For long-term investors, the S&P 500 is more than just a stock index – it's a roadmap to the heart of the U.S. economy. This index gives you a window into the performance of America’s largest companies. And it’s popular among investors who want to tap into the economic strength of the U.S. without having to pick individual stocks.

In this article, we’ll explore what the S&P 500 is, the significance of the companies it includes, and how it can act as a valuable tool in your investment strategy. You’ll also discover how you can invest in the S&P 500 via the ASX and other methods, plus what to consider if and before you do. Now, let's unpack all things S&P 500.

A brief overview of the S&P 500 index

The S&P 500 , or the Standard and Poor's 500, is a stock market index that provides a snapshot of the performance of 500 large companies listed on stock exchanges in the United States. It’s like a barometer for the U.S. economy, reflecting the health and trends of various industries across the country.

Many investors around the world see the index as the best single measure of large-cap U.S. equities. "Large-cap" means companies with a large market capitalisation (or market cap). In other words, they are large and financially significant. The S&P 500 includes industry leaders and major influencers in the economy – all with a large market cap.

History and background of the S&P 500

The S&P 500 index was introduced in 1957 by Standard & Poor's, a financial services company. But its origins trace back to the 1920s when Standard Statistics Company (later merged into Standard & Poor's) began rating mortgage bonds and other securities.

The index was designed to be a broader, more accurate reflection of the U.S. stock market's performance compared to its predecessor, which included fewer companies. Today, it represents around 80% of the U.S. equity market's value. And, like the Dow Jones Industrial Average , it’s one of the most watched stock markets in the world.

Selection criteria and process

Companies in the S&P 500 are selected by a committee, which considers various factors including market size, liquidity, and industry grouping. Being listed on this index is often seen as a mark of prestige and stability.

The companies included in the S&P 500 are chosen based on several criteria:

1. Market capitalisation: A company must have a market cap of at least $13.1 billion. This ensures that the index reflects large, stable companies.
2. Liquidity: The company's outstanding shares must be easily buyable and sellable, with a minimum monthly trading volume.
3. Public float: At least 50% of the company's current stock need to be publicly traded.
4. Sector representation: The index aims to reflect the broader industry landscape, so it includes companies from various sectors.
5. Financial viability: Each company must have four consecutive quarters of positive earnings.

The index is also a market cap weighted index. That means companies with larger market caps are more heavily weighted and have a greater influence on the index's performance. This weighting also gives investors a realistic view of the market dynamics and helps them understand the companies driving economic trends.

The companies in the index don’t change often. However, changes do occur when companies no longer meet these standards or when better candidates are available. This approach helps maintain the integrity and utility of the S&P 500 as an important benchmark for investors.

Why is the S&P 500 seen as important?

The S&P 500 isn’t just a list of companies – it's an oft-used tool for both investors and analysts. Let’s look at some of its key uses:

Benchmark for portfolio performance and market comparisons

The S&P 500 is commonly used as a benchmark, or standard, to measure the performance of an individual stock and overall investment portfolios. If an investor’s portfolio grows faster than the S&P 500, it's doing well. If it grows more slowly, they may decide to reassess their investments.

Barometer of investor sentiment and market trends

The index also acts as a barometer for the overall mood of investors and the direction of market trends. A rising S&P 500 often suggests that investors feel optimistic about the future of the economy. On the flip side, a falling index can indicate pessimism and uncertainty.

Basis for index funds, ETFs, and other investment products

Many investment products are based directly on the S&P 500. These include index funds and exchange-traded funds (ETF s ) that aim to mirror the performance of the S&P 500. By investing in an S&P 500 fund, you’re buying a small piece of each of the 500 companies in the index. This allows you to diversify your holdings and reduce risk without buying the individual stock.

Investors can use the S&P 500 to assess economic health, make investment decisions, and understand market trends. Knowing its influence and applications can be beneficial for anyone involved in the financial markets.

What major companies are included in the S&P 500?

The S&P 500 features a dynamic list of companies. This list can change as companies meet or fail to meet certain criteria. Here are 10 of some of the longest-standing companies in the index, each a major player in its respective field:

1. ExxonMobil (XOM) : As one of the largest international oil and gas companies, ExxonMobil is involved in everything from drilling to selling petroleum products. It plays a critical role in energy supply worldwide.
2. Procter & Gamble (PG) : The company behind many well-known household brands, Procter & Gamble produces a wide range of consumer goods such as Tide laundry detergent, Pampers nappies, and Crest toothpaste.
3. IBM (IBM) : International Business Machines, commonly known as IBM, has been at the forefront of technology for decades. It provides advanced computer solutions, including cloud computing and artificial intelligence services, to businesses worldwide.
4. 3M (MMM) : Known for its innovation, 3M manufactures over 60,000 products ranging from industrial adhesives and abrasives to medical products and office supplies. Its diverse portfolio addresses needs across multiple sectors.
5. General Electric (GE) : GE operates in key areas such as aviation, healthcare, and power generation. It’s known for making jet engines, medical imaging devices, and energy solutions, contributing significantly to technological advancement.
6. Johnson & Johnson (JNJ) : A leading global healthcare company that develops medical devices, pharmaceuticals, and consumer health products. Well-known for products like Band-Aids and Tylenol, Johnson & Johnson has a broad influence on the health and wellness industry worldwide.
7. Coca-Cola (KO) : As one of the most recognisable beverage brands globally, Coca-Cola produces and markets a variety of soft drinks and other non-alcoholic beverages. Its products are available in virtually every country around the world.
8. PepsiCo (PEP) : Similar to Coca-Cola, PepsiCo is a giant in the global beverage and snack industry. Beyond its famous Pepsi soft drinks, the company owns brands like Quaker, Gatorade, and Lay's, making it a major player in both beverages and packaged foods.
9. Walmart (WMT) : Walmart is the largest retailer in the world, operating a chain of hypermarkets, discount department stores, and grocery stores. It’s known for its low pricing strategy and vast product selection, serving millions of customers daily.
10. Chevron (CVX) : Chevron is another major player in the global energy sector, involved in every aspect of the oil, gas, and geothermal energy industries. It’s known for its commitment to energy efficiency and renewable energy sources alongside its traditional energy operations.

