The S&P 500 is a stock market index that is viewed as a benchmark by investors to assess how the overall stock market is doing. This index tracks around 500 of the largest U.S. companies, as measured by market capitalization, listed on the stock exchanges. Investors can purchase shares of stocks listed on the S&P 500 or invest in index funds that track the S&P 500.
Buying shares in the S&P 500 index funds have lower fees than buying shares of actively managed index funds, or individual companies. Index funds often generate higher investment returns, and are easy to buy.
Investing in stocks in the S&P 500 that make the cut might be the smartest and easiest to invest in an index fund. In this article, you will learn what is S&P 500, how the S&P 500 index works, and how to choose the best stocks in the S&P 500 for your portfolio.
What Is the S&P 500?
The S&P 500 is a stock market index that tracks the stocks of around 500 of the largest U.S. companies across 11 sectors. It represents the stock market’s performance by measuring the risks and returns of the biggest companies. Investors use it as the benchmark of how well the overall market is performing overall.
The S&P 500 was officially founded on March 4, 1957, by the two founding financial companies: Standard and Poor. It was acquired by the McGraw-Hill Companies in 1966. Now it is owned by the S&P Dow Jones Indices that is a joint venture between S&P Global Inc. (formerly McGraw Hill Financial Inc.), CME Group, and News Corp, the owner of Dow Jones.
As of August 31, 2020, the average 10-year annual return of the S&P 500 Index was 12.66%. Investors can purchase shares of stocks listed on the S&P 500 or invest in index funds that track the S&P 500.
How the S&P 500 works
The S&P 500 tracks the market capitalization of around 500 of the largest companies in its index, measuring the value of the stock of those companies. The market capitalization of a company refers to the total value of all shares of stock the company has issued. It is calculated by multiplying the number of stock shares a company has issued by the stock price.
It only measures the value of shares available to the public. As of July 2020, the total market capitalization of the S&P 500 Index was $27.05 trillion.
To qualify for the S&p 500 Index, a company must meet certain criteria. To be eligible for the index, a company must
- be based in the United States
- have a market capitalization of at least $8.2 billion
- have at least 50% of its stock available to the public
- Its stock price must be at least $1 per share. It must file a 10-k annual report
- have at least 50% of its fixed assets and revenues located in the United States
- have at least four consecutive quarters of positive earnings
- be listed on the New York Stock Exchange, Investors Exchange, Nasdaq, or BATS Global Markets
Each company in the S&P 500 index is weighted by dividing the company’s individual market capitalization by the S&P 500’s total market capitalization. Market capitalization is an important filter when it comes to a company’s representation in this index. This means companies with larger market capitalization receive the highest allocation in the S&P 500 index.
In other words, a company with a larger market capitalization in the S&P 500 Index has a much larger impact on the value of the index than a company with a smaller market capitalization. If a company has a market capitalization of $100 billion, it receives 10 times the representation as a company than a company whose market capitalization is $10 billion.
As of August 31, 2020, the top 10 companies, with a weighted market capitalization in the S&P 500 were:
- Apple Inc.
- Microsoft Corp.
- Amazon.com Inc.
- Facebook Inc. A
- Alphabet Inc. A (GOOGL)
- Alphabet Inc. C (GOOG)
- Johnson & Johnson
- Berkshire Hathaway B
- Procter & Gamble
- Visa Inc. A
As of August 31, 2020, the sector breakdown of stocks in the S&P 500 were:
- Information Technology: 27.5%
- Health Care: 14.6%
- Consumer Discretionary: 11.2%
- Communication Services: 10.9%
- Financials: 9.9%
- Industrials: 7.9%
- Consumer Staples: 7.0%
- Utilities: 3.1%
- Real Estate: 2.8%
- Materials: 2.6%
- Energy: 2.5%
The S&P 500 index has performed very well over the long term since the 2008-2009 financial crisis.
How to Buy Stocks in the S&P 500 to Make Money
You cannot directly buy stocks in the S&P 500, as the S&P 500 is not a company itself, but rather an index that comprises publicly traded companies. Although you cannot invest in the S&P 500 Index, you can buy shares in an index fund that tracks the S&P 500. You could also invest in shares of stocks that are in the S&P 500.
Investing in stocks in the S&P 500 index might be a good fit for your portfolio if you want to invest in the stock market, but are wondering which stock to buy. By investing in one of the funds, you can buy shares of stocks of many different companies that are in the S&P 500 index. It would be time-consuming or an arduous task to buy every company’s shares to diversify your portfolio. But investing in an index fund in the S&P 500 is the best way to build and develop a diversified portfolio.
The Best S&P 500 Index Funds
Once you know what it takes to buy the best index funds, you can select one of the best S&P 500 Index Funds for your portfolio below:
- Vanguard 500 Index (VFIAX): The first index fund available to individual investors.
- SPDR S&P 500 (SPY): This was the first ETF listed in the United States in 1993. At $258 billion in AUM, it is also among the largest ETFs trading on the market today.
- iShares Core S&P 500 (IVV): iShares Core S&P 500 (IVV) is an ETF that combines the qualities of AUM ($177 billion) and low expenses (0.04%).
- Fidelity 500 Index Fund (FXAIX): Fidelity 500 Index Fund requires no investment minimum, so it is the perfect index fund for investors with any budget size.
Which Stocks in the S&P 500 Make the Cut?
When it comes to which stocks in the S&P 500 to buy, it is important to know which ones make the cut. 30 stocks in the S&P 500 index rose during the COVID-19 pandemic, with a third of the total companies were technology companies.
Here are some of the best stocks in the S&P 500 index that made the cut even during the Covid-19 Pandemic:
- Regeneron Pharmaceuticals Inc. US (Health Care)
- Citrix Systems Inc. US (Information Technology)
- Netflix Inc. US (Communication Services)
- Digital Realty Trust Inc. US (Real Estate)
- Gilead Sciences Inc. US (Health Care)
- Clorox Co. US (Consumer Staples)
- Progressive Corp. US (Financials)
- Crown Castle International Corp. US (Real Estate)
- ServiceNow Inc. US (Information Technology)
- DaVita Inc. US (Health Care)
- Activision Blizzard Inc. US (Communication Services)
The information-technology sector was the best-performing sector during the first quarter of 2020. While two of the top five stocks in the S&P 500 that rose during the pandemic were the pharmaceutical companies, a third-of the total gainers were the information-technology companies. Tech giant Microsoft Corp. US (Information Technology) was located at the bottom of the list.
Investing in the S&P 500 Index Funds is one of the best ways to build and diversify your investment portfolio. The S&P 500 index provides beginner investors with one of the best ways to buy shares in an index fund that tracks the S&P 500. If you want to invest in stocks in the S&P 500, pick some of the companies that have done well over the long term.