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The Standard & Poor’s 500 (S&P 500) is a prominent index comprising the 500 largest publicly traded companies on U.S. stock exchanges. It's often used as a key indicator of the overall health of the U.S. stock market.
Overview of the S&P 500
The S&P 500 represents about 80% of the total market value of U.S.-listed companies. As a result, it’s considered one of the most reliable measures of the U.S. stock market's performance. The companies in the index have an average market cap of $75 billion, with sizes ranging from $4 billion to $2.8 trillion.
Companies in the S&P 500
The index is dominated by technology companies, with Apple alone accounting for about 7% of the total market capitalization. Other top contributors include Microsoft, Amazon, NVIDIA, and Alphabet. Although technology dominates, other sectors, such as healthcare and energy, are also represented, with companies like UnitedHealth Group, Johnson & Johnson, and Exxon Mobil among the largest non-tech firms.
S&P 500 Performance
The value of the S&P 500 index is calculated based on the combined market capitalizations of its constituent companies. After a sharp decline in early 2020 due to the pandemic, the index quickly recovered, doubling its value within two years and reaching nearly 4,800 by January 2022. However, 2022 saw a significant drop of around 20% due to macroeconomic challenges such as inflation and rising interest rates. Despite this, the index rebounded in 2023, finishing 24% higher, and continued its growth in 2024, reaching 5,600 by July.
Direct Investment in the S&P 500
While it's possible to invest in individual companies within the S&P 500, doing so can be costly. For example, purchasing one share in each of the top 10 companies would cost over $2,800. Additionally, there would be trading fees and the ongoing need to rebalance the portfolio as market capitalizations shift. It's also important to consider currency risks, as fluctuations in exchange rates can affect returns when converting investments from other currencies to sterling.
Indirect Investment via Index Funds
A more practical approach for many investors is through index funds, which aim to replicate the performance of the S&P 500 by holding the same shares in proportion to their market value. These funds are passively managed and generally have lower fees compared to actively managed funds, where managers try to outperform the market. For instance, passive North American funds have an average annual fee of just 0.1%, compared to 0.9% for active funds.
One of the top-performing funds is the HSBC American Index fund, which has delivered an 86% total return over the past five years and a one-year return of 13%. Its annual charges figure is only 0.06%, making it a cost-effective option for those seeking exposure to the S&P 500.
