How to Invest in the S&P 500 in 2024 - NerdWallet (2024)

The S&P 500 is a well-known stock market index, and an index is really just a list of companies. You can't directly invest in a stock market index (considering it's just a list), but you can invest in index funds and exchange-traded funds (ETFs) that contain the same companies listed in the S&P 500. Here's how to do it.

The simplest way to invest in the index is through S&P 500 index funds or ETFs that replicate the index. You can purchase these in a taxable brokerage account, or if you're investing for retirement, in a 401(k) or IRA, which come with added tax benefits. You can also invest in the individual companies found in the S&P 500.

Whether you want to buy an index fund, ETF or individual stocks, the first step is to open an investment account.

Opening an investment account

If you don't already have a brokerage account, you'll need to open one to buy investments. You can use the money you deposit into the brokerage account to purchase S&P 500 stocks or funds, which will then be held within that account.

If your ultimate goal is investing for retirement, consider investing in the S&P 500 through a 401(k) or IRA, rather than a taxable brokerage account.

Choosing your investments

Once you've opened an investment account, you'll need to decide: Do you want to invest in individual stocks included in the S&P 500 or a fund that is representative of most of the index? Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)

Once you've decided, you can simply follow the instructions within your brokerage account to purchase the S&P 500 investment(s) you've decided to buy.

This chart shows the performance of the S&P 500 index (SPX) today compared to the previous trading day's close.

The is made up of about 500 large public U.S. companies. It is one of the stock market indexes often considered a proxy for the overall health of the U.S. stock market.

Contrary to popular belief, the stocks forming the index are not the 500 biggest U.S. companies, but they are arguably some of the most important U.S. companies: These stocks represent about 80% of the total U.S. stock market’s value.

The S&P 500 weights the stocks by market capitalization, or total market value (the number of outstanding shares multiplied by the stock's current market price). The larger the company, the greater its influence on the index.

Three major stock market indexes set new records in 2024. And after several years of market volatility, a pandemic and geopolitical instability, it can feel like a scary time to invest, whether at the top or bottom of the market.

Tracey Dean, a certified financial planner in Salt Lake City, Utah, reminds clients not to worry about investing timing and whether they're entering the market at the top or bottom. Instead, Dean helps clients invest long-term and learn more about diversification, or spreading your dollars across a range of investments to reduce the risk you’re exposed to.

If you’ve got a long time until you need the money you’re investing (say, 20 or 30 years), “don't worry that we're at the top of the market right now,” Dean says. “They'll be another top or there'll be a bottom. That's the ebb and flow of and volatility of the markets."

No matter what’s happening in the market, now is a good time to invest if you’re investing for the long term.

If you want to invest in the S&P 500, there are a few costs to consider.

If you are investing in an S&P 500 index fund:

If you are investing in an S&P 500 ETF:

If you are investing in a stock within the S&P 500 index:

Top 20 performers in the S&P 500 index

This chart shows the top-performing stocks in the S&P 500, based on YTD returns.

Data is from Google Finance and may be delayed. For informational purposes only.

While all S&P 500 funds track the holdings of this index, an investor must consider whether using an index mutual fund (a passively managed mutual fund) or an ETF makes the most sense for them. There are several differences to consider — for example, ETFs can be bought and sold whenever the stock market is open, while mutual funds can only be bought and sold at a set price point at the end of each trading day.

The good news is that there are solid S&P 500 options in each category, and all of these products leverage the diversity of the index itself. Compare index funds versus ETFs to decide which one is right for you.

While an S&P 500 ETF or index fund may be a worthwhile investment, there are caveats to consider.

Overall diversification

The S&P 500 consists of only large-cap U.S. stocks. Portfolio diversification encompasses buying mid- and small-cap companies along with large caps; allocating funds to international companies along with domestic ones; and including bonds, cash and potentially other asset classes with stocks.

Kevin Koehler, a chartered financial analyst based in Los Angeles, also notes drawbacks in the S&P 500 related to its market-cap weighting.

“As passive investing increases, investors are continually investing in S&P 500 funds, which has contributed to a ‘rich get richer’ problem, where the largest stocks are getting larger due to S&P 500 investing, rather than individual stock investing,” Koehler says. “This can lead to higher volatility, as active managers sell an individual stock on top of index funds selling a portion. The market could continuously be overvalued compared to its underlying value.”

But relative to the downsides of many investment types, the flaws of S&P 500 funds seem relatively minor, especially when used as a part of your overall portfolio and held for the longer term.