The S&P500 index is considered to be the most common way to evaluate the performance of the top 500 US large-cap companies. This is why popular ETFs such as VOO and QQQ are in high demand. If you are not able to trade these instruments, because of local restrictions, most exchanges have local ETFs also following the index.
Above this paragraph, you can find the current live price (read value) of the S&P500 Index, ticker SPX. Do not get discourages by its value, as investing in an index doesn’t mean paying for the actual value of the index. Instead, you can invest the amount you want, which will be spread equally over the ETF that mirrors the index.
S&P500 index summary
As the name implies, the index (read bucket) consists of 500 companies. Because it’s a US-focused index, all companies are from the united states, which is important when you consider spreading investment risk. On the one hand, you benefit from investing in many different organizations that form the fundamentals economy in the US. On the other hand, you are not exposing yourself to any other market, nor any other currency than the index/ETF listed currency.
When we think of S&P, most cannot recall that it actually stands for Standard and Poor’s, which is nothing more than the two founding companies we have to thank for this index.
The good – S&P500 Index investing
So, you may have heard about this index SPX already. It’s a very common option for beginning and expert investors alike. Why you might ask? Well, let’s break down exactly how the S&P500 has taken the investing world by storm.
First off, the US stock market is more than 50% of all financial stock markets put together. Let that sink in for a moment! It comes as no surprise that investors then prefer to spread their risk and money across a wide variety of US companies to diversify on sector and industry.
Second, on average, for 50+ years, the actual return of the S&P500 has been around 10.2% annualized. Not only has it been hard for individual investors to beat the ‘stock market’ (read SPX index) in any given year, but investing consistently in the SPX also means your returns accumulate. See the above image to visualize what a timely investment could have meant for you:
If you had invested at X1 then you had gotten in at a price point of 600 USD (regardless of how much you actually invested). Fast forward to 2022, at X2, and your brokerage account would quote an investment increase of around 7 times your initial investment, also expressed as a 600% gain.
Granted, you should not expect a return like this to fall into your lap if you do decide to invest in the S&P500, it’s still good to know that had you invested at any all-time highs of the SPX, you would have always walked away with a profit, so far!
The great – SPX index
As hinted towards before, this index has many ETFs, funds, and other products that follow its value. This is a major advantage as it means you can find the best solution out there based on your own preference.
Any ETF or fund charges an ongoing cost figure (OCF), which eats away at your profits. You won’t notice it, but if you are savvy enough, you can prevent a high OCF from the start. Simply explore multiple ETFs to find the one with the lowest quoted costs.
Another way to prioritize is by dividend possibilities. The original SPX, and VOO or QQQ derivatives from S&P500, do not offer dividends. However, you can search for ‘distributed’ or ‘accumulated’ along with ‘S&P500’ to find those that do! When an ETF distributes, it really means you receive the money periodically. If it accumulates, it will add the dividends to its total value, thus marginally increasing its return the moment you sell.
The ‘bad’ side of the S&P500 index
Because there are so many options, it might be considered a bad thing to have to spend time to find those to your liking. However, once you have found the right fit, you will not have to re-do the process and can frequently, at your own pace & desire, invest in the market.
Another consideration is all other stock markets. Even if the US accounts for 52% of the total stock market roughly, there are plenty of other markets out there with opportunities and relevant, sometimes local, financial instruments.
Lastly, when you consider threats. Being exposed to only one market & one major currency (usually USD) can also carry its own risks. Thankfully, it’s easy to buy several thematic or industry-specific ETFs to counteract this. Just have a look at all the GICS possibilities.