What is the S&P 500?

Remember when you were first getting into the markets? You may have started investing in something pretty simple, like an ETF. I remember when my online broker gave me the option to choose a limit order or market order at the tender age of 24. I said, “Huh?” out loud — to my computer screen — and froze. I had no idea what that meant and I closed out of the S&P 500 index fund in which I was planning to invest. It took me another week to figure out what those two things meant — and gain the courage to try again.

Are you in that mode right now? If you’re not sure what an index fund is, much less the S&P 500, that’s okay! Let’s go back to the very, very basics and answer one of the most fundamental questions of all — what is the S&P 500?

How is the S&P 500 Broken Out?

The S&P 500 is a stock market index that measures the performance of approximately 500 U.S. companies. These companies (which happen to cover 11 sectors) offer a snapshot of U.S. stock market health as well as the broader economy.

Here are the top 25 companies on the list:

• Microsoft Corp (MSFT)

• Apple Inc. (AAPL)

• Amazon.com Inc. (AMZN)

• Facebook Inc (FB)

• Berkshire Hathaway (BBRK.B)

• Alphabet Inc. A shares (GOOGL) and Alphabet Inc. C shares (GOOG)

• Johnson & Johnson (JNJ)

• JP Morgan Chase & Co. (JPM)

• Visa Inc (V)

• Procter & Gamble Company (PG)

• Mastercard Incorporated (MA)

• Intel Corp. (INTC)

• UnitedHealth Group (UNH)

• Bank of America (BAC)

• AT&T Inc. (T)

• Home Depot (HD)

• Exxon Mobil (XOM)

• Walt Disney Company (DIS)

• Verizon Communications (VZ)

• Coca-Cola Company (KO

• Merck & Co. (MRK)

• Comcast Corp. A shares (CMCSA)

• Chevron (CVX)

• PepsiCo (PEP)

• Pfizer Inc. (PFE)

The sectors they fit into include:

• Energy

• Materials

• Industrials

• Consumer discretionary

• Consumer staples

• Healthcare

• Financials

• Information technology

• Telecommunication services

• Utilities

• Real estate

What Does the S&P Measure, Exactly?

First, let’s cover a little background on the S&P. Standard and Poor’s originally created the S&P 500 and the S&P Dow Jones Indices now owns it.

The S&P 500 consists of a broad basket of stocks without too many small and obscure companies. It contains the companies widely owned by individual investors, with the 500 components accounting for roughly 80% of the overall stock market capitalization in the United States.

You may wonder about other indices — there are dozens! For example, you may question whether the Dow Jones Industrial Average (DJIA) is better than the S&P. Each index offers a different perspective. Because the S&P contains approximately 500 companies, it actually tracks the market’s performance on a wider scale than the DJIA. The DJIA only contains 30 companies. Many money managers prefer to watch the S&P 500 instead.

Here are four other indices that track the market:

• Nasdaq Composite: The Nasdaq, composed of over 3,000 stocks, includes all of the common stocks traded on the Nasdaq exchange. Each stock in the index is weighted by market cap.

• Nasdaq 100: The Nasdaq 100 is a smaller index, as you might figure out from its name. It’s focused on the largest 100 stocks listed on the exchange and excludes financial companies.

• Russell 2000: One of the best indexes to use as a benchmark for small-cap companies is the Russell 2000.

• Russell 3000: The Russell 3000 contains the largest 1,000 stocks on the market.

How to Invest in the S&P 500

Since the S&P 500 is a group of companies, you can’t actually invest in something called the “S&P 500 stock.” However, there are ways that you can invest in the funds in the S&P 500. Here are a couple of options:

Option 1: You can invest in a mutual fund that mimics the performance of the S&P 500. What’s an index fund? An index fund is a group of stocks and bonds that follows a particular index. In this case, you could buy mutual funds that follow the S&P 500. A mutual fund lets you invest in a single fund instead of buying a plethora of individual stocks.

Option 2: You may also want to invest in the S&P 500 by investing in an exchange-traded fund (ETF) that mirrors the S&P 500. ETFs are usually cheaper than mutual funds and offer more tax efficiencies. It’s a great way to stay diversified, and like a mutual fund, not require you to buy a bunch of individual stocks.

Step 1: Open an account with Wealthsimple.

You’ll need an investment account to get started investing. How do you do it? Luckily, Wealthsimple makes it easy to get started. All you need to do is sign up through Wealthsimple’s homepage. Click “Get Started” and follow the prompts. Next, you’ll answer a few (easy!) questions about your previous investment experience and e-sign one or more Investment Management Agreements.

Step 2: Scope out the ETFs that track the S&P 500.

I’m going to point out three ETFs that I’d like to invite you to explore.

• SPDR® S&P 500 ETF (SPY)

• iShares Core S&P 500 ETF (IVV)

• Vanguard S&P 500 ETF (VOO)

To be honest, if you’re after an S&P 500 ETF, these are all great options, and they’re all fairly similar. Check their management expense ratios, or what you’ll pay for overhead costs, and you’ll realize they’re all very low, compared to those actively managed funds, or mutual funds, we talked about earlier. These ETFs’ expense ratios are all under 1%. In other words, you’re in good hands with any of the three offered by Wealthsimple.

Step 3: Undergo bank verification.

Upload a bank statement, provide a screenshot of your bank account or void a cheque to verify your banking information.

Step 4: Wait just five days.

That’s all you need to do! Your account should be up and running within five business days.

Tag Wealthsimple as Your Go-To for Tracking the S&P 500

The best way to track the S&P 500 is to get involved in it. Get your hands on it. Learn about it. Use Wealthsimple to save for long-term investing, invest in it in order to save money in college, for short-term investing, trading and more. The options are endless — but that’s a topic for another day.