What Is the S&P 500? The Index Everyone Invests In

If you hang around investing advice long enough, one term shows up more than any other, which is the S&P 500. It is the thing the news quotes when they say the market rose, it is what index funds copy, and "just buy the S&P 500" might be the single most common piece of investing advice on the internet. Here is what it actually is.

The list

The S&P 500 is a list, maintained by a company called S&P Global, of roughly 500 of the largest publicly traded companies in the United States. Apple, Microsoft, Amazon, plus hundreds of less famous names across every industry, including banks, railroads, drug makers, utilities, and retailers.

The index tracks the combined stock value of everything on the list, weighted by company size, so giant companies move the number more than small ones. When the S&P 500 is "up 1%," it means this basket of corporate America, taken together, gained about 1% in market value. Together these 500 companies represent around 80% of the entire US stock market's value, which is why the index works as shorthand for "the market."

Companies get added and dropped over time as they grow, shrink, or get acquired, so the list quietly refreshes itself. The fading businesses fall out, the risers take their place, and no action is required from you. That self-cleaning quality is part of why it has held up so well for so long.

Why it became the default investment

You cannot buy an index directly, since it is just a measurement, but index funds and ETFs copy it exactly, holding all 500 stocks in the right proportions. Buy one share of an S&P 500 fund and you own a sliver of all of them at once.

The case for doing this rests on a stubborn pile of evidence. The index has returned an average of about 10% annually over the long run, or roughly 7% after inflation. It has survived the Great Depression, world wars, the 2008 crisis, and a pandemic along the way. Meanwhile most professional stock pickers fail to beat it over long periods, per S&P Global's own SPIVA scorecard. That is genuinely remarkable when you think about it. The "do nothing, own everything" strategy outperforms most experts trying their hardest.

Warren Buffett has famously said that an S&P 500 index fund is the best investment for most people, and he put it in writing for his own family's inheritance instructions.

What it costs and what to watch

S&P 500 index funds from the major providers charge expense ratios around 0.02 to 0.09% per year, which is pennies per hundred dollars invested, among the cheapest financial products in existence. Any S&P 500 fund charging ten times that is doing the same job for more money, so check the expense ratio before buying.

Worth knowing the limits too. The index is all US companies and skews heavily toward the giants. It holds no international stocks and no bonds. Lately a handful of huge tech companies make up a big share of it too, so it is less diversified than its 500 names suggest. That is why many investors pair it with an international fund and, eventually, some bonds. The three-fund portfolio is the classic recipe. A total US market fund is a near-identical alternative that adds thousands of smaller companies.

But as a first investment and a lifelong core holding, it is hard to argue with. One purchase, 500 businesses, microscopic fees, and a century-long track record of rewarding whoever left it alone the longest. See what steady contributions into that track record become with the investment growth calculator.

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This article is for general educational purposes only and does not constitute personal financial, investment, tax, or legal advice. Consult a qualified financial professional before making major financial decisions. See our Disclaimer.