How to invest in S&P 500 index funds in 2023
79% of retail CFD accounts lose money
It only takes a few minutes to invest in the S&P 500 index. One of the simplest and most popular ways to invest is to buy shares in a Vanguard S&P 500 ETF through an online trading platform.
Where can I invest in the S&P 500 index?
According to our expert research, eToro is the best ETF broker to invest in S&P 500 index funds.
Both S&P 500 ETFs and S&P 500 CFDs are available to invest in through eToro .
Here are three more places to buy the S&P 500, ranked according to their cost, security, and features.
How do I invest in the SPX index?
The easiest way is to sign up to a stock broker, open an investment account, and buy shares in an S&P 500 ETF or CFD. This guide explains how to do it:
Step 1. Sign up to eToro
We recommend using eToro to invest in S&P 500. Sign up for a brokerage account and deposit some money. You may need to supply a form of photo ID to verify the account.
Step 2. Decide how to buy S&P 500
This boils down to choosing between an S&P 500 ETF or CFD. ETFs are generally better suited to investors who want to passively track the S&P 500’s performance. CFDs offer a greater range of trading options: you can use leverage, short the index, or buy and sell it outside of trading hours.
Step 3. Invest in the S&P 500
Sign into your trading account and search for the S&P 500. Hit the ‘buy’ button and enter the details of your purchase, such as how much you want to spend. Hit ‘buy’ again to execute the trade.
Step 4. Monitor your investment
When you buy a CFD, the trade goes through more or less instantly, and you’ll be able to see your new open position in your trading account. ETF purchases can take longer, and if you buy outside of traditional trading hours it won’t go through until the next morning.
Your trading account will show the price change in the S&P 500 since you bought it, so you can see your profit/loss at a glance. Use that information, along with your own research, to decide when to sell the S&P 500 and close your position, ideally at a profit!
The different ways to invest in the SPX
As we mentioned above, there are numerous ways to put your money into the S&P 500. ETFs and CFDs are the simplest options for beginners, but there are alternatives. Here’s a brief overview of each option and who it’s best suited for.
S&P 500 ETFs
An ETF (exchange-traded fund) is an investment fund traded on a stock exchange, much like a stock. Exchange traded funds can hold different assets, such as individual stocks, bonds, or commodities, or serve as a proxy for a stock market index.
An S&P 500 ETF is one way of investing in the S&P 500. It’s simply an investment fund that mirrors the performance of the S&P 500. When you buy shares in the fund, the value of your investment will rise or fall with the S&P 500 itself.
ETFs are ideal for new investors because they have a very low minimum investment. You can start with a few pounds and get exposure to some of the world’s largest companies. They’re also practical if you plan on trading the S&P 500 index, because you can buy or sell shares in the fund throughout the day.
Examples of popular SPX ETFs
- Vanguard S&P 500 UCITS ETF (VOO)
- iShares Core S&P 500 UCITS ETF (IVV)
- Lyxor S&P 500 UCITS ETF (LSPU)
S&P 500 index funds
An index or mutual fund is an investment fund that aims to track the performance of a stock market index, such as the S&P 500. It’s very similar to an ETF, in that there are low management fees and you can buy shares through your online broker.
However, there are a couple of differences. S&P 500 index funds are only priced at the end of each trading day, so you can buy or sell shares in the fund once per day. There may also be a higher barrier to entry, through a much larger minimum investment when you invest in S&P 500 index funds.
That means an S&P 500 mutual fund is better suited for long term investors with a higher initial budget, where the infrequent trading and barriers to entry are far less of an issue.
Examples of popular SPX index funds/mutual funds
- Fidelity 500 Index Fund (FXAIX)
- Schwab S&P 500 Index Fund (SWPPX)
- Vanguard 500 Index Fund (VFIAX)
S&P 500 CFDs
CFDs (contracts for difference) are a way to speculate on S&P 500 price changes with more flexibility than if you use an ETF or index fund. A CFD is a ‘derivative’, which means it gets its value from the underlying asset – in this case the S&P 500 – but it’s separate from it.
As a result, CFDs can be leveraged, where you borrow money to multiply the size of the trade, or they can be used to go ‘short’, where you place a trade on the index to fall in value. You can also buy and sell them outside of regular trading hours.
