S&P 500
Key Takeaways
- The S&P 500 tracks 500 of the largest publicly traded U.S. companies
- It is the most widely used benchmark for the overall U.S. stock market
- The index is market-cap weighted, so the largest companies have the most influence
- Historical average annual total return is approximately 10%
Definition
The S&P 500 (Standard & Poor's 500) is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. Created in 1957, it is widely regarded as the single best gauge of the U.S. equity market and is used as the benchmark against which virtually all U.S. stock portfolios and fund managers are measured.
The index is maintained by S&P Dow Jones Indices, a division of S&P Global. Companies are selected by a committee based on criteria including market capitalization (minimum ~$14 billion), profitability, liquidity, and sector representation. The index represents approximately 80% of the total U.S. stock market value.
The S&P 500 is market-capitalization weighted, meaning larger companies have proportionally greater influence on the index's performance. As of recent years, the top 10 companies (including Apple, Microsoft, NVIDIA, Amazon, and Alphabet) represent approximately 30-35% of the index.
How It Works
Each company's weight in the index is determined by its float-adjusted market cap (share price × publicly available shares). When Apple's stock price rises, it has a larger impact on the index than a smaller company's equivalent percentage move. The index is calculated continuously during trading hours.
Investors cannot invest directly in the S&P 500 index itself — they invest through index funds and ETFs that track it. Popular options include the Vanguard S&P 500 ETF (VOO, 0.03% fee), SPDR S&P 500 ETF (SPY, 0.09% fee), and Vanguard 500 Index Fund (VFIAX, 0.04% fee). These funds hold all 500 stocks in the proper weights.
The S&P 500 is reconstituted periodically as companies are added and removed. When a company is added to the S&P 500, index funds must buy its shares, often causing a temporary price pop. Removal has the opposite effect. Companies are removed when they no longer meet the inclusion criteria.
Example
An investor who put $10,000 into an S&P 500 index fund in 1993 and reinvested all dividends would have approximately $200,000 by 2023 — a 20x return over 30 years, representing roughly 10.3% annualized. This return was achieved despite the dot-com crash (2000-2002), the global financial crisis (2008-2009), and the COVID crash (2020). The power of long-term compounding in the S&P 500 illustrates why it is the most recommended investment for long-term wealth building.
Why It Matters
The S&P 500 is the heartbeat of the American financial system. It serves as the primary benchmark for portfolio performance, the basis for trillions of dollars in index fund assets, and a barometer of economic health. When people say "the market is up" or "the market is down," they are usually referring to the S&P 500.
For individual investors, the S&P 500 provides the simplest and most effective investment vehicle for participating in U.S. economic growth. Warren Buffett has repeatedly stated that most investors would be best served by a low-cost S&P 500 index fund, and he instructed his estate's trustee to invest 90% of the money left to his wife in one.
Advantages
- Broad representation of the U.S. economy across all sectors
- Extremely low-cost access through index funds and ETFs
- Strong long-term historical performance (~10% annual returns)
- Most widely tracked and analyzed index globally
Limitations
- Market-cap weighting creates concentration in the largest companies
- Only includes large-cap U.S. stocks — misses small-caps, mid-caps, and international
- Cannot be customized — includes all 500 companies regardless of quality
- Past performance does not guarantee future returns
Frequently Asked Questions
Related Terms
Browse more definitions in the financial terms glossary.