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What is the S&P 500? Index Meaning & How to Invest | Fi Money
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LAST EDITED BY SAYAN DAS ON APRIL 10, 2025.
LAST EDITED BY SAYAN DAS ON APRIL 10, 2025.
GUIDES LAST EDITED BY SAYAN DAS ON APRIL 10, 2025.
The S&P 500 index fund tracks the performance of 500 of the top large-cap public-listed companies in the United States. The index is very popular and widely regarded as one of the best indicators of the overall performance of the US stock market.
Investors and analysts use the S&P 500 index to track the US stock market's performance and compare individual stocks' performance. Investing in the S&P 500 index passively can be rewarding while saving you time and effort. In this article, we answer ‘What is an S&P 500 index fund?’ and the importance of this index while investing in the US stock market.
Let us take a step back and understand the function of an index fund. Index funds track major market indices and aim to replicate their performance. So, in the case of the S&P 500 index fund, the index being tracked and the performance being matched is of the large-cap S&P 500 index in the US stock exchange.
The composition of the S&P 500 index includes companies from a wide range of industries, including technology, healthcare, financial services, energy, and consumer goods. Higher weightage is accorded to companies with a higher market capitalisation that, in turn, has a greater influence on the fund's eventual performance. For example, the stocks of some of the largest companies in the index, like Apple and Microsoft, have a far higher impact on the market than other relatively smaller firms.
The S&P 500 is not simply a figure that financial news shows report. It performs several important roles in the world of investments:
As a benchmark index, the S&P 500 is a yardstick by which investment performance can be compared. Professional fund managers and individual investors use it to compare how well their portfolios are doing. If your investments regularly lag behind the S&P 500, you should rethink your strategy or investment selections.
In addition to measuring performance, the S&P 500 is an indicator of the overall health of the United States economy. When the index is rising, it usually indicates good economic sentiment and expansion. A falling S&P 500 could indicate more widespread economic issues.
The index also provides insight into market diversification across various sectors. Monitoring 500 leading companies across all 11 market sectors gives a holistic picture of the U.S. economy's various aspects.
While the basic concept is straightforward, the actual calculation of the S&P 500 involves some financial mathematics. The index value is determined by adding up the market capitalisations of all component companies and dividing by a proprietary divisor maintained by S&P Dow Jones Indices. This divisor is adjusted periodically to account for corporate actions like stock splits, mergers, or spin-offs.
Not just any company can join the S&P 500. The index committee at S&P Dow Jones Indices uses several criteria for inclusion:
Importantly, the S&P 500 isn't static. Companies are added or removed based on these criteria, typically in response to corporate events or changes in company fundamentals. The index undergoes regular rebalancing to ensure it continues to represent the market accurately.
The index contains numerous household names in a wide range of industries. Some of the most well-known include:
These familiar names represent the index's breadth, ranging from companies that manufacture smartphones to those that create medicines, invest money, produce everyday products, and fuel our vehicles. That broad representation is why many use the S&P 500 as a proxy for the entire U.S. economy.
To fully appreciate the S&P 500, it helps to compare it with other well-known market indices:
The S&P 500 includes 500 large-cap U.S. companies, weighted by market capitalisation. It offers broad exposure across all major economic sectors.
The Dow Jones Industrial Average (DJIA) tracks just 30 large "blue-chip" companies and uses a price-weighted methodology, meaning higher-priced stocks have more influence regardless of the company's size. While historically significant, many investors consider it less representative of the broader market than the S&P 500.
The Nasdaq Composite includes approximately 3,000 companies listed on the Nasdaq stock exchange. It's heavily weighted toward technology companies and includes smaller firms not found in the S&P 500, making it more volatile but also more growth-oriented.
Each index serves different purposes, but the S&P 500's broad representation and market-cap weighting have made it the most widely followed benchmark for U.S. equities.
An important point for beginners is that you can't directly buy "the S&P 500." It's an index, a mathematical construct, not a purchasable security. However, you can invest in funds that track the index's performance.
The two primary vehicles for S&P 500 investment are:
Both options provide instant diversification across 500 companies with a single purchase, making them ideal for beginning investors who want broad market exposure without selecting individual stocks.
S&P 500 index funds attract many investors due to their various benefits. Here are some of the most prominent ones:
Exposure to US stocks
The US stock market is home to some of the largest companies in the world, such as Apple, Alphabet, Microsoft, Meta, and several more. Moreover, it is also the breeding ground for several emerging enterprises in innovative sectors that you can buy cheap and cash-in later.
