The S&P 500 index is an excellent indicator for assessing the overall performance of the US stock market. Funds that follow the S&P 500 index create the foundation for buy-and-hold investors' portfolios, making learning to invest in the benchmark index a crucial ability to know.
There are two ways to best invest in the S&P 500. The first option is through index funds, and the second is through exchange-traded funds (ETFs). While these two funds share some differences, they are low-cost investments that offer great diversification.
Index Funds
Index funds that closely mirror the performance of the S&P 500 often include most or all the stocks listed in the index. The fund's shares are then sold to allow investors to purchase exposure to multiple constituent investments.
There are several S&P 500 index funds available, and the following categories can help you choose a suitable fund for your portfolio:
Expense Ratio
The expense ratios, the fees associated with looking after an investor's fund, are pretty low since index funds are passively managed. That means no thorough research or trading is required, as fund managers only need to buy and sell stocks to ensure that the fund's asset mix aligns with the S&P 500.
Most S&P 500 index funds perform similarly. Therefore, choosing a fund with the lowest possible expense ratio is essential.
Minimum Investment
You need to see if the minimum purchase amount of an S&P 500 index fund fits with the amount you plan to invest. Once you've determined that, you can buy fractional shares in the dollar value you want.
Note that whether you're buying index funds for taxable investment accounts or retirement accounts, every one of them requires a different minimum investment.
Dividend Yield
Different S&P 500 index funds offer different dividend yields. Therefore, it's important to compare them as dividends can increase your potential returns further, even when the markets are down.
Inception Date
S&P 500 index funds with longer inception dates allow you to understand how an index fund survived bull markets and minimized losses during bear markets. Such information is what makes a fund's inception date worth checking.
Exchange-Traded Funds (ETFs)
ETFs work like index funds, with the difference being that the shares issued by an ETF trade like stocks, and the values experienced fluctuations for the entire day. On the other hand, index fund shares only trade once a day when the markets are already closed for the day.
In choosing an S&P 500 ETF, you should base your decision on factors including:
Liquidity
ETFs with higher trading volumes are more liquid than those with lower trading volumes. If you're a buy-and-hold type of investor, you don't need to be too concerned about ETF liquidity.
However, if you’re an active investor with a taxable brokerage account, you should familiarize yourself with the potential impact of an ETF's liquidity on your investment plan.
Dividend Yield
Make sure that the dividend yield of an S&P 500 ETF you're looking at is at least in line with or higher than the most excellent S&P 500 ETFs.
Inception Date
Older ETFs can provide the reassurance you need, as they have gone through many ups and downs cycles, proving their ability to keep a good performance over the long term.
