How to Invest in S&P 500?

The S&P 500 is the most well-known stock index in the world. In this article we will talk about its characteristics, how it is composed, which are its components, the geographical distribution of its sales, the distribution of its returns, and most importantly, how we can invest in it.

Image showing the headquaters of a financial establishment

S&P 500: Characteristics, Components, and Geographical Distribution

Characteristics of the S&P 500

The S&P 500 is a stock index that follows the 500 largest companies in the United States. Not all companies with large capitalization are part of the S&P 500. To be part of it, several requirements must be met:

  • Have a market capitalization greater than 13 billion dollars.
  • Be listed on an American market and not listed on OTC markets.
  • That the majority of the shares in circulation are in the hands of public investors and not in the hands of insiders.
  • Be listed for at least one year.
  • Have positive profits in 4 consecutive quarters.
  • At least 50% of its fixed assets and sales must be in the United States.
  • That the price of its share is greater than $1 dollar.

The market capitalization is simply the price of the share multiplied by the number of shares in circulation. As of February 28, 2023, the S&P 500 had an average capitalization of more than 69 trillion USD, which in Spanish is equivalent to 69 billion dollars (69 with 12 zeros).

The index is rebalanced every quarter and is managed by S&P Global Inc.

The weight that each company receives in the S&P 500 depends on its capitalization. For example, if a company has a capitalization of 500 billion dollars, then it has a weight 50 times greater than that which only has a capitalization of 50 billion. But it is important to know that this weight only takes into account the floating shares, that is, it excludes all those that are in the hands of insiders.

Components of the S&P 500

Although it was created in 1957, there are post hoc reconstructions that have been done to determine its performance in wider historical ranges.

The S&P500 is a living thing that is changing as the American economy evolves and helps us see which sectors are gaining more weight and importance. For example, for many years and until the nineties, the industrial sector was the one with the highest weight, followed by Discretionary Consumption and Financial. But from then on it falls to fourth place and the financial sector rises to first place followed by Discretionary Consumption and Technology.

This is roughly how it lasted until 2008 when the Global Financial Crisis arrived and the technology sector gradually took the first position it has today but had to climb from the penultimate place it had at the end of the 60s.

Today the first 50 positions are these: Here are the top 10 positions.

 CompanySector
1AppleInformation Technology
2Microsoft CorporationInformation Technology
3Amazon.comDiscretionary Consumption
4NvidiaInformation Technology
5Tesla IncDiscretionary Consumption
6Berkshire Hathaway Inc. Class BFinancial Services
7Alphabet Inc. Class ACommunication Services
8Alphabet Inc. Class CCommunication Services
9Exxon Mobil CorporationEnergy
10UnitedHealth Group IncorporatedHealth

The technology sector represents just over 27% of the S&P 500. These are the weights that each sector has:

Image showing a breakdown of the different index sectors

Geographical Distribution of the S&P 500

As San John Bogle said, if you invest in the S&P 500 you are also investing outside the United States. He mentioned this because most of the companies that make up the index have sales outside their country.

Although this is true, even though there is diversification by sales, there is no diversification by regions or sectors because those sales are concentrated in a few American companies, for example Exxon, Apple, Intel, and Amazon occupy the top positions.

Image showing the Geographical Distribution of the S&P500

The volatility of the SP500

The volatility of the S&P 500 index is measured through several indicators using historical price information. The three main indicators for measuring the volatility of the S&P 500 are the Volatility Index (VIX), the Cross Correlation Coefficient (CC) and the Computed Price Movement Index (CPI).

So, one of the most important, the VIX, also known as the CBOE Volatility Index (Chicago Board Options Exchange), is an index used to measure expectations of volatility in the market. It is mainly designed to reflect what investors anticipate will happen to the market in the next 30 days.

It is a key stock market tool for any investor because it provides important information about expectations of SP500 movement. The VIX is calculated using a simple weighted average between the put and call options prices on the S&P 500, thus producing a numerical value that gives us indications about the current state of the financial market.

