As an equities index tracking the leading US companies, many people follow the ups and downs of the Standard & Poor’s 500 as a benchmark of how the broader stock market performs at any given time.
As such, the S&P 500 tends to be suitable as an investment for investors seeking broad exposure to the US economy. You can include the S&P 500 in your portfolio in a variety of ways. However, there are considerations and risks of the S&P 500 that you should be aware of.
Understanding the S&P 500
Like other stock market indexes, the S&P 500 is a collection of companies designed to be a barometer of a large swath of corporate America.
In 1957, financial research and analysis firm Standard & Poor’s created the S&P 500. It came more than 30 years after the company introduced a 90-company benchmark that S&P positioned as “an ‘index’ that would allow investors to more easily gauge market performance.”
Fast forward to 2024, and the S&P 500 is one of the longest-standing and most popular broad stock market indexes. The 500 companies in the S&P 500 comprise “approximately 80% of the US equity market capitalization and over 50% of the global equity market,” according to S&P Dow Jones Indices, which is a division of S&P Global.
Interestingly, when the S&P 500 debuted in 1957, the 500 firms in the index accounted for more than 90% of domestic market value. And it wasn’t technology-heavy or quite as diverse as it is today. At the time, 425 industrial stocks, 25 railroad stocks and 50 utilities stocks made up the S&P 500, a combination that S&P says was “considered most representative of the overall market.”
As the economy has changed, so has the composition of the S&P 500.
How stocks are added to the S&P 500
S&P Global uses a rigid methodology to select stocks for the S&P 500 and its related indexes. To earn a spot in the S&P 500, a company must:
- be US-based
- have a market capitalization of $18 billion or more, as of April 2024
- trade on a major domestic exchange, particularly the New York Stock Exchange or Nasdaq
- meet earnings and trading volume requirements
S&P Global rebalances the S&P 500 quarterly. One of the primary reasons for this regular rebalancing is to ensure that no one company makes up more than 25% of the index.
The largest companies in the S&P 500
While it might be broad, a handful of companies account for a majority of the S&P 500’s composition. This explains the 25% rule and the weighted nature of the index. Because the S&P 500 is based primarily on market cap, the most valuable companies have disproportionate weightings in the index.
To illustrate, consider the 10 largest companies (and their weighting) in the S&P 500:
| Company | Weighting in S&P 500 index |
|---|---|
Microsoft (MSFT) | 7.1% |
Apple (AAPL) | 5.7% |
NVIDIA (NVDA) | 4.7% |
Amazon.com (AMZN) | 3.9% |
Meta Platforms (META) | 2.5% |
Alphabet Class A (GOOGL) | 2.2% |
Alphabet Class C (GOOG) | 1.9% |
Berkshire Hathaway Class B (BRK.B) | 1.8% |
Eli Lilly (LLY) | 1.4% |
JPMorgan Chase (JPM) | 1.3% |
Total: | 32.4% |
State Street data as of April 22, 2024
These companies account for 32.4% of the S&P 500.
While the top 10 holdings are heavily concentrated in the information technology (IT) sector, the S&P 500 includes firms in 10 other sectors:
| Company | Weighting in S&P 500 index |
|---|---|
Information technology | 28.8% |
Financials | 13.4% |
Health care | 12.3% |
Consumer discretionary | 10.2% |
Communication services | 9.3% |
Industrials | 8.9% |
Consumer staples | 6.2% |
Energy | 4.2% |
Materials | 2.4% |
Utilities | 2.3% |
Real Estate | 2.2% |
State Street data as of April 22, 2024
How to invest in the S&P 500
The easiest and most efficient way to invest in the S&P 500 is via a low-cost exchange-traded fund (ETF).
Several ETFs track the S&P 500, but the oldest and most popular is the SPDR S&P 500 ETF Trust (SPY). SPY was the first ETF to hit the US market in January 1993 and is now the world’s most heavily traded ETF.
