How to Invest in the S&P 500

The S&P 500 is a powerful barometer for the state of the US economy.

Updated: May 20, 2024
Connor Sephton

Written By

Connor Sephton

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The S&P 500 is a powerful barometer for the state of the US economy. It brings together the 500 most valuable companies on Wall Street — covering approximately 80% of market activity.

As you'd imagine, some of the world's biggest brands feature prominently in this index. But every three months, several companies are removed or added based on changes in their market capitalisation.

Fluctuations in the S&P 500 tend to be driven by corporations with the largest valuations. That's because this is a weighted index that gives greater prominence to bigger companies.

For example, Microsoft's stock currently represents over 7% of this flagship index — and overall, the top 10 constituents are responsible for 32.2% of its movements.

They are:

CompanyWeighting
1. Microsoft7.26%
2. Apple5.66%
3. Nvidia5.14%
4. Amazon3.7%
5. Meta2.54%
6. Alphabet1.98%
7. Berkshire Hathaway1.71%
8. Eli Lilly1.4%
9. Broadcom1.35%
10. Tesla1.09%

This also means that the S&P 500 doesn't offer balanced exposure across all sectors. While information technology represents 29.7% of index weight, the likes of consumer staples and energy languish behind at 6.1% and 4% respectively.

Index funds allowing individual investors to gain exposure to the S&P 500 were first established by Vanguard in the 1970s, but it took decades before such products became popular.

Billionaire Warren Buffett is a fan. Back in 2013, he said that someone who placed 90% of their cash in one of these funds, and the remaining 10% in government bonds, would outperform most “pension funds, institutions or individuals who employ high-fee managers”.

Here's how the S&P 500 has fared over the past 10 years:

YearAnnual 
2023+24.23%
2022-19.44%
2021+26.89%
2020+16.26%
2019+28.88%
2018-6.24%
2017+19.42%
2016+9.54%
2015-0.73%
2014+11.39%

In this article, we'll tell you how to start investing in the S&P 500, the pros and cons to consider, and essential strategies for protecting your wealth.

Four ways to invest in the S&P 500

It's important to shop around when finding the product that's right for you. Fees, minimum investments and withdrawal periods can all vary.

Common options include:

  • Stocks and Shares ISAs: This is a powerful tool for British savers because it allows up to £20,000 to be invested every year — and all returns are tax-free. Through ISAs, you can gain exposure to ETFs and index funds tracking the S&P 500's movements.
  • Index funds: In recent years, this approach has often attracted a minimum investment amount from major providers, but we're starting to see greater competition in the market. The price quoted to investors is based on “net asset value” — in other words, what the stocks held by the fund are worth in total.
  • Exchange-traded funds: As the name suggests, ETFs based on the S&P 500 can be bought and sold just like shares, with prices changing throughout the day. While this offers flexibility for short-term strategies, fees from frequent trades can eat into margins.

Alternatively, if you're looking to focus your investments on a specific sector within the S&P 500 — such as healthcare or finance — dedicated ETFs only tracking these companies are available too.

Things to consider before investing

A common mantra when it comes to investing in stocks concerns “time in the market, not timing the market”.

Attempting to jump into the S&P 500 during a rally may mean you inadvertently gain exposure to the index at its peak — and if prices then start falling away, it could be years before you recoup your initial investment. Conversely, trying to invest when the market bottoms out can be akin to catching a falling knife. It could be painful.

Because of this, it's typically recommended that you only gain exposure to stocks if you're planning to hold on to the investment for several years, and it isn't money you might need to raid on a rainy day. Adopting a longer-term horizon makes it easier to ride the peaks and troughs in the market, and can also make financial sense.

Research by Hartford Funds argues that only adding the S&P 500 to portfolios during bull markets “could be a costly mistake” — and has data to back this up. Its figures suggest that, between 1994 and 2003, 50% of this index's best-performing days actually happened in bear markets, while 28% were in the first two months of a bull market. 

This table shows how the value of a $10,000 investment in the S&P 500 would have ended up at the end of this 30-year period — and what happens if even a small number of rallies are missed:

$10,000 fully invested from 1994 to 2023$181,763
If the 10 best days are missed$83,272
If the 20 best days are missed$48,874
If the 30 best days are missed$30,889

Overall, sitting out for just 10 days of trading has the potential to cut profits by 54% — rising to 83% once the index's 30 best days are taken out of the equation. This also illustrates the power of compound interest, where you end up making returns on your returns.

Common investment strategies that can prove useful include pound cost averaging, which involves gradually increasing your position in the S&P 500 every week or month, rather than entering all at once with a lump sum.

There can be advantages to creating consistency, as regular buys help remove emotion from trading and mean you won't just be investing when the markets are exceptionally high or low.

And while the S&P 500 does offer some healthy diversification, it's also worth considering other asset classes with lower risk. “The Rule of 100” is an often-used technique when determining where funds should be allocated. Here, you deduct your age from the number 100 to see what percentage of your wealth is best placed in stocks.

For example, if you're 45, this would suggest 55% of a portfolio should be tied up in the market. Putting the rest of the cash aside in savings accounts, government gilts and Premium Bonds can deliver more predictable returns, and are often easier to access in case of emergencies.

It's also important to consider the tax implications. If you invest in an S&P 500 index fund or ETF outside of a Stocks and Shares ISA, you'll have to pay capital gains tax if you make more than £3,000 in annual profit once they're sold.

Current rates stand at 10% for basic rate taxpayers, and 20% for those on higher bands. The allowance for dividends has recently been cut to £500.

Alternative investments to the S&P 500

Beyond Wall Street, there are other options to consider.

ETFs and funds tracking other stock market indices around the world are also available — but it's worth looking at their historical performance to see how they stack up. Here's a comparison of the returns between the S&P 500 and the UK's flagship FTSE 100 in recent years:

FTSE 100 total returnsS&P 500 total returns
Last five years30%109%
Last 10 years58%331%
Last 20 years162%682%

ETFs following emerging markets and developing economies have also proven popular in recent years. In 2023, equities in Hungary, Poland, Greece, Egypt and Mexico all delivered healthier returns than the S&P 500. However, it's important to stress that what's happened in the past offers no guarantees for what lies ahead in the future.

Finally, you may want to explore buying stocks individually, as this can allow you to enjoy dividends. But this approach can take an extensive amount of research, and often carries more risk.

Not only will you have to gauge metrics such as price-to-earnings ratios when establishing whether a company is overvalued, but failing to understand the industries they operate in, and the challenges that lie ahead, can lead to costly mistakes.

In conclusion…

Interest in the S&P 500, and the markets more widely, boomed during the coronavirus pandemic. And in recent years, a vast array of trading platforms have simplified the process of making an investment. 

From regular Direct Debits, to clever apps that round up your debit card purchases to the nearest pound and invest the difference, the world of stocks is now accessible to consumers of all budgets. Long gone are the days where orders had to be made by telephone and would take days to clear.

Make sure you take the time to reflect on your financial goals, seek expert advice, and remember that the value of your investment can go up as well as down.

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