If you are looking to expand beyond low risk investments like Treasuries, certificates of deposit, and high yield savings accounts or completely new to stock market investing then the S&P 500 can be a great place to start. It does include 500 stocks though, which can be overwhelming for screening and analysis purposes so buying an S&P 500 fund can be your best bet. Nearly all brokerage firms and fund companies offer an S&P 500 fund so investing in this fund strategy is relatively easy for all types of investors. However, when looking at S&P 500 funds there can be a lot of questions for considerations.
What Is an S&P 500 Fund?
The S&P 500 Index is a stock index of the largest and most powerful companies in the United States. It is also one of the top indexes investors look to for the direction of the U.S. stock market overall. Companies in the S&P 500 Index are chosen by the S&P Index Committee. The S&P 500 is not just the largest 500 companies in the U.S. since the committee takes into consideration several 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. That fund is currently known as the Vanguard® 500 Index Fund. Some twenty 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 product as well. Most financial advisors would also suggest that longer term investors invest in a portion of S&P 500 Index funds based on their long-term goals, risk tolerance, and disposable income.
Advisors and Brokerages
Like all investing, broadly many investors choose to work with a financial advisor, full-service broker, or a discount broker. In general, advisors will suggest S&P 500 funds as a basis for equity allocations of a portfolio. Advisors usually charge based on an annual assets under management fee.
Full-service brokers will have higher fees for placing trades for you. Discount brokers have lower fees because these accounts are self-directed so that can be advantageous for simple fund investing like S&P 500 funds.
ETF vs. Mutual Fund
Generally fund investors have two basic choices, ETFs or mutual funds. As a beginning investor, ETFs can be a good place to start when looking to invest in specific indexes. ETFs primarily focus on passive index replication which gives the investor a fund that tracks all of the securities in the specified index. ETFs usually offer low-cost expense ratios because trading and active management is minimized. ETFs also trade throughout the day like stocks so they offer better liquidity.
There are also several S&P 500 mutual fund options. Fund companies offer both passive and active S&P 500 funds for investors. Mutual funds can come with slightly higher fees because of associated 12b1 costs but usually will be comparable with ETFs. Mutual funds have slightly different structurings with a net asset trading value (NAV) so investors can only buy at the day’s closing NAV price.
As mentioned, ETFs trade daily on market exchanges like stocks with fluctuating prices. Mutual funds also trade daily but at their NAV. Mutual funds can be traded through brokerage accounts like ETFs but they can also be bought and sold with a fund company directly.
Do it yourself (DIY) investing may dictate how an investor literally chooses to buy an S&P 500 fund. ETFs are regularly traded through all types of brokerage platforms. Like other passive ETFs many discount brokers offer commission free trading. If you are looking to invest exclusively in passive ETFs which includes S&P 500 ETFs then it can be a good idea to open an account with a discount broker that offers commission free trading on passive ETFs. Keep in mind some brokers may have minimum investments so this can also be a consideration. In the ETF market, the SPDR S&P 500 ETF (SPY) is the most popular by assets under management at $279.41 billion as of April 2019.
Mutual funds also trade through brokers and discount brokers. Additionally, as mentioned, you can buy mutual funds from a fund company directly. How you choose to buy often depends on your portfolio. Many DIY investors manage their portfolio holistically through their advisor or broker. Some investors may manage a portfolio of funds through a specific mutual fund provider. Choosing a mutual fund provider with market leading passive mutual funds like the S&P 500 strategy can be important if this is an area where you plan to focus. If you are looking to invest in in passive mutual funds directly through a mutual fund company, fees will likely be the top consideration. (For more, see also: Four Best S&P 500 Index Funds)
Alternative Investing Options
There are also some alternative investing options such as a 401k, individual retirement account, or roboadvisor. Investors can allocate to S&P 500 funds through their retirement account as allowed. Investing with a roboadvisor through a managed profit including S&P 500 funds is also popular.
Advancing Beyond Just the Passive S&P 500 Index Fund
There are several options for investors looking to take a more advanced approach to S&P 500 fund investing. Smart beta indexes offer low costs with the advantage of fundamental or customized investing. Examples of top smart beta funds can include the AAM Dividend Fund (SPDV) and the S&P 500 Equal Weight Index Fund (RSP).
Investors may also prefer to choose certain segments of the SP 500 Index that offer capital appreciation potential. Fund like the SPDR sector series or dividend focused funds can be good examples.
Many fund managers also offer active S&P 500 funds. These funds will focus primarily on the S&P 500 as a primary universe but make active trades through active management analysis.
Furthermore, there are also leveraged funds which can also offer a simplified approach to hedging. Bullish leveraged funds use leverage to multiple the return of the S&P 500 and enhance the return when the S&P 500 does well. Bearish leveraged funds use leverage to short the S&P 500 and can serve as a form of hedging when the S&P 500 falls.
Overall, there are many advanced S&P 500 fund alternatives for investors alongside the many passive fund options. These funds will also typically be in the form of either ETFs or mutual funds offering the same trading standards.