The S&P 500, also known as Standard and Poor’s 500 Index, features the 500 leading publicly traded companies in the U.S.
However, unlike the name suggests, it is not an exact list of the top 500 U.S. companies by market cap, as there are other criteria that also come into play.
Because of its diversity and depth, the index is widely considered one of the best gauges of large U.S. stocks, and even the entire equities market’s performance.
It is also important to understand that there is no such thing as directly investing in the S&P 500 because it is an index – but you invest in one of the many funds that use it as a benchmark.
PS: The index actually contains 503 components, because three of them have two share classes listed.
The S&P 500 belongs to the S&P Global 1200 family of indices:
Combined together, the three of them cover 90% of U.S. capitalization in an index known as the S&P Composite 1500.
Full of familiar names, the S&P 500 combines many blue-chip companies with strong performance histories of financial performance.
Some of the most popular are:
… and the list goes on.
The S&P 500 uses a market-cap weighting method, in which individual components of the index are included in certain amounts that correspond to their total market cap. This gives a higher percentage allocation to companies with the largest market capitalisations.
1. Determining the weighting of each component begins with adding up the total market cap for the index by adding together the market cap of every company in the index.
2. To review, the market cap of a company is calculated by taking the current stock price, and then multiplying it by the company’s outstanding shares.
The total market cap for the S&P 500, as well as the market caps of individual companies, are frequently published on financial websites – which saves investors the need to calculate them.
Index funds are passive investments that allow investors to match the performance of the S&P 500, and are considered ideal for investors who don’t want to own individual stocks, but still want to earn returns.
S&P 500 index funds can help with portfolio diversification, as they provide exposure to some of the biggest U.S. companies.
The best index fund actually depends on its minimum investment, costs, and how closely it aligns to the S&P 500 market index.
1. Fidelity 500 Index Fund: founded in 1988 and formerly known as Institutional Premium Class fund, Fidelity removed this fund’s investment minimum so investors with any budget size can get into the low-cost index fund action
2. Schwab S&P 500 Index Fund: launched in 1997, it is one of the cheapest and most accessible S&P 500 tracking funds out there. It is also considered very attractive for investors concerned about costs, as its expense ratio is relatively low.
3. Vanguard 500 Index Fund Admiral Shares: also known as the Vanguard S&P 500 Index fund, it was founded in 1976 and is the “OG of all index funds”.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.