How to invest in the S&P 500

• The Standard and Poor’s 500 (S&P 500) tracks the performance of the 500 largest publicly-traded companies in the US.
• Learn how to buy stock in these companies or invest through an index ETF.
• Compare some of the top online brokers that give you access to US stocks.

Investing money in the right assets could help you earn a passive income. However, we have all heard that retail investors hardly make money from stocks. They usually buy high and sell low because they don’t have the expertise or knowledge to understand company valuations or time the markets. In such cases, investing in a managed fund with strong historical performance could help eliminate the guesswork. But what type of fund should you put your money in?

Even though there’s no straightforward answer to that question, index funds are generally considered a good option for investors looking for a passive income.

An index fund is designed to replicate a benchmark index, like the Standard and Poor’s 500 or S&P 500. So, an S&P 500 index fund may contain all the top 500 stocks from the S&P, which means buying one share of the fund will give you exposure to the 500 biggest companies in the US.

Companies in the S&P 500 are well-established and many of them are market leaders, so their shares are likely — but not guaranteed — to perform well. As a result, an index fund tracking a benchmark index like the S&P 500 doesn’t require active management, which also brings down the cost of investing compared to a managed fund.

Canadians looking to diversify their investment portfolio with US-listed stocks can consider purchasing individual stocks of various companies on the S&P 500 list or investing in an S&P 500 index fund. Such a fund is also called an exchange-traded fund (ETF).

Read on to learn everything you need to know about investing in the Standard and Poor’s 500.

What is the S&P 500?

The S&P 500 is a sharemarket exchange tracking the performance of the 500 largest publicly-traded companies in the US. Many investors consider the S&P 500 index to represent the entire US sharemarket. That’s because even though the S&P 500 only includes shares of 500 companies, these company shares make up about 70 per cent of the sharemarket in the US.

However, it’s worth knowing that the S&P 500 only includes companies with large market capitalizations and doesn’t list any mid-cap or small-cap firms. The S&P 500 index is also market-cap-weighted. It means companies with higher market capitalizations make a more significant percentage of the portfolio.

Which companies are in the S&P 500 index?

The S&P 500 is a mix of the 500 largest companies, giving you broad exposure to the US equities market. When you invest in the S&P 500 index, your portfolio will include shares from market leaders, such as:

• Alphabet (GOOGL)
• Amazon (AMZN)
• Apple (AAPL)
• Disney (DIS)
• eBay (EBAY)
• Facebook (FB)
• Microsoft (MSFT)
• Netflix (NFLX)
• Tesla (TSLA)
• Twitter (TWTR)

What are the benefits of investing in the S&P 500 index?

The S&P 500 comprises 500 of the largest and most stable companies in the US. So, when you invest in an S&P index fund, you are investing in shares of some of the strongest companies that are expected to record positive long-term growth.

Another advantage of investing in an index is that you don’t have to worry about picking shares that perform well or selling those that don't. An S&P 500 fund gives you access to shares that form a bulk of the market, automatically leading to portfolio diversification and freedom from timing the market.

It’s worth noting that even though the S&P 500 contains shares of some of the largest US companies and is expected to give positive returns, it doesn’t mean that the S&P 500 companies are immune to a market crash. But such companies are usually more resilient in the face of market downturns and crashes.

Over time, the S&P 500 index has always recovered from market downturns and earned investors a decent average return over investment periods that are longer than five years.

An ETF is a managed fund that can be bought or sold on an exchange, like the NYSE. Most ETFs are passive investments. It means they don’t try to outperform the market but replicate the performance of the index they are tracking.

For retail investors, it is generally time-consuming and riskier to buy individual shares as they don’t have the knowledge to understand the valuations of every company they purchase. For such investors, an index ETF provides a passive investment option that may be less risky than buying individual shares in some cases owing to the automatic diversification of the portfolio.

Step 1: Find an S&P 500 ETF

There are several funds available that track the performance of all the S&P 500 shares or a selected number of shares. You can compare various ETF options on the basis of their historical performance, constituting shares, and the expense ratio.

ETFs that track the S&P 500

• iShares S&P 500 ETF (IVV)
• BetaShares S&P 500 Equal Weight ETF (QUS)
• ETFS S&P 500 High Yield Low Volatility ETF (ZYUS)
• SPDR S&P 500 ETF Trust (SPY)
• Vanguard S&P 500 ETF (VOO)

This is not an exhaustive list of what's available.

Step 2: Select an online broker

Once you have identified the ETF you wish to invest in, the next step is selecting an online broker or share trading platform.

Some of the features you may look for while comparing brokers include:

• The facility to trade online through a website or mobile app.
• Low commission fee.
• Quality of information available, such as market reports and research.
• The ability to make fractional investments in high-value shares.

Step 3: Sign up for a stock trading account

After selecting an online broker, sign up to create a share trading account. This will require you to verify your details by providing a copy of your official ID, like your driving license or passport.

Step 4: Transfer funds to your stock trading account

Once you have signed up and verified your account, follow the steps shared by your online broker to transfer funds from your bank into your share trading account.

Step 5: Complete the purchase

Search and select the shares or ETFs you wish to invest in and complete the purchase.

There are several online trading platforms to choose from, which could get overwhelming. Here’s a quick look at some of the top online brokers in the US that give you access to buy stock.

The bottom line

An S&P 500 fund is considered a reliable investment option by most investors, as it gives your portfolio exposure to not only the 500 largest companies in the US but also some of the biggest names globally. But it’s important to note that index-based funds are not actively managed (which reduces your investment cost).

You cannot expect to beat the market by investing in an index-based ETF, but you can expect relatively consistent returns when you invest in stock tracking a benchmark index like the S&P 500.

Overall, an index ETF could be a good option for investors who wish to benefit from the long-term growth in equities without being actively involved in trading or timing the market. But it’s worth remembering that equity investments are always fraught with market risk. So, you should only choose this investment option if you have a medium to high risk appetite and a long-term investment horizon of at least five years.