income units, whereas any income is reinvested to buy additional units if the accumulation option is chosen.
Is it safe to invest in the S&P 500?
Investing in equities always carries some degree of risk, as the investment may lose some, or all, of its value. That said, investing in a broad-based index such as the S&P 500 is lower-risk than investing in individual companies.
The S&P 500 has steadily increased in value since its inception and, according to McKinsey, has delivered an average annual return of 9% over the last 25 years.
However, there have been fluctuations in the index, most notably a 37% fall during the global financial crisis and a 20% drop in 2022. Looking over a longer period, there have been only five years of negative returns since 1996.
