Which Is An Advantage Of Investing $500 In An S&P 500 Index Mutual Fund Instead Of In The Shares Of Any Single Company’s Stock? (2023)

FAQs

What are the benefits of investing in the S&P 500? ›

The S&P is a float-weighted index, meaning the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading. Because of its depth and diversity, the S&P 500 is widely considered one of the best gauges of large U.S. stocks, and even the entire equities market.

S&P 500 index funds are popular in part because they can instantly diversify a portfolio. With a single asset, you are invested in 500 of the largest companies in the U.S., covering many types of industries and sectors.

The difference between a total stock market index fund and an S&P 500 index fund is that the S&P 500 Index includes only large-cap stocks. The total stock index includes small-, mid-, and large-cap stocks. However, both indexes represent only U.S. stocks.

Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too.

Investing only in the S&P 500 does not provide the broad diversification that minimizes risk. Economic downturns and bear markets can still deliver large losses. The past performance of the S&P 500 is not a guarantee of future performance (yeap, and we'll get back to that!)

Broad diversification

This index fund would hold about 500 different stocks. While the performance of each of these 500 stocks fluctuates over time, investing in a fund that holds all of them matches your portfolio's performance to that of the index itself.

Though this index includes just 500 of the more than 6,000 publicly traded U.S. stocks, the S&P 500 tells a more complete story of what the market is doing than the Dow or Nasdaq 100. It represents about 85 percent of the value of all publicly traded companies in the U.S., according to S&P Global.

Investing products such as stocks can have much higher returns than savings accounts and CDs. Over time, the Standard & Poor's 500 stock index (S&P 500), has returned about 10 percent annually, though the return can fluctuate greatly in any given year. Investing products are generally very liquid.

Regardless of where you invest, it's wise to keep a long-term outlook. The market could be shaky over the coming months or even years. But if you invest in an S&P 500 ETF and hold that investment for at least a couple of decades, you're almost guaranteed to make money.

What is the best S&P 500 index mutual fund? ›

In fact, most index funds are a type of mutual fund. The main difference is that index funds are passively managed, while most other mutual funds are actively managed, which changes the way they work and the amount of fees you'll pay.

Conclusion. Comparing the CRSP US Total Market Index and the S&P 500 Index since 1957 reveals that their long-term returns are similar, and their representative ETFs are tax efficient. Significant differences in annual returns occur frequently, but these differences are offset over extended periods.

ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.

You'll want to think about: Expense ratio. As index funds are passively managed, expense ratios, which represent the fees you pay for the upkeep of your fund, should be nominal. Because all S&P 500 index funds perform very similarly, the amount you're paying in fees becomes incredibly important when picking a fund.

Investing in the S&P 500 has worked out really, really well. The average annual return of the index was 10% from 1980-2022, excluding dividends. Of course, there are some companies that deliver much higher returns in any given year.

Getting rich from an S&P 500 index fund isn't quite as glamorous as picking a 10-bagger stock. But the beauty of the S&P 500 index is that it can make anyone wealthy. There's no skill, expertise, or luck required.

The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor's 500® (S&P 500®) for the 10 years ending December 31^st 2022, had an annual compounded rate of return of 12.6%, including reinvestment of dividends.

It tracked a hypothetical $10,000 investment in the S&P 500 stock index made on Jan 1, 1980 through the end of 2022. If the money was left untouched, the $10,000 invested in 1980 was worth $1.26 million at the end of 2022.