The S&P 500 is perhaps the most famous stock market index in the United States. Short for Standard & Poor’s 500, this index tracks the performance of 500 of the biggest stocks in the U.S. But you don’t have to buy your own portfolio of these 500 stocks individually. If you want a piece of the action, you can invest in every stock in the S&P 500 with one purchase. Here is everything you need if you want to know how to invest in the S&P 500.
What Is the S&P 500?
The S&P 500 is an index that tracks 500 of the biggest U.S. stocks. A committee meets to choose the stocks in the index. They don’t necessarily have to be the biggest 500 companies. The committee looks at things like market capitalization, liquidity, sector, and other criteria.
To qualify, a company must be squarely in the large-cap category with a minimum $8.2 billion market cap. The index is market capitalization-weighted, which means bigger companies have a bigger influence on the index than smaller ones.
S&P 500 Investing: How to Begin
Before 1975, if you wanted to buy the 500 stocks in the S&P 500, you would have had to buy each stock individually. In that pivotal year, Vanguard founder John Bogle introduced the first-ever index fund, which tracked the S&P 500. These days, there are many S&P 500 index funds to choose from. Here are the steps to put one in your portfolio. Here are the steps to start investing in the S&P 500:
1. Open a Brokerage Account
First, you need a brokerage account. This could be a retirement account like a traditional IRA or Roth IRA, an employer-sponsored 401(k) or similar, or your own traditional, taxable brokerage account.
There are many brokerages to choose from. Look at fees for buying and selling mutual funds and ETFs if you are opening a new account with a goal of investing in the S&P 500. Many brokerages offer their own family of funds or a group of partner funds with no mutual fund trading fees. For ETFs, you shouldn’t be paying any trading fees anyway.
2. Choose Between Mutual Funds and ETFs
You can buy S&P 500 index funds as either mutual funds or ETFs. Both track the same index and work in a similar way, but there are some key differences you should know about.
- Mutual funds are intended to be owned for a relatively long period of time. They trade only once per day, after the market close. Some have a minimum investment amount and a minimum length of time to invest. And early withdrawals can lead to penalties. On the positive side, you can buy and sell mutual funds in round dollar amounts.
- ETF (exchange-traded fund) is bought and sold like a stock. The price changes constantly throughout the day as traders buy and sell. As of recently, most major discount brokerage firms allow you to trade all ETFs free. There is no minimum time to hold or minimum purchase amount aside from the price of a single share. ETFs may have lower expense ratios in some cases as well.
For most people, ETFs are going to be a more attractive way to get started investing in the S&P 500. However, mutual funds have their benefits too. It’s up to you to decide which is a better fit for your portfolio.
3. Pick Your Favorite S&P 500 Fund
Once you decide between ETFs and mutual funds, you can start comparing more specific details to pick your favorite fund. Look at any costs and fees to start. You don’t want to overpay when you can get essentially the same thing from multiple sources.
For mutual funds, Schwab charges 0.02% for the Schwab S&P 500 Index Fund (SWPPX), with a $100 minimum. Fidelity charges just 0.015% for its Spartan S&P 500 Index Investor Class shares (FXAIX), with no minimum investment. The Vanguard 500 Index Fund (VFINX) has a 0.14% fee and a $3,000 minimum.
In the world of ETFs, the Vanguard S&P 500 ETF (VOO) costs 0.03%. iShares Core S&P 500 (IVV) costs 0.04% per year. The biggest and oldest S&P 500 ETF is the SPDR S&P 500 ETF (SPY) from State Street Global Advisors with a 0.0945% expense ratio.
4. Enter Your Trade
When you’re ready, log into your brokerage account and enter the trade. We recommend using Ally Invest, as it takes just a few minutes to enter a trade using its mobile app, website, or more advanced trading platform.
5. You’re an Index Fund Owner!
It’s that simple. Opening and funding a brokerage account is a quick and easy process. Once the funds have cleared, you can buy an S&P 500 index fund in just a few clicks. As long as you understand the risks of investing, it’s a great first investment and a fun way to get your feet wet in the stock market.
Written by Eric Rosenberg.
View the original article at here.