What's an S&P 500 Fund and How Do You Invest in One?
If you're new to the world investing, then you may want to look into investing in an S&P 500 index fund. No idea what that means? Don't worry — we’ll provide a quick intro, so that you can gain an understanding of how S&P 500 funds work and if they’re the right kind of investment for you.
What Is an S&P 500 Index Fund?
Before you look into investing in an S&P 500 index fund, it's important to understand the basics. For starters, a stock index is a way to measure how the stock market is faring. Think of it like a scale that indicates the market’s health. More specifically, rather than measure the rise and fall of every single stock on the market, indexes gauge how the market is doing on the whole by measuring the health of a specific collection of stocks.
The S&P 500 index is among the most popular because it tracks the collective health of the 500 most influential companies in the stock market. Together, these companies make up about 80% of the market's overall value. Although the index is updated every quarter, some constant contenders include large companies like Apple, Amazon, Microsoft and Facebook. So, when you invest in an S&P 500 index fund, you buy shares — or partial shares — of all 500 companies on the index. If those 500 companies do well, your investment will grow alongside their stock values. If they do poorly, your investment will reflect that and shrink accordingly.
In general, the S&P 500 tends to yield an average return of 10% a year, so the longer you keep your money in, the more your investment will grow. That said, you can withdraw a partial amount — or the entire amount — of your money at any time. This process generally takes about 1-2 days to complete, but, in some cases, it may take up to a week depending upon what method you used to buy-in initially.
Is Investing in the S&P 500 Fund Right for You?
Whether S&P 500 index funds are the right investment for you will largely depend on what type of investor you want to become. The two main styles of investing are passive investing and active investing — and an S&P 500 fund makes far more sense for passive investors.
Passive Investing: This usually involves investing in a set of stocks for the long haul, with little buying or selling between your purchase and cashout. S&P 500 index funds are a very popular choice for passive investors because they include shares or partial shares of companies from 11 different industries. This creates a very diverse portfolio that you can more or less sit back and watch grow as the value of the market increases. If you're looking for a low-risk, long-term investment, then an S&P 500 index fund is a solid way to go.
Active Investing: This involves a lot more work and a pretty thorough knowledge of the market. Many investors who take this approach hire a portfolio manager to handle the buying and selling of the stocks in their portfolio in exchange for a percentage of the profits. Active investing is more about taking advantage of the fluctuating values of specific stocks over time. For instance, a good active investor might buy stock in a company for a fairly low price during a period when the company is struggling. They would keep an eye on the company over time, waiting for its stock price to surge during a particularly good business period. By selling the stock at a higher price than they bought it, these investors can make a good deal of money, so long as they play their cards right. In short, while active investing may be more lucrative, it requires great instincts, thorough knowledge of market trends, and some luck.
Different Types of S&P 500 Index Funds
While they all track the same companies, there are a variety of different S&P 500 index funds to choose from, some of which are better than others. It's a bit like looking for which retailer is offering the best price on a particular product.
When looking for the best fund to invest in, you'll want to do your research to find one that features:
- A Low Expense Ratio: This refers to the cost that a management company charges investors to manage their portfolio; it’s usually a percentage of the profits.
- High Assets Under Management (AUM): A financial institution's AUM is a measure of the collective worth of all the assets that they’re managing for their clients. In general, you'll want to go with an index fund that has a high AUM.
- Low Tracking Error: The point of an S&P 500 fund is to mimic the stock market as closely as possible, so the lower a fund's tracking error, the better it mirrors the market.
According to Bankrate, some of the top S&P 500 funds to look into in 2021 include the Fidelity ZERO Large Cap Index; the Vanguard S&P 500 ETF; the SPDR S&P 500 ETF Trust; iShares Core S&P 500 ETF; and the Schwab S&P 500 Index Fund.
How to Start Investing
When you're ready to start investing, you'll want to open a brokerage account. This is simply a type of account that investors use to buy and sell a variety of different assets like stocks, ETFs and bonds. Once your account is in place, you'll be able to transfer money between it and your everyday bank account(s).
While this may sound daunting, opening a brokerage account is easier than ever before. You can opt for a managed brokerage, which will be set up and managed by a financial advisor, or you can set one up online and manage it yourself. Some of the best online options that feature $0 trade and minimums include:
- TD Ameritrade: TD Ameritrade offers an easy, inexpensive way to start trading. It's especially great for beginners, namely because it offers a large number of instructional videos and tutorials.
- Robinhood: Robinhood offers an app that allows you to trade right from your phone. As soon as you make a transfer from your bank account, it will give you instant access to your funds, meaning you don't have to wait until the deposit goes through.
- Charles Schwab: Charles Schwab has been around for some time, but it’s now offering online broker services. In addition to helping you get acquainted with the market, Charles Schwab will provide reports to help you decide which investments are right for you.
- Merrill Edge: This one's a particularly great option to look into if you're a Bank of America customer. You'll get instant access to any cash you transfer from your account — and, best of all, access to financial advisors at over 2,000 Bank of America locations.
Regardless of which you choose, once you’re set up with a broker, simply submit an order and watch your savings grow!