How to invest in the S&P 500 in 2024 (2024)

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• You can invest in the S&P 500 via mutual funds or ETFs that contain all the S&P index's listed stocks.
• S&P 500 index funds offer a low-cost, low-risk way to invest in a representative array of major US companies.
• Though diversified, S&P 500 funds omit growth and foreign stocks, which can impact their gains.

The is one of the most commonly cited and closely watched equity indexes in the world. Many investors and fund managers view it not only as a benchmark for the stock market, but also as a proxy for the US economy.

If you subscribe to the belief — as many do — that investing in a representative sample of the entire market ultimately yields better returns than trying to pick individual winners, the S&P 500 is one of the best samples available.

Unfortunately, you can't directly invest in the S&P 500 — it's a stock market index, or group of stocks, not an individual stock itself. But there are vehicles that you can invest in, called index funds, that act as a proxy for this proxy — duplicating its list in their portfolios and mimicking its performance.

Why invest in the S&P 500?

The S&P 500 is made up of 500 of the largest US-based public companies and is known as a weighted index.

The S&P 500 "is by far, the most widely used indicator of investment success or failure," says Cory Clark, chief marketing officer at DALBAR, Inc., which evaluates and audits business practices.

This means that companies with a higher market capitalization, or valuation, carry more clout in the calculations, so the overall index correlates more closely to the broader market.

The S&P 500 's worth is cited in points, which represent the collective value of the stock shares within it.

In 2022, the index had an annual percent change of -19.44%. But in 2023, the S&P 500 rebounded 8.9% in November alone, making it one of the 20 best monthly performances in its history. It has continued climbing in December.

The S&P 500's current market return for 10 years (from 2013 to mid-2023) is 12.39%, according to SoFi Learn. Goldman Sachs is predicting that the S&P 500's average target will be as high as 5,100 at the end of 2024.

Although it's limited to large-cap companies, the S&P 500 is diverse enough "to reflect all major sectors of the economy," says Clark — from industrials to information tech to consumer goods to health care. The companies within it are collectively worth about 80% of US stocks' total value.

So if you want to invest in the spectrum of the US stock market, and in effect the US economy, the S&P 500 is a good entry point.

How to invest in the S&P 500

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.

Types of S&P 500 index funds

S&P 500 index funds come in two basic types: mutual funds and exchange-traded funds (ETFs).

Both mutual funds and ETFs contain portfolios that invest in the companies of the S&P 500.

"The main difference between a mutual fund and an ETF is that an ETF can be traded throughout the day, like a stock," says Jay R. Ritter, the Joseph B. Cordell Eminent Scholar Chair at the University of Florida's Warrington College of Business. In contrast, mutual fund shares are priced and traded at the end of the day.

Also, mutual funds often have a higher minimum investment than ETFs — sometimes, a few thousand dollars. ETF shares are priced like individual stock shares; prices range, and you can buy as many or as few as you wish. The initial investment in an ETF is often lower

Overall, though, "ETFs and mutual index funds are more alike than different," according to Milo Benningfield, a certified financial planner and founding principal of Benningfield Financial Advisors. "They're all pooled investment vehicles."

Do some S&P index funds perform better than others?

S&P 500 index funds may differ slightly in the exact makeup of their portfolios. The Vanguard S&P 500 Growth ETF, for example, emphasizes the growth-oriented companies in the S&P 500 (ones expected to appreciate faster than average stocks).

The Invesco S&P 500 High Dividend Low Volatility ETF specializes in stocks that offer especially strong dividends. But they're all tracking the same basic index, so the results are pretty similar. Funds generally post an annual yield within a percentage point or so of each other.

What can impact performance — and of course, affect your returns — are the collective annual fees a fund charges, known as the expense ratio. When comparing a fund's yields, it can help to dig a little to see if they're net of expense ratios, or research and other costs that can drag down an investor's return.

That kind of information is usually available in the fun's prospectus, or through online financial sites. "Index fund fees often range from a low of about .05% [of a client's invested assets] to 0.5%," according to Ritter. Mutual funds' fees tend to be higher than those of ETFs'.

Otherwise, "the decision of which fund to go with "sometimes comes down to a matter of convenience, notes Benningfield, "since providers like Vanguard offer access to a host of index and other funds in one location."

Popular S&P 500 index funds

All the leading brokerages and financial services companies offer S&P 500 index funds at traditional firms:

• Charles Schwab
• Fidelity Investments
• Vanguard

Online brokerages:

• Robinhood Investing
• Stash Invest

And with some of the best robo-advisors:

• Wealthfront Investing
• Betterment Investing

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

Benefits of the S&P 500 funds

• They're a good proxy for stocks overall: An S&P 500 Index fund tends to correlate "more closely to the broader market, so it's better than some other indexes, like the Dow Jones Industrial Average), which only tracks 30 stocks," says Ritter. However, there's no guarantee that it will be successful. When the economy is struggling, the stock market also takes a hit. In 2022, for example, the Dow fell nearly 9% and the S&P 500 dropped a total of 20%.
• They're low-risk:Any fund offers the safety of diversification. With 500+ stocks in their portfolio, S&P 500 funds are especially diversified, their securities representing a range of industries. The companies within them tend to be safe, stable, blue-chip companies like Visa, Procter & Gamble, Johnson & Johnson, and Berkshire Hathaway.
• They're likely to bounce back: Since the S&P 500 Index generally correlates closely with the broader market, it's likely the index fund will eventually bounce back as a struggling economy starts to recover. As the stock market as a whole goes up, the S&P 500 will likely follow. But keep in mind that the same logic applies if the market starts to fall.
• Provides a diverse portfolio of assets: The index instantly provides investors with a diverse selection of stocks, which in turn lowers the risk of your stocks doing well. If one business within the S&P 500 loses value, you're portfolio won't be all that affected.

Downsides of S&P 500 funds

• They have investment gaps:The S&P 500 index "tends to be dominated by the largest companies, Benningfield says, "and it's also limited to companies with a US headquarters." So a major e-commerce business like Alibaba.com, which is based in China, wouldn't be included in an S&P 500 index fund. Nor would a small but fast-rising domestic corporation. Tesla is a case of an up-and-comer that wasn't included for years (it did ascend to the index in December 2020).
• They may not post the strongest returns:The diversified, passive approach of S&P 500 funds — like most index funds — means an investor's downside is generally limited. But so is the upside: There's less of a chance to make a killing by betting on a winner. Even if a fund did, it might not benefit as much, since the returns would be mitigated by the other holdings in the portfolio.
• Limited customization: If you prefer to hand-pick your investments, the S&P 500 might not be a good choice. You can't pick and choose which companies are a part of the index fund. If there are certain companies that you don't want to buy shares of, you'll have no choice but to invest with them as part of the index fund.

S&P 500 — Frequently asked questions (FAQs)

Should you invest in the S&P 500?

The S&P 500 is a grouping of stocks, not the stocks themselves, so there's no way to directly invest in it. But S&P 500 index mutual funds and ETFs buy securities that track or duplicate the index — and investors can buy shares in them.

An S&P 500 index fund furnishes an excellent entry into the stock market, since it offers a broad — though not perfect — representation of many publicly traded securities. For the most part, the minimum initial investment and recurring fees are low, and the autopilot approach of an index fund frees an investor from doing their own research on multiple companies.

The diversified nature of S&P index funds means that an investor probably won't score big from a fast-growth stock — but also won't have to stay up nights worrying about investing in a lemon of a company. If you want to own a broad slice of the US' biggest and best securities, says Benningfield, "an S&P 500 index fund is a great place to start."