All of this means S&P 500 CFDs offer the potential to outperform a fund that passively tracks the S&P 500’s performance. Of course, you can also underperform it as well. Tools like leverage and shorting introduce a lot more risk, and are best left to experienced traders.
S&P 500 futures
Futures contracts are agreements to buy or sell the SPX at an agreed price on a set date in the future. S&P 500 futures are a means to predict how you think the index is going to perform over a set time frame, such as the next three or six months.
Most futures contracts involve leverage, so you only put up a small part of the total trade value (the margin) when you buy one. That makes futures more risky, and they require a bit more financial expertise to understand as well.
Some traders use futures as a hedge against the performance of stocks they own. For instance, if you own stocks that are part of the S&P 500 then you might want to short the S&P 500 so that you still make some money if the price falls.
S&P 500 stocks
Another way to invest in the S&P 500 is to buy shares in the individual stocks that the index tracks. It isn’t practical to buy every share in the index, but you can invest directly into a few of the most heavily weighted stocks in the S&P 500 in order to get broad exposure to its performance.
The most heavily weighted stocks in the S&P 500 tend to be the largest companies by market capitalisation. If you invest directly in those largest stocks, you gain exposure to the index without taking on the risk of all the underlying companies.
One reason to do this is that these larger companies with the highest market cap dominate the index anyway, so that it can give you the impression of a diversified portfolio while actually being reliant on the performance of those particular stocks.
For the S&P 500 index, the largest stocks you might choose to invest in are:
|Apple Inc. (AAPL)||7.02%|
|Microsoft Corp. (MSFT)||6.20%|
|Amazon Inc. (AMZN)||2.67%|
|NVIDIA Corp. (NVDA)||1.91%|
|Alphabet Inc. Class A (GOOGL)||1.86%|
|Berkshire Hathaway Inc. Class B (BRK.B)||1.64%|
|Alphabet Inc. Class C (GOOG)||1.61%|
|Tesla Inc. (TSLA)||1.49%|
|Meta Platforms Inc. Class A (META)||1.38%|
|UnitedHealth Group Incorporated (UNH)||1.32%|
The flip side of investing directly like this is that you lose the diversification and stability that comes with buying into an entire index. It requires much more hands-on management to do your own stock picking, so it’s best suited to more experienced investors.
How much does it cost to invest in the S&P 500 index?
From $0 to $5, depending on how you invest. For each option, you must consider the cost of buying the actual asset, whether that’s an ETF, index fund, CFD, or share, plus the fees associated with it.
|Instrument||Trading fee||Expense ratio|
|Exchange traded funds||$0-$5.99||0-0.2%|
|Index fund / mutual funds||$0-$5.99||0.1-2%|
*A fee comparison of 3 leading brokers for example purposes
ETFs and CFDs are generally the cheapest option overall, as they have low fees and a low minimum investment. Index funds and mutual funds have low fees but may have a high minimum investment. Buying individual stocks is the most expensive option in absolute terms, because the share price of a single large company is often more than $100.
All options are likely to include a trading fee, which you pay each time you make a transaction. Some trading platforms offer zero-fee trading, with others it may be a few dollars.
Then ETFs and index funds each have their own expense ratio. Expense ratios refer to an annual management fee, charged as a percentage of your total investment. Expense ratios are usually no more than 0.05%, so if you invest $1,000, you would pay $5 per year in management fees.
Should I invest in the S&P 500 index?
Yes, S&P 500 investing is a great choice if you’re looking for a safer investment with more price stability compared to picking individual stocks. It gives you an instantly diverse portfolio with exposure to a broad area of the stock market.
The flip side is that you have less control over which companies you invest in. An index committee decides how the index works, and you can’t pick and choose the underlying companies you like the most. The S&P 500 is better suited to hands-off investors, compared to those who have the skills, experience, and desire to pick their own stocks.
What are the advantages of investing in the S&P 500 index?
