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What is the S&P 500 and why do people invest in it? 🇺🇸


What is the S&P 500

The Standard & Poor's 500, commonly referred to as the S&P 500, stands as one of the most renowned stock market indices globally. Comprising 500 of the largest publicly traded companies in the United States, the index provides a snapshot of the performance of the American stock market. 




What is an index?

Index or indices refer to stock market indices, which are measures used to track the performance of a specific group of stocks and shares or an overall market. Indices are constructed using a weighted average of the prices of the constituent stocks, and they provide a snapshot of the performance of the underlying market or sector they relate to. The S&P 500, for example, is an index that tracks the performance of 500 of the largest publicly traded companies in the US. Other well-known indices include the FTSE 100, an index that tracks the performance of 100 of the largest publicly traded companies in the UK.




Why do people invest in the S&P 500? 


Broad Market Representation

The S&P 500 encompasses a diverse array of companies across various sectors, including technology, healthcare, finance, consumer goods, and more. This broad representation offers investors exposure to a wide range of industries and helps mitigate the risk associated with investing in individual stocks alone. By investing in the S&P 500, investors gain access to the collective performance of these industry-leading companies in one go, diversifying their investment portfolios and potentially reducing volatility.



Track Record of Performance

 Over the years, the S&P 500 has demonstrated a robust track record of long-term performance. Historically, the index has delivered attractive returns to investors, outperforming many other indices and asset classes. This consistent performance has earned the S&P 500 a reputation as a reliable benchmark for measuring the performance of the US stock market and as a cornerstone of many investment portfolios.


In the 32 years between February 1992 and February 2024, the S&P 500 index (in USD) had a compound annual growth rate of 10.32%. Here’s a snapshot of the breakdown provided by Curvo. We’ve added a year-by-year return table at the bottom of this article.


Period

Average annualised return

Total return

Last year

30.5%

30.5%

Last 5 years

14.8%

99.1%

Last 10 years

12.7%

230.5%

Last 20 years

9.9%

560.1%


Passive Investing and Low Costs

The rise of passive investing has further fuelled the popularity of the S&P 500. Exchange-traded funds (ETFs) and index funds that track the S&P 500 have become widely accessible to retail investors, offering a cost-effective and convenient way to gain exposure to the stock market. With lower management fees compared to actively managed funds, S&P 500 funds provide investors with a straightforward and efficient means of participating in the growth potential of the U.S. stock market.




How do I invest in the S&P 500?

Investors have several main ways to invest in the S&P 500:


Exchange-Traded Funds (ETFs)

ETFs are investment funds that trade on stock exchanges. S&P 500 ETFs track the performance of the index and allow investors to buy and sell shares throughout the trading day. ETFs offer

Where can I invest in ETFs?

flexibility and liquidity, making them a popular choice for investors seeking exposure to the S&P 500. Here’s an example of an S&P 500 ETF



Index Funds

Index funds are investment funds that aim to replicate the performance of a specific index, such as the S&P 500. These funds hold the same stocks in the same proportions as the index they track. Investors can buy shares of an S&P 500 index fund, which provides exposure to the entire index. Here’s an example of an S&P 500 Index Fund.


Mutual Funds: Some mutual funds are designed to replicate the performance of the S&P 500 index. These funds are actively managed and may have slightly different compositions or strategies compared to index funds or ETFs. Investors can invest in S&P 500 mutual funds through their general investing accounts or SIPPs.


Individual Stocks: While perhaps less common for retail investors, some investors may choose to directly invest in individual stocks that are components of the S&P 500 index, like Apple, Tesla, or Microsoft. By selecting specific companies within the index, investors can tailor their portfolios to their preferences or investment strategies.





What companies are in the S&P 500?

The S&P 500 index comprises 500 of the largest publicly traded companies in the United States, representing a diverse range of industries. While the specific constituents of the index may change over time due to factors such as mergers, acquisitions, and changes in market capitalisation, the companies typically include leading names across various sectors. Some well-known companies that are commonly included in the S&P 500 index include:


  • Apple Inc. (AAPL)

  • Microsoft Corporation (MSFT)

  • Amazon.com Inc. (AMZN)

  • Alphabet Inc. (GOOGL, GOOG)

  • Meta. (META)

  • Berkshire Hathaway Inc. (BRK.B, BRK.A)

  • Johnson & Johnson (JNJ)

  • JPMorgan Chase & Co. (JPM)

  • Visa Inc. (V)

  • Procter & Gamble Co. (PG)



What’s the average return of the S&P 500 year on year?

Below is a record of the average annual return of the S&P 500, referenced from Curvo.


Past performance is not a reliable indicator for future performance.

Year

Return

2023

26.29%

2022

-18.11%

2021

28.71%

2020

18.40%

2019

31.49%

2018

-4.38%

2017

21.83%

2016

11.96%

2015

1.38%

2014

13.69%

2013

32.39%

2012

16.00%

2011

2.11%

2010

15.06%

2009

26.46%

2008

-37.00%

2007

5.49%

2006

15.79%

2005

4.91%

2004

10.88%

2003

28.68%

2002

-22.10%

2001

-11.89%

2000

-9.10%

1999

21.04%

1998

28.58%

1997

33.36%

1996

22.96%

1995

37.58%

1994

1.32%

1993

10.08%

Want to learn more?

Interested in investing but don’t know exactly where to start? Try the free Pluto app. Learn investing basics, and practise in a risk free environment with no real money. Find us on the Apple App Store.






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