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To invest in SPY or other S&P 500-tracking ETFs, you’ll need to consult your financial advisor or create your own self-directed brokerage account. You might also have access to these ETFs via your workplace retirement plan.
When you buy an index-tracking ETF, you’re not buying the index (in this case, the S&P 500) directly. Instead, you’re buying shares in a fund that passively tracks the index, meaning it holds stocks in nearly identical concentrations to the index it tracks.
If you’re concerned that the S&P 500 index is concentrated in the top 10 holdings, you might consider an equal-weight ETF. Equal-weight ETFs hold all of the stocks in an index, , in equal proportion.
Stash Graham, managing director at Graham Capital Wealth Management, cited ETFs such as SPY and equal-weight ETFs as two of the best ways to invest in the S&P 500. He also suggested a third, slightly more advanced approach.
Graham said that you can “invest in the companies with the most significant exposure to the S&P 500 index … As passive investing has grown over the last two decades, the S&P 500-centric index funds have been huge beneficiaries of this passive capital. As such, the companies with the most significant weights in the headline S&P 500 have seen the most buying by authorized participants (authorized participants are the parties that help create the index fund shares by buying the individual company stocks within a given index).”
By “passive capital,” Graham is referring to the money index fund managers use to buy the stocks that make up the S&P 500. Given the disproportion noted above, the leading names in the index see heavy and sustained institutional buying, which in combination with other factors, such as strong earnings, future growth prospects and solid balance sheets, has historically helped their stock prices rise.
Potential risks associated with S&P 500 investments
Over time, the S&P 500 has been good to investors.
As of April 22, 2024, it generated a one-year return of 21.2%, a five-year annualized return of 11.5% and a 10-year annualized return of 10.3%.
While S&P Global warns that “Past Performance Is No Guarantee of Future Results,” it does note that:
- In 18 of the last 21 years, the S&P 500 outperformed more than half of actively managed, domestic large-cap funds.
- In the 20 years ending June 30, 2022, just 5% of all large-cap funds beat the S&P 500.
That said, investing in the S&P 500 doesn’t come without risk.
Because the S&P 500 is weighted heavily in favor of tech stocks, it tends to underperform when tech stocks underperform. You’ll find that SPY and other broad-market ETFs often own a lot of Microsoft, Apple and other leading, large-cap stocks. So, if you’re aiming for portfolio diversification, investing in the S&P 500 as a whole doesn’t get the job done.
But alternatives do exist.
S&P Global and other companies maintain many other indexes. These indexes are often sector-specific subsets of the S&P 500, focused on a smaller or larger number of stocks or geographically defined.
Frequently asked questions (FAQs)
While the S&P 500 contains companies from 11 different sectors, information technology stocks, such as Apple and Microsoft, dominate the index with a nearly 30% weighting, as of mid-April 2024. Financial, health care and consumer discretionary stocks combine to account for almost 36% of the S&P 500.
According to Graham, “Investing in an index fund mimicking the S&P 500 is probably the easiest and most common way to get exposure to domestic equity markets.”
If you want broad exposure to a massive swath of the US economy, the S&P 500, via a low-cost, passively managed index fund, is likely the first and possibly the best place for most investors to start.
As Graham said: “The diverse array of sectors you get exposure to [via] the S&P 500 is appealing from an investment perspective. Since the S&P 500 is the most widely referenced benchmark in American equities, it is an outsized beneficiary of passive capital flowing into markets. When times are good, as they usually are, new capital will come into equity markets, bidding up your existing position (as it is likely that some of that new capital will go into S&P 500-related funds).”
It depends on your place in life, goals and risk tolerance. “A younger person who might be looking for more growth … could invest in a fund tracking the Nasdaq Composite Index. Conversely, someone a little older who’s looking for a little less volatility and a little more income can invest in an index mimicking the Dow Jones industrial average,” Graham said.
