Takeaways
- The S&P 500 is an equity index of 500 large companies traded across multiple exchanges.
- Investors can buy an index fund that tries to mirror the S&P performance.
- The S&P 500 is calculated using the float-adjusted methodology.
- There are strict eligibility requirements for companies to be included in the S&P 500.
What is the S&P 500?
The S&P 500, or the Standard and Poor’s 500, is a stock market index that measures the performance of 500 large capitalization publicly traded companies in the United States. This index is considered a proxy for the United States equity market because it encompasses all sectors in the U.S. economy, and its market capitalization represents approximately 80% of the U.S. economy.
Companies in the S&P 500
The eligibility criteria for a company in the S&P 500 is a high bar for most companies. As a result, larger companies only make the cut and represent a substantial part of publicly traded equities. Below are some of the eligibility criteria for companies in the S&P 500[1]:
- Structure: Companies must be corporations (e.g., no LLCs), which includes equity and mortgage Real Estate Investment Trusts (REITS)
- Share Type: Companies must issue common stock.
- Company Size: Companies must have a market capitalization of over $12.7 billion. The minimum market capitalization requirement is reviewed quarterly and updated to reflect market conditions appropriately.
- Recent Success: The sum of the last four quarters and the most recent quarter must have positive earnings (as defined by Generally Accepted Accounting Principles).
- Listed on United States Exchanges: Listed companies must have a primary listing on the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ), or Chicago Board Options Exchanges (CBOE)
Companies in the S&P 500 index are selected from the pool of companies in the S&P Total Market Index. This process is handled by an Index Committee. The S&P 500 index is updated every quarter on the third Friday of each calendar quarter-end (e.g., March, June, September, December).
S&P 500 Historical Rate of Return
According to recent data, the long-term average return on investment, including dividends, for the S&P 500 is 9.29%[2]. Of course, stock returns vary from year to year, and investors can’t expect to receive a return of 10% consistently.
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For example, in 2021, the annual total return for the S&P 500 was up over 28%, while in 2008, it was down 37%. These fluctuations should be expected, as the overall index tracks the broader market, which ebbs with economic cycles.
Putting your money to work in the S&P has been lucrative for investors over the long term. If you are participating in your employer-sponsored 401(k) account, you probably are investing in some portion of the S&P 500. With the right investment strategy, buying an investment that tracks the S&P 500 can add alpha to your stock portfolio.
Can You Buy the S&P 500?
While you cannot buy the S&P 500 directly, you can buy exposure to the makeup of the S&P 500. Because the S&P 500 is an index or a collection of public stocks that change in composition, you can’t buy the S&P 500 itself. However, investment firms have created index funds and exchange-traded funds (ETFs) to capture the index’s returns with these low-cost investment vehicles. Portfolio managers have created these funds to mirror the exact composition of the S&P 500 (or as close as they can get).
Here are a couple of Smart Money’s favorite index funds which track the S&P 500:
- Fidelity 500 Index Fund (FXAIX)
- Schwab S&P 500 Index Fund (SWPPX)
- Vanguard 500 Index Fund Admiral Shares (VFIAX)
Here are a couple of Smart Money’s favorite ETFs which track the S&P 500:
- SPDR S&P 500 ETF (SPX)
- iShares Core S&P 500 ETF (IVV)
- Vanguard S&P 500 ETF (VOO)
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Other Major Stock Indexes
Many major stock indexes track the overall economy as well as various sectors of the United States economy. Here are three additional stock market indexes that track the health of the overall United States economy.
- Down Jones Industrial Average: The DJIA is probably the second most known broad-based U.S. economy index. This index is a curated list of 30 large and famous publicly traded companies in the United States.
- NASDAQ Composite: This index tracks stocks traded on the NASDAQ stock exchange on a market capitalization-weighted basis. Not all companies in this index are based in the U.S., and the NASDAQ is known for its heavier tilt toward technology stocks.
- Wilshire 5000: This index tracks thousands of publicly traded companies in the U.S., and its goal is to capture all the public companies on a market capitalization-weighted basis.
Smart Summary
Investing in the S&P 500 can give your portfolio exposure to most of the U.S. equities market. If you are a stock investor focused on the long-term success of your portfolio, S&P 500 indexes or ETFs can be excellent vehicles to get started investing. They can also act as an investment to round out your portfolio as you focus on your overall investing strategy.
[1] S&P Dow Jones Indexes. S&P U.S. Indices Methodology. Accessed August 29, 2023.
[2] Y Charts. S&P 500 Annual Total Return. Accessed August 29, 2023.
