As 2023 draws to a close, our attention as investors turns to the year ahead. Which investment vehicles, in which sectors, will serve us best in 2024? While none of us have a crystal ball that will reliably show us the future, we can all use some common sense and careful planning to enter the new year with confidence. In this article I’ll explore four index-traded funds that you may want to consider when researching approaches based on the S&P 500.
S&P 500 Index Funds Explained
You cannot invest directly in the S&P 500 or any other index. So instead, you can access the collection of stocks in an index by buying an exchange-traded fund (ETF). An index fund is simply an investment vehicle that tracks an index. While index funds are available in both mutual fund and exchange-traded fund forms, this article will focus on ETFs. The main difference between mutual funds and ETFs is that mutual funds trade based on a price set at the end of the day, and ETFs can be bought and sold throughout the day, just like stocks.
The S&P 500 is cap-weighted, as are the majority of funds that track it, meaning that the amount of each holding is based on the size of the stock. After years in which tech stocks dominated stock market performance, S&P funds are heavily weighted toward the sector.
Definition
The S&P 500 Index measures the performance of the top 500 companies in the US, by value. S&P 500 Index funds are mutual funds that invest in the 500 companies of the S&P 500 or a subset of those companies.
Key Benefits
The S&P 500 is one of the best proxies for the US stock market overall. The stock market has experienced many downturns over the years, but, unlike individual companies, the entire stock market recovers from recessions and crashes. Since companies in the S&P 500 represent 80% of the US stock market, investing in a fund based on it is generally considered a vehicle for investing in the full US stock market. Of course, this also means that while your investment won’t perform worse than the S&P, it won’t perform better either.
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The best S&P 500 Index mutual funds of 2024
There are many ETFs that use the S&P 500 index or some derivative of it as the basis for holdings within the fund. I have selected four ETFs for this article. (For more see How to build a portfolio of index funds for income.)
1. SPDR S&P 500 ETF
SPY
SPY
- Recent price: $448.73
- Assets: $420 billion
- Number of holdings: 504
- Weighted capitalization
- Expense ratio: 0.09%
- Dividend yield: 1.5%
Fund overview
SPY is the first US ETF and the most popular. SPY was founded in January 1993 and has been trading in the market for 30 years. The ETF’s assets grew from $6.8 million to more than $1 billion in the first three years and are now more than 400 times the latter amount. SPY has remained the “gold standard” for ETF investors, who use SPY’s performance to compare other stocks or ETFs for risk and return. You can trade this ETF on multiple platforms. For those looking to use the options market as part of their investment approach, SPY also has the most liquid market among S&P 500 mutual funds.
2. iShares Core S&P 500 ETF
IVV
IVV
- Recent price: $450.83
- Assets: $369 billion
- Number of holdings: 507
- Weighted capitalization
- Expense ratio: 0.03%
- Dividend yield: 1.5%
Fund overview
Of the four ETFs discussed here, IVV has the lowest expense ratio. This fund was created by BlackRock
BLK
3. iShares S&P 100 ETF
O.E.F
O.E.F
- Recent price: $212.55
- Assets: $11 billion
- Number of holdings: 105
- Weighted capitalization
- Expense ratio: 0.2%
- Dividend yield: 1.3%
Fund overview
OEF starts with the S&P 500, then removes the 400 smallest companies, leaving it with the 100 largest stocks from that 500 stock index. Since the S&P 500 is so weighted, the top 100 is a majority of the full 500. OEF makes this list because it allows investors to more easily track the stocks they own. A list of 100 can be tracked more effectively than 500. OEF is a good alternative to an ETF like SPY, which tracks the full 500 stocks. However, be aware that this also means that its investment is highly concentrated in the top 10 S&P holdings, as OEF’s top 10 holdings account for nearly 47% of the fund’s total value.
4. Invesco S&P 500 Equal Weight ETF
RSP
RSP
- Recent price: $146.14
- Assets: $40 billion
- 505 Participations
- Balanced distribution
- Expense ratio: 0.20%
- Dividend yield: 1.8%
Fund overview
For investors concerned about the top weighting of the traditional S&P 500, the Invesco S&P 500 Equal Weight ETF is a good alternative. This ETF holds a piece of every company in the S&P 500, meaning the 505 holdings are each less than 1% of the total capital. Since many of the largest stocks in the S&P 500 pay little or no dividends, RSP’s weighting methodology produces a higher dividend yield than SPY and IVV.
Investing in stocks is one of the best moves you can make to grow your wealth. Take a closer look at the stocks recommended by the Forbes investment team in this exclusive report, The Best Stocks to Buy in 2024.
Methodology used
I’ve been investing in ETFs since SPY debuted in 1993, both as a professional investor managing other people’s assets and for my own investment work. This short list is intended to make investors new to S&P 500 Index funds aware of the most popular options, as well as some ETFs that I find interesting, similar funds that are alternatives to the traditional cap-weighted index.
Why S&P 500 Index Funds?
Investors looking for a simple, popular long-term investment could consider S&P 500 index funds, especially those investors who prefer a passive index approach. S&P 500 index funds contain hundreds of stocks, removing the burden of individual stock research. Additionally, all four ETFs mentioned in this article are passively managed funds, which keeps expense ratios low since indexing is lower than the cost of paying a team of people to actively manage the assets .
Conclusion
The S&P 500 has long been considered a strong representation of the US stock market as a whole. Investing in the S&P 500 by investing in one of the index funds that track it can be a long- or short-term strategy for investors looking ahead to 2024.
Read Next
Investing in stocks is one of the best moves you can make to grow your wealth. Take a closer look at the stocks recommended by the Forbes investment team in this exclusive report, The Best Stocks to Buy in 2024.