If you’re looking to invest in S&P 500 stocks, but don’t have the temperament to properly comb through the financial fundamentals of 500 individual companies, an S&P 500 Index can help you gain exposure to those stocks—without the grueling analysis.
The S&P 500 Index tracks the largest and most powerful companies in the United States. The constituent stocks are curated by the S&P Index Committee, which selects companies based on a host of factors, including market cap, liquidity, and sector allocation.
In 1976, Vanguard introduced individual investors to the nation's first mutual fund designed to mimic the S&P 500 Index. Some 20 years later, the first exchange-traded fund (ETF) was launched, which similarly tracked the S&P 500 Index. Today, nearly all major brokerages and fund companies offer some type of S&P 500 fund. Investors may access these funds through financial advisors, full-service brokers, or discount brokers.
- If you’re investigating the possibility of adding S&P 500 stocks to your portfolio, an S&P 500 Index fund can help you facilitate broad exposure to those kinds of stocks, with minimal due diligence.
- Exchange-traded funds (ETFs) maintain a strategy of passive index replication, affording investors broad access to all of the securities within the given index.
ETF vs. Mutual Fund
ETFs primarily focus on passive index replication, essentially giving investors access to all securities within the specified index. These ETFs, which usually offer low-cost expense ratios due to the minimized active management, trade throughout the day, similar to stocks. Consequently, they are highly liquid, and subject to intra-day price fluctuations—just like stocks.
Contrarily, S&P 500 mutual funds may be either passive or active. They tend to have slightly higher fees than ETFs because of associated 12b1 costs. Furthermore, mutual funds have slightly different structures, where investors may only buy them at the day’s closing net asset trading value (NAV) price.
Those looking to cheaply invest in S&P 500 ETFs may gain exposure through discount brokers, who offer commission-free trading on all passive ETF products. But keep in mind that some brokers may impose minimum investment requirements. Currently, the largest S&P 500 ETF is State Street Global Advisors' SPDR S&P 500 ETF (SPY), which boasts around $226 billion in assets under management, as of March 2020.
Mutual funds also trade through brokers and discount brokers, but may also be accessed directly from the fund companies. Some investors wish to holistically manage their portfolio through an advisor or a broker. Others prefer to manage a portfolio of funds that are all housed within a specific mutual fund provider. Investors may also access funds through employer 401k programs, individual retirement accounts, or robo-advisor platforms
Advancing Beyond Just the Passive S&P 500 Index Fund
Investors in search of a more advanced approach to S&P 500 fund investing may wish to consider smart beta indexes, which impose lower costs, and offer the advantage of fundamental or customized investing. Examples of such funds include the AAM Dividend Fund (SPDV) and the S&P 500 Equal Weight Index Fund (RSP). Investors may also target certain segments of the S&P 500 Index that offer capital appreciation potential, with funds like the SPDR sector series or dividend-focused funds.
Many fund managers also offer active S&P 500 funds, which focus primarily on S&P 500 names, but actively trade names beyond those strictly found in the index. There are also leveraged funds, which offer a simplified hedging approach. Bullish leveraged funds use leverage to multiply the return of the S&P 500 when it performs well. Bearish leveraged funds short the S&P 500, to pull in positive returns when the index falls.