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The S&P 500 Explained and Defined

By Samuel Becker · April 28, 2023 · 11 minute read

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The S&P 500 Explained and Defined

What Is the S&P 500?

The S&P 500 is perhaps the most well-known stock market index in the United States, and gives a broad measure of how well the stocks of 500 of the largest companies are performing. It can be used as an economic or stock market indicator, and is one of several large stock market indexes (or indices) out there. It’s actually short for “The Standard and Poor’s 500,” a reference to the organization that manages it. That organization, S&P Dow Jones Indices, also manages other market indexes.

The S&P 500 is commonly cited when discussing stock market performance. For instance, if you turn on the news (especially a financial news channel), you’re likely to hear a commentator or anchor mention, at the top or bottom of every hour, the performance of a market index, including the Dow Jones Industrial Average (the Dow) and the S&P 500.

The S&P 500 is a particularly useful measure because it includes 500 companies — comprising a large, representative swath of the overall U.S. stock market. The Dow Jones, for comparison, comprises just 30.

Index fund investing (also called passive investing) provides a relatively simple way to start investing in the stock market. An investment in a mutual fund that’s built similar to the S&P 500 provides immediate widespread market diversification.

That’s a general answer to the question “what is the S&P 500 index,” however. And there’s a lot more to dig into as to what makes the S&P 500 unique. Understanding common market indices is critical for new investors if they hope to fold their knowledge into their investing strategy.

💡 If you’re new to investing, check out our Investing 101 Center.

The S&P 500 Explained

The S&P 500 is often considered a reliable measure of large U.S. company stock performance. These are large- and mega-cap stocks —“cap” being short for capitalization. Capitalization is a measure of the value of a company’s stock. In the stock market, it’s how company size is measured.

The index describes itself as including 500 “leading” companies. It uses the word “leading” as opposed to “biggest” because there is more to the criteria for inclusion than just size. That said, many of these companies are household names, or what might be considered “blue chip” stocks.

The S&P 500 index includes about 80% of the U.S.’s market capitalization, which is another way to say that it measures 80% of the market by size. It includes companies that are the biggest players in the U.S. economy, many of which bring in business from across the globe. There is also a healthy mix of different types of companies that compose numerous S&P 500 sectors, too.

The index does not include every stock available in the U.S. Small- and mid-size companies are typically excluded from the S&P 500, but there are plenty of indices that measure just these market segments, or the entire U.S. stock market, including both big and small companies.

Index Investing

There are also different ways to invest in those segments, too, which is important to understand when weighing buying ETFs vs. index funds.

In fact, there are thousands of indices that measure just about every investable market in the world. It is important to understand that an index simply measures the very market that it was built to measure — nothing more, nothing less.

While it’s possible, and maybe even advisable for some investors to look at purchasing ETFs in an effort to invest in certain parts of the market, index funds can also do a lot of the heavy lifting. It’ll require a little bit of research on the investor’s part, though, to make sure they’re choosing the right investment for their portfolio.

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Which Companies Make Up the S&P 500?

As of mid-April 2023, the S&P 500 index consists of 503 holdings, selected by a committee. In general, the S&P 500 seeks to limit turnover in the index.

The most influential companies in the U.S. are included in the S&P 500 index. Because the index is market cap–weighted, the companies included could change over time.

To be included, companies must be headquartered in the U.S. with a market cap of $8.2 billion or greater. There are additional requirements for trading liquidity and company earnings.

The S&P 500 aims for a representative breakdown across industries, or “sectors,” as they’re called in investing parlance. Said another way, if technology makes up 25% of the market measured by the S&P 500, then the index should reflect that.

Information technology, health care, and financials are the three largest sectors represented by the S&P 500 index. Other sectors include communication services, consumer discretionary, industrials, consumer staples, utilities, real estate, energy, and materials.

How the S&P 500 Compares to Other Major Indexes

If you’re interested in learning about the S&P 500’s history, it started about a century ago. The first version of the S&P 500 index was created in 1923 by Henry Barnum Poor’s company, Poor’s Publishing. It began tracking 90 stocks in 1926. Standard & Poor’s was officially founded in 1941, when the company merged with Standard Statistics, with the goal of being a leading provider of financial information and analysis.

The modern S&P 500 index was created in 1957. At the time, it was the first U.S. market cap — weighted stock market index.

Market cap — weighted means that more valuable companies have a greater ability to move the index than a smaller company. For example, a 5% increase in the value of a large stock would have a more pronounced impact on the market index than a 5% increase in a stock which has a much smaller market cap. This is in contrast to an equal-weighted index, which attempts to equalize each company’s performance within the overall index.

The S&P 500 vs the Dow Jones (DJIA)

Compare the S&P 500 to the Dow Jones Industrial Average. The DJIA or “the Dow” as it is often called, has been around for longer than the S&P 500 — it was created in 1896. To this day, the DJIA measures only 30 U.S. “blue chip” stocks that are considered anchors of the American economy. Companies listed in the Dow change regularly, according to their stature and various economic trends.

Because the Dow only measures the performance of 30 companies, it is sometimes considered a less representative measure of U.S. stock market performance. Further, the DJIA uses a somewhat complicated price-weighted calculation methodology.

The stocks held in the DJIA are selected by a committee. Market cap, or size, of a company is considered, but that’s not all. “A stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors,” according to the index. All of the stocks comprising the DJIA are also a part of the S&P 500.

Generally speaking, the S&P 500 and DJIA are the most popular market indexes in the U.S. But there are more granular indexes out there, too, such as the Nasdaq.

The S&P 500 vs the Nasdaq

The Nasdaq is often used as a measure for technology stocks. Take note, too: The Nasdaq is an exchange (of which there are several stock exchanges), and the Nasdaq index tracks the stocks (and other securities) listed on its exchange.

