The S&P 500 Index is among the most popular stock market indices in the world. It is regarded as an indicator of equity market performance in the U.S., the largest economy in the world. Let’s dive deeper into the popular index to see if you should invest in it right now.
What is the S&P 500 Index?
The S&P 500 Index consists of the 500 largest companies in the U.S., making it a benchmark against which portfolio performance is generally evaluated. The index is weighted by market cap, which means a company’s valuation determines its index weight. For example, if the total market cap of the index is $25 trillion, a stock valued at $2.5 trillion will account for 10% of the index.
It means mega-cap companies such as Microsoft, Nvidia, and Apple account for 20.7% of the S&P 500 Index in June 2024 due to their multi-trillion dollar valuations. Comparatively, smaller companies will not move the needle much in terms of index weightage.
Similar to a stock, the S&P 500 Index fluctuates throughout the trading day based on the performance of the underlying companies. Investors might wonder why the index is used as an indicator of the broader economy. Well, it’s because the 500 largest companies account for 80% of the total U.S. stock market.
Why should you invest in the S&P 500 Index?
According to legendary stock market investor Warren Buffett, investing in the S&P 500 Index is the best way to gain access to the stock market, especially for those who don’t have the time or expertise to pick individual stocks. In the last six decades, the S&P 500 Index has returned more than 10% annually to investors, allowing them to derive game-changing wealth over time.
In this period, the index has wrestled with several economic downturns, such as the dot-com bubble, the financial crisis, and other black swan events.
Moreover, around 85% of the large-cap funds fail to outpace the flagship index, showing how difficult it is to consistently pick winning stocks. Investing in the S&P 500 allows you to get broad exposure to profitable U.S. businesses across multiple sectors, which results in portfolio diversification and lower overall risk.
Best S&P 500 ETFs in Canada
Canadian investors looking to gain exposure to the S&P 500 Index can consider low-cost exchange-traded funds (ETFs) that track the index. Among the most popular ETFs in Canada is the Vanguard S&P 500 Index ETF (TSX:VSP).
The VSP ETF invests in stocks of U.S. companies and uses derivative instruments to hedge exposure to the U.S. dollar, shielding investors from fluctuations in exchange rates. In the last 10 years, the S&P 500 Index has returned 11.6% to shareholders, while the VSP has returned 11.3% due to its fees and commissions.
With US$3.2 billion in assets under management, VSP has a management fee of 0.08% and an expense ratio of 0.09%.
For those willing to withstand fluctuations in exchange rates, the iShares Core S&P 500 Index ETF (TSX:XUS) is a good option. With US$6.5 billion in AUM, the expense ratio and management of the fund are similar to those of the VSP ETF.