Diversification
Instead of purchasing stocks of individual companies, an S&P 500 Index Fund provides you exposure to a diversified portfolio of large-cap US stocks across various companies and industries. This helps reduce your overall portfolio risks.
Low cost of purchase
S&P 500 Index Funds are often passively managed (just like index mutual funds). This means that they have lower management fees than other actively managed funds, which reduces your cost of ownership and adds to your eventual returns.
Convenience :
Mutual funds and exchange-traded funds (ETFs) are the two most popular ways of investing in the S&P 500 Index. Not only are they easy to acquire, but you can also set up a SIP, invest in them regularly with small amounts, and build a large corpus over time.
Strong historical performance
The S&P 500 Index has historically provided strong returns over the long run, thus, making it a good choice for those looking to invest with long-term goals in mind.
The terminology around the S&P 500 can be confusing, so let's clarify some common terms:
You might also encounter SNP500 as another abbreviation for the index in some financial platforms and international markets.
Understanding these distinctions can help clarify conversations about the S&P 500 and prevent confusion when researching investment options.
For Indian investors, gaining exposure to the S&P 500 has become increasingly accessible through various international investing platforms and mutual funds that enable global investments. As you consider adding U.S. market exposure to your portfolio, the S&P 500 represents one of the most straightforward and time-tested ways to participate in the growth of America's largest companies.
If you want to gain exposure to the US market, an S&P 500 index fund is a good place to start. It is a low-cost, diversified investment tool that has historically provided strong returns over the long term. Moreover, it is easier to invest in than buying several stocks of multiple companies and having to regularly monitor each of them.
If you, too, want to invest in an S&P 500 index fund and further save on commission costs, consider Fi Money.
Mutual Fund investments on Fi are commission-free. With its intuitive user interface, suited for novice & seasoned investors, you can select from over 800 direct Mutual Funds. Plus, Fi's 100% secure as it functions under the guidance of epiFi Wealth, a SEBI-registered investment advisor. To help simplify the steps involved, you can invest daily, weekly, or monthly via automatic payments or SIPs — created with one screen tap. Moreover, Fi offers 100% flexibility with zero penalties for missed payments.
The S&P 500 Index is considered a benchmark for the US stock market. Therefore, millions of investors use it as a way to measure the performance of their portfolio against the broader market. The stocks that the index comprises are some of the leading companies in a variety of sectors. By investing in a single instrument, you get exposure to all those companies, thereby, both hedging your risks and increasing your chances of higher returns.
S&P is a leading provider of financial information, index performance, and credit ratings. The S&P 500 index, in particular, is a widely recognised benchmark for the performance of the US stock market. Analysts and investors track this index to understand the prevalent market conditions, predict future market movements, and evaluate a company’s financial health before making an informed investment decision.
S&P 500 stands for "Standard & Poor's 500." Standard & Poor's is the name of the financial services company (now part of S&P Global) that created and maintains the index, and 500 refers to the number of large American companies included in the index.
The S&P 500 index is a calculation that tracks the performance of 500 large U.S. companies. It's a measurement tool, not something you can buy directly.
An S&P 500 index fund or ETF is an investment product that aims to match the performance of the S&P 500 index by buying shares of the companies in the index in similar proportions. Investors purchase these funds and ETFs to gain exposure to the S&P 500's performance.
No, the S&P 500 is different from the entire stock market. It represents about 80% of the total value of the U.S. stock market, covering only large-cap companies. The complete U.S. stock market includes thousands of additional mid-cap and small-cap companies not included in the S&P 500. Additionally, the global stock market includes companies from many other countries.
You cannot buy the S&P 500 index directly because it's just a mathematical calculation. To invest in the S&P 500, you need to purchase shares of index funds or ETFs that track the S&P 500, such as SPY, VOO, or IVV.
The S&P 500 is considered a good investment for several reasons:
The minimum amount needed depends on the specific investment vehicle you choose:
The composition of the S&P 500 changes regularly but not on a fixed schedule. Companies are added or removed when they no longer meet the criteria for inclusion (market cap, profitability, liquidity) or due to mergers, acquisitions, or bankruptcies. On average, there might be 20-30 changes per year, representing about 4-6% turnover. The S&P index committee meets monthly to discuss potential changes and can make adjustments at any time as needed.
