You may have noticed that the S&P 500 has been mentioned a lot recently, especially with all the market turbulence caused by the coronavirus pandemic. We’re going to explain everything you need to know about this popular index, including what companies are in the S&P 500 and whether it’s a good pick for UK investors.
What is the S&P 500?
First, let’s take a look at what those letters and numbers stand for.
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S&P refers to ‘Standard and Poor’s’. This is the name of the organisation that created and maintain this composite index.
500 simply refers to the number of companies permitted on this particular index.
The S&P 500 index contains the majority of the biggest and best companies operating in the US.
What companies are in the S&P 500?
The companies within the index can change quite regularly.
This is because the businesses that make it onto the index do so based on performance. So when a company underperforms, it may lose its position and be replaced by a more successful business.
You can find a lot of big brands within the index, such as Apple, Microsoft and Johnson & Johnson. A notable recent addition that made the headlines was Tesla.
How much space a company takes up on the index depends on its market capitalisation and how many shares are available to the public.
Who decides on new additions?
Companies are not chosen simply by market capitalisation (i.e. how big they are).
Even though the S&P 500 index contains many big companies, other metrics are used to ensure only quality businesses are permitted onto the index.
A committee decides whether or not to add a company. This decision is only made after an in-depth review of the company in question is carried out.
This doesn’t mean that it’s impossible for companies on the index to fail. However, it does ensure that businesses are only included once thorough analysis has taken place. The result is that companies are not added to the index just because they’re popular.
Is it a good investment?
Historically, the returns have been excellent.
This is because America is a global economic powerhouse, with many US shares performing extremely well over the years.
Because the S&P 500 tracks some of the best companies in the US, investors have reaped the rewards.
The great thing about investing in the whole index is that you can still begin with quite a small investment that gets split between all the companies in it.
Most companies on the list also operate internationally. So even if it was your only investment, you’d still have a somewhat diversified portfolio at a low cost.
Where can you invest in the S&P 500?
The most common way to invest in this index is through an index fund. One of the most popular funds tracking this index is Vanguard’s S&P 500 ETF.
Most top share dealing accounts should give you access to funds that allow you to invest in companies within this index.
In the UK, we have the added benefit of being able to use a stocks and shares ISA to minimise how much tax we pay when investing. So in some cases, we have a better deal than Americans when it comes to investing in the S&P 500!