What is the S&P 500? Why is it important for investing?

One of the things we advocate at Invest in ETFs is to invest in low-cost index funds. These often beat many mutual funds after fees. But our readers often struggle to understand what the S&P 500 is. This short note will walk you through it.

The performance of 500 of the top publicly traded firms in the US is tracked by the S&P 500, often known as the Standard & Poor’s 500 Index. Because it is a market capitalisation-weighted index, the largest market capitalisation businesses are given the most weight in the index.

The S&P 500 is an index, which is just a list of stocks, and it includes the biggest and best-known American corporations. Apple, Microsoft, Alphabet, Amazon.com, Tesla, Berkshire Hathaway, UnitedHealth Group, Johnson & Johnson, and ExxonMobil are a few of these businesses. Just these nine firms account for 27.8% of the index’s whole market capitalisation.

When was the S&P 500 launched?

The S&P 500 was launched in 1957 by the credit rating agency Standard and Poor’s and is considered to be one of the best gauges of the performance of prominent American equities and the stock market overall. It is important to note that the S&P 500 is an index and cannot be directly invested in, but it can be tracked through funds that use it as a benchmark.

The S&P 500, also known as the Standard and Poor’s 500, is a stock market index that tracks the performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and as of December 31, 2020, more than $5.4 trillion was invested in assets tied to the performance of the index. The index is a free-float weighted/capitalisation-weighted index and the nine largest companies on the list of S&P 500 companies accounted for 27.8% of the market capitalisation of the index. These companies include Apple, Microsoft, Alphabet, Amazon.com, Tesla, Berkshire Hathaway, UnitedHealth Group, Johnson & Johnson and ExxonMobil.

How can I invest in the S&P 500?

Investing in the S&P 500 is easy and can be done through a variety of different methods. One of the most popular ways is through mutual funds and exchange-traded funds (ETFs) that replicate the performance of the index. These funds hold the same stocks as the index in the same proportions, so they mimic the performance of the index. Some of the most popular ETFs that track the S&P 500 include SPY, VOO, and IVV. It is always important to speak to a professional before investing, but now that you know more about ETFs this can be a good starting point.

Another way to invest in the S&P 500 is through derivatives. The Chicago Mercantile Exchange (CME) offers futures contracts that track the index, which can be traded on the exchange floor or on CME’s Globex platform. The Chicago Board Options Exchange (CBOE) also offers options on the S&P 500 index, as well as on S&P 500 index ETFs, inverse ETFs, and leveraged ETFs. These are more complicated assets and are best avoided for novice investors, once you are more comfortable with investing and in consultation with a financial advisor, these would be a great way to add some sophistication to your investments.

When was the S&P 500 created?

Henry Varnum Poor founded Poor’s Publishing in 1860 and produced an investor’s guide to the railroad industry. This was the first time the S&P 500 index was used. The Standard Statistics Company started evaluating mortgage bonds in 1923 and created the first stock market index in the same year, which included the stocks of 233 American companies. Standard & Poor’s was created in 1941 as a result of the union of Poor’s Publishing and Standard Statistics Company. In 1957, the index was enlarged to include the 500 businesses it does today and was given the new moniker, S&P 500 Stock Composite Index.

Who decides which 500 businesses are included in the S&P 500 index?

S&P Dow Jones Indices oversees the S&P 500 index’s selection criteria, which are controlled by a committee rather than rigorously following rules like those of indices like the Russell 1000 Index. Since its beginning in 1928 and through December 31, 2021, the average yearly return has been 11.82%. Since the index’s adoption of 500 stocks in 1957 through December 31, 2021, the average annualised return has been 11.88%. The S&P 500 is a well-known and commonly used index that provides investors with a wide variety of investment alternatives and a lengthy history of producing profitable returns.

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