S&P 500 Index – Invest in 500 Companies At Once!| Updated: |
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You have probably heard of the Standard & Poor’s 500 (S&P 500) index. But do you know what it is? Many people believe it is a fund. But it is only a stock market index. And there are many funds available that track the performance of this index. There are many interesting facts about this index. If you have chosen to invest in this stock market index, you may want to learn more about it.
For instance, did you know that it does not track the 500 largest companies in the United States? It tracks 500 large companies from the U.S. stock market, not necessarily the largest. Indeed, the index is not managed by a single formula and a computer. A committee of humans takes the decision of including or removing a company from the index.
In this article, we will see what is inside the S&P 500 index. We will also see how the committee manages the index and updates it over the years. Finally, I will also describe how to invest in this index.
The S&P 500 Index
The Standard & Poor’s 500 (S&P 500) index is an index tracking 500 large companies in the United States stock market. It is one of the most famous indexes, along with the Dow Jones Industrial Average (DJIA) and the NASDAQ. His name comes from the fact that the Standard & Poor’s company manages it.
The Standard & Poor’s company is an indexing company that manages several indexes. It is a very old company, found in 1860. The S&P 500 index, started his life under the name of the Composite Index, in 1923. At that time, it was only tracking a few stocks. In 1926, it was first increased to track 90 stocks. Only in 1957 was it expanded to 500 stocks, becoming the S&P 500 index.
To be a bit more precise, the index is managed by the S&P Dow Jones Indices joint venture. It is part of the broader S&P Global company. It is the same company that is managing the Dow Jones Industrial Average (DJIA), another very famous stock market index.
Selection of companies
A committee of people selects the components of the index. The selection is not as easy as choosing the 500 largest companies in the U.S. stock market. There are requirements on eight points for each company in the index: market capitalization, liquidity, domicile, public float, sector classification, financial viability, and time on the public market.
Here are a few of the most essential requirements for inclusion in the index:
- The company must have a market capitalization that is great than 6 billion dollars.
- The price of the share must be higher than one dollar. This rule excludes penny stocks from the index.
- The shares must have a trading volume of at least 250 thousand shares per month.
The committed adjusts the index several times a year to reflect changes in the stock market and the companies making the index. For instance, there have been four changes in the first two months of 2019:
- On January 2, Dominion acquired SCANA. SCANA was removed from the index, and First Republic Bank (FRC) was added in its place.
- On January 18, PG&E Corporation filed for bankruptcy and was removed from the index. Teleflex took its place in the index.
- On February 15, ECA bought Newfield Exploration Co (NFX), which was removed from the index. This event made a place for Atmos to join the index.
- On February 27, Wabtec Corporation (WAB) acquired a large company and became large enough to join the index. This led Goodyear Tire & Rubber company out of the index.
As you can see, the index is far from being set in stone. It changes many times each year. Since there are always 500 companies in the index, each change removes a company from the index and adds a new one.
Companies in the S&P 500 Index
You may think that the index tracks the performance of 500 shares. But, it is tracking 505 shares. Why is that? The reason is, in fact, simple, some of the 500 companies in the index have different kinds of shares. For instance, Alphabet (the parent company of Google) offers two classes of shares with different voting rights. The index includes both kinds of shares for Alphabet. And it does the same for other companies from the index, resulting in 505 shares, at this time.
Such as most of the indexes that are followed in these days, the S&P 500 index is market-capitalization-weighted. It means that the bigger a company is, the more significant part of the index it will make. The total value of all the shares of the company is taken into account as the size of the company. At the time of this blog post, here are the five biggest companies in the index:
- Microsoft Corporation: 3.53%
- Apple Incorporated: 3.29%
- Amazon: 3.09%
- Facebook Incorporated: 1.75%
- Berkshire Hataway: 1.69%
Even with 500 companies, the first five companies are already making up around 13% of the index. And the first ten companies are making up 21% of the index. This imbalance is because of market capitalization weighting and the huge discrepancies there are in the U.S. stock market.
There are many alternative versions of the S&P 500 index.
