The S&P 500 index (SPX) is one of the most famous indices in the world, and is used as a key indicator for the strength of both the US and world economy. It is a capitalisation-weighted index which tracks the performance of 500 stocks listed on stock exchanges across the US and has been running since 1926.
This page will take you through a brief history of the S&P 500, how the stocks it tracks are selected, and the methods you can use to invest in it.
The history of the S&P 500 ruins back nearly a century, with the index beginning in 1926. Originally the index only tracked 90 companies and was run by the Standard Statistics Company. This merged with Poor’s Publishing in 1941 to create Standard and Poor’s (S&P), and the index became the S&P 500 on March 4th 1957 when it was expanded to include 500 companies.
Over the years the S&P 500 has been one of the most consistent economic performers, and funds that track the index have been recommended as good long-term prospects by famous investors such as Warren Buffett and Burton Malkiel. In 70% of the years it has been running the S&P 500 has posted an increase in value, and (including dividends) the average annual return of the index has been 9.8% for nearly 100 years.
The S&P 500’s all-time high was achieved on 19th February 2020 when the index reached 3,386.15. This was followed by a steep fall due to the coronavirus pandemic spreading across the world. Not even the S&P 500 is immune to corrections in the global economy, and the index similarly fell sharply during the market crashes of 2000-02 and 2007-08.
The stocks included in the S&P 500 are selected by a committee which assesses each potential company on the following eight criteria: market capitalization, liquidity, domicile, public float, sector classification, financial viability, and length of time the stock has been publicly traded on a US stock exchange. Only stocks listed on the New York Stock Exchange or NASDAQ are eligible to be included, and each company must meet the following requirements:
- A market capitalisation of at least US$8.2 billion
- An annual dollar value traded/float-adjusted market capitalisation greater than 1.0
- A minimum monthly trading volume in each of the previous six months of 250,000 shares
By following these selection criteria, the S&P 500 aims to ensure it remains representative of the US economy over time.
The easiest way to invest in the S&P 500 index is with either an ETF or a mutual fund. Both of these products will allow you to invest in the performance of all 500 stocks listed by the index with only one transaction. Mutual funds are a good option if you’re looking to buy and hold for a long time, but incur relatively high fees and can only be bought or sold at the end of each trading day. ETFs (exchange-traded funds) give investors similar diversification, but also come with the flexibility of being able to be traded on an exchange at any time. If you’re planning on trading in the short term, it’s advisable to use an ETF.
The other option when it comes to investing in indices is to buy all of the stocks that an index tracks. This can be a good strategy with blue-chip indices such as the Dow Jones Industrial Average, but it is not a practical option with the S&P 500 due to the amount of time and money (in transaction fees) it would take to buy all 500 stocks.