• The S&P 500 index is a grouping of publicly traded stocks in the U.S. that span 11 sectors.
• You can’t buy the index directly, but you can buy index funds that track it.
• The S&P 500 is market-cap-weighted, meaning companies with more outstanding shares and higher prices have a greater impact on its value.
• To be included in the S&P, companies must meet specific requirements, including profitability, a minimum number of outstanding equity shares, and a certain market capitalization.

S&P 500 Performance

In recent years, U.S. equity markets have been volatile, fluctuating due to the COVID-19 pandemic, inflation (or rising prices), and the Federal Reserve’s policy of raising interest rates to combat inflation.

Here’s a chart from the last few years with some of the major moves highlighted:

• —25%: Down from its high of 4,780 in late 2021 to 3,585 in Oct. 2022.
• +37%: Up from the Oct. 2022 lows to all-time highs in Jan. 2024.
• +18%: Up from Nov. 2023 to Jan. 2024.

Takeaways:

• Timing the market doesn’t work. If you had bought on the rallies from 2022 to 2023, expecting a quick gain, you probably would have sold for a loss.
• If you had bought consistently monthly or every six months (an amount you could afford) and held it, you would have a capital gain today.

However, with any investment, there is always the risk of losing your money.

What’s Included in the S&P 500?

Each company’s weighting in the index differs, meaning some companies can influence the S&P’s value more than others.

Top 10 Stocks

Below are the top 10 stocks with the largest weightings in the S&P 500:

Takeaways: The top 10 stocks represent more than 25% of the total weighting of all the stocks within the S&P 500.

A large move in a company’s stock with a 1% weighting will have less of an impact on the S&P’s value versus a company with a 6% weighting.

Sector Breakdown

Below is the weighting of the sectors within the S&P 500.

• A sector is a grouping of companies that share similar characteristics, target customers, and types of business.
• For example, the technology sector contains tech stocks, while the financial sector contains bank stocks.

Just like the stocks within the S&P, not all sectors carry the same weighting.

So, a large move in one sector with a higher weighting can move the index disproportionately.

Not All That Diversified

It’s helpful to research the sector diversification of an index to ensure you’re not overweight in one sector.

We can see from the pie chart above that the S&P is comprised of nearly 40% of tech-type stocks, whether it’s mobile, streaming services, online retailers, or software companies.

• 8.60% — Communication services contain stocks like Alphabet (Google), Verizon, AT&T, Netflix, and the Walt Disney Company.
• 28.90% — Information technology contains Apple, Microsoft, and Amazon, while some stocks are in both sectors, like Alphabet.

So, if you believe the economy is going to expand and the tech sector will do well, buying the S&P can help.

However, if you own individual stocks in the tech and communication sector and want to diversify into other sectors, buying the S&P 500 may not help you.

For example, if you want exposure to real estate, energy, or healthcare, these sectors have a small weighting within the S&P 500:

• Energy = 3.90%
• Healthcare = 12.6%
• Real estate = 2.50%

If the S&P 500 is inadequate for your sector diversification, you’ll have to look for sector funds that can help you balance your portfolio.

How to Invest in the S&P 500

You can’t buy an index directly, but instead need to invest in funds that track the components within the S&P 500.

Index funds are passively managed and track the stocks, sectors, and weightings of an index, such as the S&P 500.

In other words, these funds comprise all the S&P 500 stocks, and their performance is nearly identical to that of the index.

Here are two popular funds that track the S&P 500:

• Vanguard S&P 500 ETF (VOO), which contains all 500 of the S&P 500 stocks and has a tiny 0.03% expense ratio, which is the cost to manage the fund.
• Blackrock’s iShares Core S&P 500 ETF (IVV) mirrors the S&P 500 and also has a low expense ratio of 0.03%.

Final Thoughts

• If you enjoy buying individual stocks, that’s your decision, your risk, and your money.
• However, index fund investing allows investors to access stocks without the need for in-depth stock analysis.
• You can always do both, meaning buy stocks layered on top of your index investing, which provides you with more exposure to specific sectors or best-of-breed companies.

Good luck out there.