The S&P Midcap 400 index, also known as the S&P 400 index, is tracking the performance of medium capitalization (mid-cap) companies from the U.S. stock market. Its companies are just a bit smaller than the smallest company in the S&P 500 index.
The S&P Smallcap 600 index, also known as the S&P 600 index, is tracking the performance of, you guessed it, small-capitalization (small-cap) companies from the American stock market. Its companies are smaller than the smallest company from the S&P 400 index.
Interestingly, these indexes can be combined. The S&P 400 plus the S&P 600 index form the S&P 1000 index. And together, the S&P 1000 index and the S&P 500 index form the S&P 1500 index. Finally, the S&P 500 and the S&P 400 put together are the same as the S&P 900. It seems they thought of everything!
All these funds are also existing in two alternative variants. Investors often split them into their Value and Growth subsets of companies. These subsets are based on the style of each company and its related investment style. Some people invest because the value of the share is below the real value of the company. This style of investing is what we call Value Investing. And some people prefer to focus on companies that are growing at a rapid pace. We call them Growth companies, hence the name of the index variant.
S&P 500 ETFs
Since the S&P 500 is only an index, you cannot directly invest in it. You could track the index yourself by buying all the companies from it. However, this would be highly inefficient and almost impossible unless your net worth is quite big. Therefore, you need to invest in the index through a mutual fund or an Exchange Traded Fund (ETF). Since most ETF providers also provide an equivalent mutual fund and vice-versa, we will look only at the ETFs tracking this index.
The S&P 500 index is one of the most popular indexes that exist. As such, many funds are tracking this index. You will find many ETFs for this particular. Here are the three main ETFs tracking this index:
- SPDR S&P 500 ETF (SPY): This fund manages the giant sum of 263 billion dollars. The ETF has a TER of 0.09%.
- iShares Core S&P 500 ETF (IVV): This ETF manages 160 billion dollars. It has a TER of 0.04%.
- Vanguard S&P 500 ETF (VOO): Although the smallest of the three, VOO still manages more than 100 billion dollars. It has a TER of 0.04%.
These three ETFs are very large, more than enough. Given their TER, I would either choose the iShares ETF (IVV) or the Vanguard ETF (VOO). They are both very good funds, and I do not think it will make a big difference in the long-term which ETF you choose. I would go with VOO since I like Vanguard’s philosophy. But again, this is a personal choice. There is nothing wrong with IVV.
I think that covers the S&P 500! It is a very popular index that includes about 90% of the United States stock market. It contains only large or very large companies. The S&P 500 index is quite old. It is more than 60 years old in its current form.
I would prefer the index to be decided by formula rather than a committee. However, over the years, this has worked pretty well. I do not think this will cause an issue in the future. I am currently investing in this index via the Vanguard S&P 500 index. If you want to invest in the U.S. stock market, it is a good choice of index.
What do you think of this index? Is it part of your investment portfolio? Do you know anything else interesting about the S&P 500?
If you want to invest in more than 500 companies, you can learn about the Russell 3000 index. If you want to compare indexes, I also wrote a guide about comparing different stock market indexes.
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12 thoughts on “S&P 500 Index – Invest in 500 Companies At Once!”
I am new to Switzerland, and I would like to set up a trading account where I can invest a certain amount of money every month into the SPY index.
How do I do this, this seems very complicated in Switzerland….
Hi. I have an article to get started on investing. It should get you most of the way.
I have the index funds equivalents of both ishares and Vanguard:
I also have Lifestrategy 100% equity but two years ago I switched 90% of it into the managed Fundsmith LLP Equity I INSTL ACC NAV (FUQUIT)
Going forward my bias is towards ETF’s.
Thanks for sharing your portfolio!
Why did you choose to invest in FUQUIT? I would be interested to know.
Also, it seems that your two first funds are almost the same. Did you think of simplifying to only one of them?
Thanks for stopping by!
