You can’t purchase a share of the S&P 500 itself. The index is a benchmark that measures the performance of a group of large U.S. companies rather than an investment product you can own directly.
Instead, you can invest through products designed to track its performance, such as exchange-traded funds (ETFs) and index mutual funds. Futures contracts also provide exposure, but their complexity and risk generally make them a different category from traditional long-term investing.
Understand What the S&P 500 Represents
The S&P 500 tracks large publicly traded U.S. companies and combines their performance into a single index value.
Although it provides broad exposure to large U.S. companies, it isn’t equally weighted. Companies with larger market capitalizations have a greater influence on the index. As a result, a relatively small group of the largest companies can account for a substantial portion of its performance.
That concentration is worth understanding before assuming an S&P 500 investment provides complete diversification.
Use an ETF to Track the Index
One common way to invest is through an ETF designed to follow the S&P 500.
The fund holds shares of companies represented in the index and adjusts its portfolio as necessary to continue tracking the benchmark.
ETFs trade on stock exchanges throughout the trading day. You can generally purchase them through a brokerage account, with the execution price depending on the market when your order is filled.
When comparing ETFs tracking the same index, consider:
- Expense ratio
- Trading costs
- Bid-ask spread
- Tracking performance
- Liquidity
- Any applicable account fees
Two funds following the same benchmark can provide very similar underlying exposure even when their costs and trading characteristics differ.
Consider an Index Mutual Fund
An S&P 500 index mutual fund offers another route to essentially the same group of companies.
One major difference is how it trades. While ETFs can trade throughout market hours, mutual funds generally process purchases and sales once per trading day based on the fund’s calculated net asset value.
For long-term investors making regular contributions, intraday trading may not matter much. What may matter more are expenses, minimum investment requirements, automatic contribution options, and the type of account you're using.
Fractional Shares Can Lower the Starting Amount
Traditionally, buying an ETF required enough money to purchase at least one full share. Fractional-share investing has changed that at many brokerage platforms.
If your broker supports fractional shares for a particular ETF, you may be able to invest a specific dollar amount instead of purchasing an entire share.
Availability and minimum purchases vary by platform, so check the brokerage's rules before investing.
Pay Attention to Expense Ratios
Index-tracking funds are generally passively managed, but they still have operating expenses.
The expense ratio represents the percentage of fund assets used annually for management and operating costs. Even seemingly small differences can matter when compounded over a long investment period.
When two funds track substantially the same index, comparing expenses can help you understand how much of your investment may be consumed by ongoing fund costs.
Understand What You Actually Own
Buying an S&P 500 fund gives you exposure to hundreds of large U.S. companies, but that doesn't mean your money is distributed equally among them.
Because the index is weighted largely according to market capitalization, its biggest companies receive substantially larger allocations than smaller constituents.
That means movements in a handful of very large companies can have an outsized effect on the index.
Don't Confuse Multiple S&P 500 Funds With Diversification
Buying several funds that all track the S&P 500 doesn't necessarily make your portfolio more diversified.
Even if the funds come from different providers, their underlying holdings may be substantially the same.
True portfolio diversification can involve exposure to investments the S&P 500 doesn't represent, potentially including smaller companies, international markets, bonds, real estate, or other asset classes depending on your objectives and risk tolerance.
Diversification can help manage concentration risk, but it cannot eliminate investment losses.
Be Cautious With Futures
Futures contracts tied to the S&P 500 provide another form of exposure, but they work very differently from ordinary index funds.
Futures are contracts involving obligations based on an agreed price and future date. They can involve leverage, margin requirements, rapid price movements, and losses that may be substantial.
Understanding the mechanics of an ETF doesn't prepare you automatically for futures trading. These products require a separate understanding of leverage, margin, contract specifications, and risk management.
Consider Taxes and Account Type
Selling an investment for more than you paid can create a taxable capital gain in a taxable brokerage account.
Tax treatment can depend on factors including how long you held the investment, your individual tax circumstances, and the type of account involved. Tax-advantaged retirement accounts operate under different rules from ordinary taxable brokerage accounts.
Taxes shouldn't be an afterthought when comparing investment strategies, particularly if you expect to trade frequently.
Build Your Strategy Around More Than the Index
For many beginners, the practical decision isn't whether they can buy the S&P 500 directly—they can't. It's deciding which investment vehicle provides appropriate exposure at a reasonable cost.
Compare fund expenses, trading characteristics, account requirements, tax considerations, and how the investment fits alongside the rest of your portfolio.
Most importantly, remember that an index fund can decline when its underlying stocks fall. Historical performance doesn't guarantee future returns, and broad exposure to large U.S. companies doesn't eliminate market risk.
Choose the Route That Fits Your Investment Plan
ETFs and index mutual funds can both provide straightforward exposure to companies represented in the S&P 500. The major differences involve how they trade, their costs, minimums, and account features.
Rather than trying to identify the “best” route based on recent performance, focus on the characteristics you can evaluate: costs, investment horizon, risk tolerance, account type, and the rest of your portfolio. A long-term strategy depends less on finding a perfect entry point and more on choosing an approach you understand and can maintain.