These companies have been included in the index for many years due to their size, stability, and significant impact on the U.S. and global economies. Keep in mind that the list of companies in the S&P 500 is reviewed and updated periodically to reflect current market conditions. It’s also the talk of many investors who regularly monitor the index, like Warren Buffett .

Why does Warren Buffett often talk about the S&P 500?

Warren Buffett, one of the world's most successful investors, frequently discusses the S&P 500. He does this for a few key reasons:

Passive investing: Buffett is a strong supporter of passive investing . This involves holding a broad, diversified portfolio of stocks over the long term rather than trying to beat the market through active investing. His opinion is that most investors should buy and hold an index fund that tracks the S&P 500. His view is that this is likely to yield better returns than picking individual stocks or timing the market.

“The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low-cost way.” - Warren Buffett

Long-term growth: Buffett often points to the S&P 500 as evidence that the American economy continues to grow over time, despite short-term fluctuations. He believes in the resilience and potential of U.S. companies, largely represented in the index.

Simplicity and accessibility: He praises the S&P 500 for its simplicity and accessibility. With just a single investment in an S&P 500 index fund, investors can own a piece of the top 500 companies in the U.S. It can be an easy and effective way to diversify your investments.

Low cost: Buffett emphasises the low-cost nature of S&P 500 index funds. These funds typically have lower fees because they are passively managed. This generally means that more of the investors' money is invested rather than spent on management fees.

Warren Buffett views the S&P 500 as a simple way for most investors to participate in the growth of the American economy and potentially build wealth over the long term.

How can I invest in the S&P 500 from Australia?

Many U.S. investors tend to invest in the S&P 500 via the New York Stock Exchange. For Australian investors, i nvesting in the S&P 500 is just as simple, thanks to the availability of international investing options. Here are a few ways you can invest:

• ETFs: One of the easiest ways to invest in the S&P 500 from Australia is through an ETF that tracks the index. An ETF is traded on the Australian Securities Exchange (ASX) , just like an individual stock. Popular options include the iShares S&P 500 ETF (IVV) and the SPDR S&P 500 ETF Trust (SPY) .
• Managed funds: Another option is to invest in managed funds (or a mutual fund) that specifically invest in the S&P 500. These funds are managed by professionals who handle all the buying and selling of shares. You can invest in these funds through financial advisers or sometimes directly from the fund manager’s website.
• Online investing platforms: Several online trading platforms allow you to invest in U.S. stocks and ETFs directly. Platforms like Pearler offer access to U.S. markets, including the ability to buy ETFs that track the S&P 500.

When investing in U.S. securities from Australia, consider the currency exchange rates and any fees associated with trading international securities. These can include brokerage fees, currency conversion fees, and potential taxes on international investments.

What if I invest in the S&P 500 and it fails horribly?

Investing in the S&P 500 involves spreading your investment across 500 of the largest U.S. companies, which is intended to diversify risk. This diversification means that even if some companies or sectors struggle, others may perform well, balancing out potential losses.

However, it's important to remember that all investments carry risk. The S&P 500, while diverse, reflects the broader U.S. economy and can be impacted by global economic downturns, political events, and other macroeconomic factors. In scenarios where the entire market declines, the S&P 500 will likely also experience a drop. To mentally and practically prepare for these scenarios, consider:

• A long-term perspective: Historically, the S&P 500 has recovered from downturns and continued to grow over the long term. It's crucial to have a long-term perspective and not react hastily to short-term market volatility. (Keep in mind, though, that past performance doesn't indicate future returns.)
• Regular reviews: Regularly review your investment strategy to ensure it aligns with your financial goals and risk tolerance. You may need to make adjustments depending on changes in the market or your personal circumstances.
• Diversification: Beyond the S&P 500, consider diversifying your portfolio further by including other asset classes such as bonds, real estate, or international stocks. This can help mitigate risks associated with any single market.

While the S&P 500 aims to reduce risk through diversification, it doesn’t eliminate it. Investing involves acknowledging and managing risks, but we can never avoid them entirely.

The S&P 500 offers a broad view of the U.S. market, making it a valuable tool for investors seeking diversified exposure to major American companies. By understanding this index, you can make more informed decisions about incorporating it into your long-term investment strategy. Whether you're looking to invest directly or through ETFs on the ASX, the S&P 500 provides a pathway to potentially enhance your portfolio's growth and stability.

As always, it's a good idea to seek investment advice from a professional and conduct research so you make informed decisions.

Happy investing!