The Best S&P 500 Index
When it comes to major U.S. stock indexes, none is more regarded as a barometer of overall stock market performance and an indicator of how large corporations are performing than the S&P 500 index.
With this in mind, here’s what all investors should know about what the S & P 500 index is, how it works, how you can invest in it, and why doing so might be a smart decision for you.
What is the S&P 500 index?
The S & P 500 (also known as the Standard&Poor’s 500), a registered trademark of the S & P Dow Jones Indices, is a stock index consisting of the 500 shares of the largest companies in the United States stock markets. In general, it is considered the best indicator of how U.S. stocks in general are performing.
The S&P 500 index is weighted by market capitalization, which means that larger companies make up a larger share of the value of the index and therefore have more influence on their performance. In other words, each company does not simply represent 1/500 of the index. Massive companies like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) have a greater impact on the S&P 500 index than relatively smaller companies like Macy’s (NYSE:M) and Harley-Davidson (NYSE:HOG).
A key point to know is that although it is about 500 large companies, there is a wide range. Several of the largest companies in the index have market caps above $ 1 trillion, and are more than 200 times larger than the smaller components of the S & P 500, which have market caps between $ 6 billion and 7 7 billion.
The value of the S&P 500 index fluctuates continuously throughout the trading day, based on market-weighted performance data of its underlying components.
Interactive chart: the S&P 500 index
Vs S & P500
Which companies are in the S&P 500 index?
The S&P 500 index is composed of 505 shares issued by 500 different companies. There is a difference in the numbers here because some S & P 500 component companies issue more than one class of shares, for example, Alphabet Class C (NASDAQ: GOOG) and Alphabet Class A (NASDAQ: GOOGL) are included in the S & P 500 index.
Obviously, it would not be practical to list all S & P 500 components here. However, because the S & P 500 is a market capitalization-weighted index, its performance depends primarily on the larger stocks it contains.
With that in mind, here’s a look at the 10 largest components of the S&P 500 index as of February 2020, though it’s important to keep in mind that the order can (and probably will) change over time:
NASDAQ price: AAPL)
NASDAQ price: AMZN)
Facebook (NASDAQ: FB)
Forecast of profitability and dividendwelcome)
Alphabet Class C (NASDAQ: GOOG) (NASDAQ: GOOG)
Alphabet Class A( NASDAQ: GOOGL)
JPMorgan Chase(NYSE: JPM)
Johnson & Johnson (NYSE: JNJ)
Visa (NYSE: V)
Data source: Dow Jones S & P Indices.
Why is the S&P 500 index considered the best stock market snapshot?
In short, the S & P 500 consists of a wide basket of stocks without too many small and dark companies. It contains the companies largely owned by individual investors, with 500 components accounting for approximately 80% of the total stock market capitalization in the United States.
The S & P 500 vs. the Dow Jones Industrial Average
A common question is why the S&P 500 is considered by most experts to be a better stock market indicator than the Dow Jones Industrial Average. After all, the value of the Dow is usually the headline number you see on TV.
However, the Dow has two major shortcomings. On the one hand, it includes only 30 companies, and leaves some of the largest stocks on the market, for example, the top 10 stocks of the S & P 500 Amazon, Alphabet and Berkshire Hathaway are noticeably absent from the Dow.
Second, and most importantly, the Dow Jones Industrial Average is a price-weighted index. This means that companies with higher stock prices have more influence on the index than those with lower prices per share, even if they are much smaller companies. As an example, Goldman Sachs (NYSE:GS), with a stock price of actualmente 238 currently, has more than twice as much weight in the Dow as Walmart (NYSE:WMT), despite being only a quarter of the size by market capitalization.
In short, the S & P 500 covers far more stocks than the Dow, and it does so with a weighting that makes far more sense to try to measure overall stock market performance.
Other major indices
Tracking 30 of the largest blue chip companies on the market.
Tracking all public companies operating on the Nasdaq exchange.
Track 2000 companies ranging from small cap to mid cap.
How can you invest in the S&P 500 index?
You can invest in the S&P 500 index by buying shares of a mutual fund or exchange-traded fund (ETF) designed to passively track the index. These are investment vehicles that own all stocks in the S&P 500 index in proportional pesos.
A good example is the S&P 500 funds offered by Vanguard. The Vanguard S & P 500 ETF (NYSEMKT: VOO), which trades as a stock, and the Vanguard 500 Index Fund Admiral Shares (NASDAQMUTFUND: VFIAX) investment fund both have extremely low rates and offer a yield virtually identical to the S & P 500 index over time.
Additionally, S&P 500 futures contracts are traded on the Chicago Mercantile Exchange, allowing investors to essentially buy or sell options contracts across the index.
Is the S&P 500 index the best investment for you?
Legendary stock investor Warren Buffett has said that a low-cost S & P 500 index fund is the best investment most people can make. And it’s not hard to see why. For long periods, the S & P 500 has delivered annualized total returns of 9% -10%, and you can invest in a passive S & P 500 fund at virtually no cost.
To be clear, if you have the time, knowledge, and desire to properly research stocks and maintain a portfolio, we (and Warren Buffett) believe that it is certainly possible to achieve superior investment returns relative to the S & P 500 over the long term. However, not everyone has the time and discipline to invest in stocks that way, and newer investors in particular may be better off using an S & P 500 index fund to invest until they develop their knowledge.
Simply put, investing in the S & P 500 is a way to gain broad exposure to the profitability of U.S. companies without too much dependence on the performance of any individual company. Over time, the S&P 500 can produce strong returns in your portfolio, and with minimal effort on your part.