How To Invest In The S&P 500 (2024)

Investors in US companies have enjoyed some stellar returns over the last five years, thanks to the soaring price of technology stocks such as Apple and Microsoft.

According to Trustnet, North American equity funds were the second highest-returning sector over the last five years, delivering a total return of 69%.

The US S&P 500 stock index has also benefited from strong investor appetite for technology companies, increasing by 56% over the last five years.

However, this barometer of corporate performance endured a downturn last year, as high inflation, rising interest rates and an economic slowdown have taken their toll on the valuation of so-called growth stocks.

Here’s the lowdown on the index, along with a closer look at whether now is a good time to invest in it.

Note: market-based investments can go down as well as up, and you may lose some, or all, of your money. If in doubt, you should seek financial advice before deciding whether to invest.

What is the Standard And Poors 500?

Created in 1957, the S&P 500 is an index of 500 leading US companies as measured by their size or ‘market capitalisation’.

Accounting for 80% of the worth of US listed companies, the index 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 $72 billion. The universe of stocks is a wide one, however, with companies ranging in size from $650 million to a colossal $3 trillion.

Which companies are in the Standard And Poors 500?

Technology stocks dominate the S&P 500, with Apple accounting for 7% of the overall index by market capitalisation. The top 10 constituents represent around a quarter of the total index, with Apple, Microsoft, Amazon and Alphabet featuring among this group.

Top 10 companies outside the technology sector include investment group Berkshire Hathaway, healthcare companies UnitedHealth Group and Johnson & Johnson, and energy giant Exxon Mobil.

How has the Standard And Poors 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, which has a direct impact on the valuation of growth stocks.

Technology companies have also faced a slowdown in advertising due to the squeeze on consumer spending and wider geopolitical issues.

The pound fell to its lowest level against the US dollar since 1985 in late 2022, due to signs of an economic recession and concerns over the level of government spending.This had a positive impact on the sterling value of US investments held by UK investors and offset a large proportion of the fall in the S&P 500.

Looking at other indices, the tech-heavy Nasdaq index fell by over 30% in 2022, although the FTSE 100 has been more resilient. It rose by a modest 1% last year, thanks to increased investor appetite for defensive shares, which have more stable earnings in an economic downturn.

How to invest directly in the Standard And Poors 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 $2,200 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.

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 research and 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 in this sector.

In other words, the average fee for £1,000 invested in a North American index fund would be £1, compared with £9 for a comparable holding in an active fund.

The highest-performing index fund over the last five years is the UBS S&P 500 Index Fund with a total return of 82% according to Trustnet. It has delivered a one-year total return of 2% and has an annual management charge of 0.09%.

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 S&P 500 ETFs 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 HSBC S&P 500 UCITS ETF, with a total return of 83% according to Trustnet. It has achieved a more modest one-year return of 2% and has an annual management charge of 0.09%.

Redmayne Bentley’s Alastair Power 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 says: “The fund’s ability to generate additional performance through stock lending has enabled marginal outperformance of 1.6% against the benchmark over the five-year period to January 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 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

In addition to 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.

Should you invest in the Standard And Poors 500?

Investors will be weighing up whether the current depressed price of the index is an opportunity to ‘buy on the dip’ or whether prices are likely to fall further given macroeconomic conditions.

However, the index continues to face headwinds in the form of aggressive base rate hikes by the Federal Reserve (the central bank in the US), along with fears of an economic recession and signs of a slowdown in earnings growth.

Redmayne Bentley’s Mr Power comments: “There’s reason to remain constructively optimistic in our outlook for the S&P 500 through 2023. The index is likely to remain volatile through the first couple of earnings seasons as investors digest corporate profitability and earnings guidance whilst waiting to see the depth of US recession and interest rates peak.

“Should investors turn their attention to the speed of the economic recovery, there’s scope for equity market rallies in the second half. Target prices for the S&P 500 have broadly been revised down by strategists in 2023 outlooks but the previously-mentioned $4,100 level feels achievable for the upcoming year.”

Overall, 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.

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 cycles within the stock market.

How does the Standard And Poors 500 compare to other major indexes?

While the S&P 500 provides a diversified basket of US stocks, investors may wish to consider other US indices.

The Dow Jones Industrial Average also covers large-cap stocks but there’s only 30 stocks in this index. It also excludes some of the big tech companies such as Amazon, Alphabet, Tesla and Meta.

The Dow Jones is a price-weighted index based on the share price of companies, rather than their market capitalisation (as for the S&P 500). In addition, it excludes transportation and utilities companies.

Another option is the Nasdaq Composite Index, which covers over 3,500 stocks listed on the Nasdaq stock exchange. It therefore covers 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).