An index provides instant stock market diversification, where you spread your risk across a large number of underlying companies, rather than one or two. Here are some more reasons why you might want to invest in the S&P 500 index:
- Get instant access to all the top companies in the US market. The S&P 500 index includes hundreds of leading US stocks. Big technology companies like Apple and Microsoft are there, but so are the likes of Nike, Disney, Johnson & Johnson, and Exxon. It provides a diverse portfolio packed with big brand names and blue-chip stocks.
- Investing in an index means no difficult decisions over which stocks to choose. Putting money into the S&P 500 index is extremely easy, and requires little expertise. It’s a great way to start investing, with few fees or management costs, and you can build on it by picking individual stocks later on if you like.
- S&P 500 ETFs are cheaper to invest in than buying individual stocks in companies like Apple, Google, or Microsoft. It’s perfectly possible to invest small amounts, like $10-$100, into an S&P 500 index ETF or fund. That’s less than the cost of one share in a large, popular company. An index is more affordable if you only have a little to spend.
- The S&P 500 trends up over long periods of time. The long term trend is up, if you’re willing to ride out short term peaks and troughs. The S&P 500 has bounced back even after the worst financial crises to eventually reach new highs.
- The performance of the S&P 500 is used as a benchmark to rate active fund managers. A fund manager or an index that outperforms the S&P 500 is generally considered to have done a good job, and the index represents a performance to aim for. By investing in the S&P 500 directly, you’re likely to outperform most investors and funds.
- A balanced index offers more protection against downturns than individual investments. One of the biggest virtues of investing in the S&P 500 index is that the range of different companies means one failure is less likely to harm the overall portfolio. This is even more true when it includes companies from different sectors, which are less likely to be impacted by contagion if one business fails.
What are the disadvantages of investing in the S&P 500 index?
The main risk of investing in the S&P 500 is that all the underlying companies are related in some way, so a broader economic downturn that affected the entire country would likely affect many stocks in the index at the same time. Here are some more risks of S&P 500 investing.
- The S&P 500 is heavily weighted towards the technology sector. All of the top weighted companies in the S&P 500 are technology companies. Apple, Microsoft, Amazon, and Google have an outsized impact on the index’s performance. This is fine in the good times, but a broad based sell-off in technology stocks can have a large impact on the index’s performance.
- US-specific issues can affect all the stocks in the index. As every company on the S&P 500 is based in the United States, any economic, government, or political issue that affects the US may impact every company in some form. While you’re diversified against some sector risk, you aren’t protected against geographical risk
- You can’t avoid investing in companies in the index. Even if you don’t like some companies on the S&P 500 index, such as those in oil, alcohol, or gambling, you have to invest in all of them when you put money into an index. Whether your aversion is ethical or economic, you don’t have a choice but to accept those companies as part of the investment.
S&P 500 predictions from expert analysts
Insights from stock market analysts can give you an idea of the overall sentiment towards the S&P 500. It may help you see things from a different perspective, or pick up things you may have missed. Here are some S&P 500 forecasts and insights from leading experts:
At 4,009, the average projection for the S&P 500 calls for a decline of more than 1% by the end of 2023.Bloomberg Research
The S&P 500 was expected to end 2023 at 4,200 points, which would amount to a 9.4% increase for the calendar year, according to the median forecast of 42 strategists.Reuters
The S&P 500 Index is forecast to turn out flat returns and no growth in earnings in 2023 after declining about 17% this year.Goldman Sachs Research
An ETF is a better option if you want to be able to buy and sell shares in the S&P 500 throughout the day. An index fund is better suited to long term investors with a larger initial sum to invest.
An ETF is the best way for a beginner to invest in the S&P 500 index. It’s easy to buy shares in an ETF and the costs are relatively low. You only have to pay the trading fees and a small annual management fee.
Yes, if you choose the right online broker. Not all brokers offer index investing, so make sure to find a broker that offers the S&P 500 index before you sign up.
The S&P 500 itself does not pay dividends, but many companies listed on it do. If you invest in an S&P 500 index fund or ETF then you will receive a percentage of the dividends paid out by those companies, based on the number of shares you own in the fund.
The Lyxor S&P 500 ETF (LSPU) has the best 1-year performance, thanks to its low management fees. The iShares Core ETF (IVV) has the largest trading volume, while Vanguard ETFs have a good reputation in the industry.
More indices to invest in
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