Yes, the first two are the same and I bought them a while back but surprisingly the ishares sometimes does better by just under 1% but eventually Vanguard catches up after a day or two. I agree that there is no need for both those funds as one would suffice and my preference would be an ishares ETF. This will be fixed when I move to ETFs.
I switched to FUQUIT about two years ago because even though it has a higher OCI it was performing a lot better than the Lifestrategy 100% Equity fund. Over the last three years, FUQUIT has gained around 50% while Lifestrategy is around 24%.
All the above funds as well as more managed and index funds are in my UK ISA. You can contribute £20K GBP per tax year into a UK ISA and all gains for free from capital gains.
Should have included the percentages and date of purchase in the above reply but by yoga class had a higher priority…
1) Vanguard Lifestrategy 100% Equity (purchased August 2017) – 22.50%
2) Two S&P 500 trackers (Vanguard and Blackrock North American purchased August 2017) returned 36.57% & 37.26% respectively
3) Fundsmith LLP Equity (purchased July 2018) – 19.91%
4) Fundsmith LLP Equity (purchased April 2017) – 52%
5) Vanguard small cap tracker (August 2017) – 20.49%
In 2017 I was based in Zurich and my ISA was on a platform that charged a percentage based fee. ISA rules meant I could not change platforms till I became a UK resident and on my return to the UK I switched platforms and repurchased/changed my holdings.
I sold my trackers and the smaller Fundsmith about a week before the DOW reached it’s peak mainly on the markets being too high and coronavirus.
Currently my ISA is around 40% cash and I’ll be funding the £20K allowance for the current tax year before the 5th of April.
At close of markets on the 9th this is where I stand:
1) Vanguard Lifestrategy 100% Equity (purchased August 2017) – 8.74%
Fundsmith LLP Equity (purchased July 2018) – 4.12%
Thanks for sharing :)
I didn’t know the UK had the ISA system. Is that like an IRA in the U.S. or the third pillar in Switzerland?
Thanks for stopping by!
The ticker for the Vanguard small cap in my previous response is: VIGSCA
Don’t know about the US system but an ISA allows you to save £20,000 GBP per annum and you don’t pay capital gains as long as you follow some rules. For example, if I had changed platforms whilst resident in Switzerland then it is possible that HMRC can argue that I have exceeded the £20K allowance and I no longer qualify for tax relief. ISA’s used to be called PEP’s (Personal Equity Plan) previously. If you don’t use your ISA allowance for the tax year then you lose it.
You have already paid income tax on the money you invest in an ISA but you don’t pay any capital gains when you take the money out. You can cash in your ISA anytime.
The closest I can think of to Pillar over here is SIPP (Self invested Personal Pension) and the maximum you can pay is £40,000 per annum. There are rules that state what the maximum is but for most people the maximum tax relief is on the first £40K. Anything you pay into a SIPP is tax free but you pay tax when you start taking the money out. So obviously if you are a higher rate tax payer then it makes sense to pay the maximum into a SIPP. Unlike in the ISA, the SIPP allowance of the last three years can be carried forward as long as it is part of your income. For arguments sake, lets say I work freelance and my limited company has profits of £200,000. Assuming that I have not used my pension allowance for the previous three years then my company can pay in £160,000 tax free into my SIPP account. That will leave just £40,000 in the company account liable for corporation tax.
So basically, as far as taxes are concerned, on an ISA the money going in has already been taxed and there is no tax when you take it out. On a SIPP, there has been no tax on the way in but you are liable for income tax when you take it out.
Thanks a lot for sharing this. It’s really interesting to learn how other countries’ systems are working.
It seems like a great system, better than the one we have here. It would be great to defer 40K of taxes for later.
J’aimerai acheter des ETF de Vanguard 500 (VOO).
J’habite en suisse et investi avec swissquote, quand je recherche le fond j’ai la possibilité de choisir plusieurs marchés: parmi lesquelles SIX et NYSE.
Vous conseillé de choisir lequel?
Compliment pour le blog, très interessant et utile.
Since VOO is a US ETF, I would recommend buying VOO on NYSE for maximum volume.
P.S. Please comment in English in the English section of the blog.