What Is the S&P 500?
Written by Sam Levine, CFA, CMT
Fact-checked by Dayana Yochim
Edited by Carolyn Kimball
The Standard & Poor’s 500 Index was created in 1957 to measure the performance of the U.S. economy. It now serves to benchmark an estimated $15.6 trillion of investing assets. The index includes 503 stocks and almost a third of its value comes from just 10 companies.
Quick take: The S&P 500 measures the performance of the U.S. stock market. Many exchange-traded funds (ETFs) seek to mirror the index. It’s not very diversified, being heavily weighted in technology stocks. For example, at the end of August 2023, Apple accounted for 7.1% of the S&P’s value.
Tell me more: The index is made of 500 U.S. companies selected by a committee from S&P Dow Jones Indices. The stocks added to the index must meet certain criteria of liquidity and size and have positive earnings over the most recent quarter and the summed past four quarters. Some companies issue different classes of shares, which is why the S&P 500 actually has 503 stocks.
The index is rebalanced every quarter, which is when a stock might be added or removed from the index. The committee will only change a few companies each year, which makes investing in S&P 500 index funds very tax-efficient.
Here are the annualized returns (that’s just a fancy average) of the S&P 500, assuming dividends are reinvested, as of the end of August 2023:
| 1 year | 15.94% |
| 3 year | 10.52% |
| 5 year | 11.12% |
| 10 year | 12.81% |
Should you expect to earn 10-16% on your stock money every year? No, no, no. Over the last 10 calendar years, the highest total return was a whopping 31.49% in 2019 (we miss you, meme stocks) and the lowest was a drop of 18.41% in 2022.
Financial planners typically expect the S&P 500 to average 9-10% return per year, but that’s over the super long term – think 20 years or more. Over the short term, the S&P 500’s returns look like a drunk person trying to walk up a hill. Expect slips, falls, and meandering in the opposite direction. In other words, don’t invest money you’ll need soon into the stock market.
One more thing: Mutual fund managers find it very difficult to consistently beat the S&P 500. According to S&P Global, the folks that manage the S&P 500, only 8.6% of U.S. large cap funds outperformed the index over the last 10 years. That implies that most investors will be better off buying low cost index funds instead of actively managed funds.
Bottom line: The S&P 500 includes many of the largest and most admired American publicly traded companies, and buying an S&P 500 index fund is a perfectly reasonable way to “invest in America.” But it is concentrated in technology, thanks to how much those stocks have boomed and the way the index is constructed.
Did you know
Warren Buffett, one of the greatest stock investors in history, wrote that he put instructions in his will to place 90% of the money in a trust for his wife into an S&P 500 index fund, with the rest invested in short-term government securities.
More on stock market basics
What Is the Dow Jones Industrial Average?
What Is a Mutual Fund?
About the Editorial Team
Sam Levine is a writer, investor and educator with nearly three decades of experience in the investing industry. His specialty is making even the most complicated investing concepts easy to understand for beginning and intermediate investors. He holds two of the most widely recognized certifications in the investment management industry, the Chartered Financial Analyst and the Chartered Market Technician designations. Previously, he was a contributing editor at BetterInvesting Magazine and a contributor to The Penny Hoarder and other media outlets.
Dayana Yochim has been writing (articles, books, podcasts, stirring speeches) about personal finance and investing for more than two decades, focusing on bringing clarity and the occasional comedic aside to what is often a murky, humorless topic. She’s written for NerdWallet, The Motley Fool, HerMoney.com, Woman’s Day, Forbes, Newsweek and others, and been a guest expert on "Today," "Good Morning America," CNN, NPR and wherever they’ll hand her a mic.
Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money.
