What is the S&P 500? The basics

The S&P 500 is one of the most closely watched and well-known stock market indices in the world. Officially known as the Standard & Poor’s 500 Composite Stock Price Index, it tracks 500 of the largest publicly listed companies in the US.

Put simply, a stock market index is a way of grouping companies together to show how a particular market, sector or region is performing. In the case of the S&P 500, investors often use it as a snapshot of the health of large US companies - and, more broadly, as a rough guide to the US economy.

From Apple and Microsoft to Amazon, many S&P 500 companies are global household names. But while the index is made up of some of the world’s biggest businesses, it doesn’t mean investing in companies or funds linked to the index is risk-free.

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How is the S&P 500 defined?

To be included in the S&P 500, companies must be listed on a major US stock exchange, such as the New York Stock Exchange or Nasdaq. Companies must also meet several criteria, including a minimum market capitalisation. Market capitalisation is the total stock market value of a company, calculated by multiplying its share price by the number of shares outstanding. This currently sits at $22.7 billion, although this figure is reviewed regularly and can change over time.

You’re likely to recognise many of the companies in the S&P 500. The index includes some of the world’s largest technology, healthcare, financial and consumer businesses. These are often well-established companies, but that doesn’t mean growth is guaranteed.

The S&P 500 is weighted by company size. This means larger companies have a bigger influence on the index’s performance than smaller ones. For example, a movement in a very large company such as Apple or Microsoft can have more impact on the index than a similar movement in a smaller company.

This is important because the S&P 500 isn’t spread evenly across all 500 companies. A small number of very large businesses can have a bigger effect on how the index performs.

How to invest in the S&P 500

You cannot invest directly in the S&P 500 itself. But you can get exposure to it through funds that track the index, or by buying shares in some of the companies it includes.

Shares

Buying shares allows you to invest directly in companies that feature in the S&P 500, giving you more freedom and flexibility to choose what to invest in. Shares are at the higher end of the risk/reward spectrum. This means you could make higher returns, but you could also face bigger losses if the companies you choose perform badly. Investing in shares can be more expensive than funds because of fees and charges.

Funds

Instead of directly investing in the companies, another way you can gain exposure to the index is through an S&P 500 tracker fund. This is a fund that’s designed to follow the performance of an index. These funds pool money from many investors and use it to buy shares in the companies that make up the index. Tracker funds generally have lower fees than actively managed funds, so can offer a more cost-effective way to invest.

Because a tracker fund invests across many companies, it can also help spread risk. However, this doesn’t remove risk completely. If the US stock market falls, the value of an S&P 500 tracker fund is likely to fall too.

Examples of S&P 500 funds

Select 50 is a list of funds selected by our experts to help investors narrow down their options. It currently includes two funds offering exposure to the S&P 500.

• Vanguard S&P 500 UCITS ETF (VUSA). This fund aims to track the performance of the S&P 500 by investing in large US companies. Because the index is weighted by company size, larger companies make up a bigger part of the fund.
• Legal & General S&P 500 US Equal Weight Index Fund. This fund also tracks companies in the S&P 500 but gives each company a similar weighting. This means it is less concentrated in the biggest companies than a traditional S&P 500 tracker.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing into a fund, please read the relevant key information document which contains important information about the fund. Direct shareholdings should generally form part of a well-diversified portfolio of other investments. There is no guarantee that the investment objective of any index tracking sub-fund will be achieved. The performance of the sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. Select 50 is not a personal recommendation to buy or sell a fund. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.