Distribution of S&P 500 Returns

The following graph shows the distribution of S&P 500 returns for annual ranges. This is very useful for 3 main reasons:

  • We can get an idea of which returns are most likely.
  • Which returns, both extreme positives and extreme negatives, are uncommon and therefore there will be high probabilities of reverting to the mean after them.
  • Negative returns are quite common and therefore not to be scared when we see them.
Graphical representation of the Distribution of  1-year S&P500 Returns

How to Invest in the S&P 500?

To invest in the S&P 500 we can do it through Indexed Investment Funds and also with Indexed ETFs. If we wanted to speculate or apply some trading or coverage strategy, then we can also use the futures that are quoted on the CME such as the E-mini and the Micro E-mini. In this post, we will only see the alternatives we have with Funds and ETFs.

We have several alternatives and we can divide them like this:

  • Indexed Funds to the SP500
    • In Dollars
    • In euros
    • In euros with currency coverage
  • Indexed ETFs to the SP500
    • In Dollars
    • In euros
    • In euros with currency coverage
    • Physical replica
    • Synthetic replica
    • Accumulation
    • Distribution

Best indexed funds investing in S&P500

FundISINTERIndex
Amundi Index S&P 500 – AE (C)LU09961790070,30%S&P 500
Pictet-USA Index-R EURLU0474966240,75%S&P 500
Amundi Index MSCI North America – AE (C)LU03898123470,30%MSCI North America
Vanguard U.S. 500 Stock Index Fund EUR AccIE00321266450,10%S&P 500
Fidelity S&P 500 Index Fund P-ACC-EURIE00BYX5MX670,06%S&P 500
S&P500 Equiponderado Equal Weight IndexES01652420010,30%S&P500 Equal Weight Index

Best ETFs Investing in S&P500

FundISINTERDividendCurrency
Lyxor Core Morningstar US (DR) UCITSLU17815409570,04%DistEur
JPMorgan BetaBuilders US Equity UCITS ETFIE00BJK9H7530,04%AccEur
Amundi Prime USA UCITS ETF DRLU20892384680,05%AccEur
iShares Core S&P 500 UCITS ETFIE00B5BMR0870,07%AccEur
Xtrackers MSCI USA Index UCITS ETFIE00BJ0KDR000,07%AccEur
Vanguard S&P 500 UCITS ETFIE00BFMXXD540,07%AccEur
Vanguard FTSE North America UCITS ETFIE00BK5BQW100,10%AccEur
SPDR Russell 2000 US Small Cap UCITS ETFIE00BJ38QD840,30%AccEur
Xtrackers Russell 2000 UCITS ETFIE00BJZ2DD790,30%AccEur
iShares MSCI USA Small Cap UCITS ETFIE00B3VWM0980,43%AccEur

Interactive Brokers

If you want to invest in the S&P 500, you need to start by choosing the right broker. Interactive Brokers is one of the most popular brokers on the market. Particularly, this broker offers a zero-commission ETF program where you can invest in over 150 ETFs without any commission.

In addition to this, Interactive Brokers is a regulated, trustworthy broker. You can also diversify your portfolio with stocks, forex, mutual funds, bonds, options, and many other assets.

Have a look at our in-depth Interactive Brokers review for more information.

Conclusion

It is always important to consider having exposure to the S&P 500 since the American economy is not only the largest, but the market capitalization of its stock market and the global reach of its companies have no parallel at the moment. But at the same time, it cannot be our only exposure.

FAQs

What are the average returns of the S&P 500?

The average annual return of the S&P 500 over the past 100 years is about 10%. However, the returns of the index can vary significantly from year to year.

What are the top 3 sectors in the S&P 500?

The top 3 sectors in the S&P 500 are information technology, financials, and consumer discretionary. These sectors account for over 60% of the index's weight.

How can I invest in the S&P 500?

There are a few ways to invest in the S&P 500. You can buy shares of an index fund or ETF that tracks the index. You can also buy individual stocks that are included in the index.

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