An exchange is a digital marketplace for stocks or other securities—the New York Stock Exchange (NYSE) and the Nasdaq are the two largest in the U.S.

For companies listing their stock for sale on an exchange, the Nasdaq has long been a go-to spot for technology heavyweights. The Nasdaq is not exclusive to technology companies, but due to its heavy weighting in the tech sector, it is often considered a bellwether for technology stock performance.

Another popular U.S. stock market index is the Wilshire 5000, which represents the entire U.S. stock market. Currently, the Wilshire 5000 generally consists of around 3,500 stock holdings at a given time — sometimes more, sometimes fewer.

The Russell & Others

For small-cap stocks, the Russell 2000 is often a top choice. The index tracks the 2,000 (or so) smallest companies trading in the U.S. stock market. The Russell 1000, on the other hand, measures the 1,000 largest stocks. The Russell 3000 contains nearly all U.S. stocks.

There are a slew of indices in the U.S., and tons more internationally. Most countries have their own market indices. It is also possible to find indices that niche down to smaller subsets of the stock market, such as by industry or other criteria (such as “green stocks“, for example). There are so many market indices out there, it would be impossible to list them all.

Popular global indices include the MSCI World and the MSCI ACWI, which stands for “all country world index.” The latter includes emerging markets like Brazil and China, and the former includes only developed markets, such as the U.S., Germany, and Japan.

Popular Market Indexes

Index

Number of holdings

Focus/Speciality

S&P 500 500 Market bellwether
Dow Jones Industrial Average 30 Large “blue-chip” stocks
Nasdaq 100 Technology stocks
Wilshire 5000 ~3,500 Entire-market index
Russell 2000 ~2,000 Small-cap stocks

Pros and Cons of Investing in the S&P 500

With a broad understanding and definition of the S&P 500 in hand, it’s also important to know some of the basic pros and cons of investing in the S&P 500.

Pros

Perhaps the biggest and most obvious advantage to investing in the S&P 500 is that it’s relatively easy to do. You can purchase an index fund or ETF that tracks the index, and immediately gain exposure to a broad swath of the market, with the advantages of some built-in diversification. It’s also a low-cost way to invest, and average returns, historically, have been hard to beat.

Cons

It’s possible that you could miss out on gains for specific companies or in specific market segments by investing in the market at-large through the S&P 500. That’s a big trade-off — investors who can handle bigger risks may see bigger rewards, after all.

There’s also a potential drawback in that market-cap weighting, as discussed, could play a role in determining returns if some big companies experience turbulence. These days, volatility in the tech sector could come into play, in particular.

Performance of the S&P 500

The S&P 500 index has had a pretty incredible historical run. It has grown significantly over time — but not without some hiccups along the way. The S&P 500 has annualized approximately 10% over time. In other words: The stock market’s long-term performance boils down to about 10% growth per year.

This stat requires some context, though. It does not mean that the S&P 500 grows by a neat and tidy 10% each year. Instead, 10% is the average. Some years experienced much larger growth than this, and there were other years where growth was significantly smaller, or even negative.

Over time, investors have witnessed several stock market crashes as measured by the S&P 500, such as the dot-com bubble in the early 2000s, and the market crash of 2008.

For example, the S&P 500 returned -37% in 2008 and +27% in 2009. Though long-term averages have been favorable, it’s certainly not without short-term volatility.

How Can You Invest in the S&P 500?

There are lots of options for investing in the S&P 500 index. The easiest might be buying an S&P 500 index fund, which is investing just as the index is constructed. When an investor buys an S&P 500 index fund, they’re buying the 500+ companies tracked by the index.

There are generally two types of funds, each constructed somewhat differently: mutual funds and exchange-traded funds, or ETFs. Which an investor decides to use may depend on context.

While the two types of funds are different in construction, both an S&P 500 index mutual fund and an S&P 500 index ETF will accomplish largely the same thing.

If you’re wondering which funds you should look for? An internet search will yield numerous results for these types of funds, and investors can do a bit of research to find which might be the right fit for their portfolio.

Investing in the S&P 500

The S&P 500 is a broad market index, comprising around 500 of the largest companies in the world. It’s typically cited as an indicator of overall stock market performance, and used as a bellwether when gauging the health of the U.S. economy.

Investors may, in many cases, be guided to invest in the S&P 500 by their advisors — it’s often a good move, too, as S&P 500 index funds or ETFs are somewhat diversified investments right out of the box (at least in terms of providing exposure to a range of big U.S. companies).

That doesn’t mean that it’s risk-free, or the right move for everyone, however. Being limited to large- and mega-cap companies has a big potential downside, as that sector of the economy can see big declines as well as gain.

Using SoFi Invest, investors can consider an S&P 500 index ETF, effectively investing them in the S&P 500 index. It’s easy to get started when you open an Active Invest brokerage account with SoFi Invest. SoFi doesn’t charge commissions, and other fees apply (full fee disclosure here). Members can access complimentary financial advice from a professional.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What is the S&P 500 in simple terms?

The S&P 500 is a market index — similar to a cross-section or core sample of the stock market. It’s made up of some 500 of the biggest companies in the U.S., and can be used as a gauge of the overall health of the market and economy.

What is the purpose of the S&P 500?

Investing in an S&P 500 index fund or ETF can be an easy and cost-effective way to invest in the entire U.S. market, rather than a single company or sector. On a broader scale, the S&P 500 can be used as a measure of the stock market’s performance.

Is buying the S&P 500 a good investment?

Some financial professionals might say that there could be room in a long-term financial plan for an S&P 500 investment, given that the U.S. stock market provides an average return of about 10% over time. But that’s just a historical average, and nothing is guaranteed. And investing in big U.S. companies may not be the right investment for your specific situation.


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