What even is the S&P500?

Hi friends!

I’m still dealing with something in my personal life that’s keeping me from making videos, and dying to get back to it. In the meantime, I’m putting some of that energy into this newsletter.

A recent theme I’ve noticed among my friends and followers is a desire for an easy-to-understand explanation of the basics. So many terms are thrown around about money (index funds! dividends! options!) in a way that makes folks feel like everyone knows what these terms mean except them.

As part of my mission to demystify money and investing, I also want to emphasize that there are no dumb questions! Unless you were a weirdo like me watching CNBC as a teenager, or majored in Finance (also me), you were never taught these things!

So I’m going to use this newsletter (and perhaps future videos) to break down some of these terms and topics in an easy-to-understand, digestible, and actionable way.

Today, I’m breaking down the S&P 500.

The S&P 500 is a term I remember seeing on the news as a kid: “the S&P rose 3 points today on positive news from the Fed.” I asked my dad what that meant, and he just shrugged and said “it’s the stock market.” I did not accept this as a satisfactory explanation, and quickly learned my parents were not a reliable source for my investing questions.

The S&P 500 is, indeed, a measure or proxy of the stock market, and it’s often used as shorthand for the market as a whole, but it’s important to understand what it actually is (and what it’s not).

S&P is short for Standard & Poor’s, a company whose predecessors compiled and published financial information long before you could look up a stock on your phone. In 1957, it introduced the S&P 500: an index tracking 500 leading publicly traded U.S. companies.

An index is basically a way of measuring how a group of investments is doing. Rather than checking hundreds of individual stocks, you can look at one number and get a sense of their overall movement. When the news says the S&P 500 went up 1% today, that’s what it’s describing.

And “publicly traded” just means you can buy and sell shares of those companies on a stock exchange. The S&P 500 doesn’t include every business in America, or every stock in the world.

You’ll often hear it described as “the 500 biggest U.S. companies.” That’s a useful starting point, but it isn’t quite how the list works.

A committee selects companies using eligibility rules. The main ones worth knowing:

The committee also considers representation across industries. Meeting the requirements doesn’t automatically get a company in, and the membership changes over time. You’re not tracking the same 500 companies forever.

The companies don’t all count equally.

The S&P 500 gives bigger companies more weight, based on the market value of their publicly available shares. So a giant company’s stock moving 5% has a much bigger effect than a smaller member moving 5%.

Imagine an index with just two companies, one worth $900 billion and one worth $100 billion. The bigger one would make up 90% of that index. Owning both would not mean your money was split 50/50.

This also helps explain why the S&P 500 became such a widely used benchmark. Those 500 companies represent approximately 80% of the available U.S. stock market’s value. That’s a pretty substantial picture of the market without tracking every listed company.

Its long history, broad industry coverage, and widespread use made it a common reference point for everyone from news anchors to fund managers. “Did you beat the S&P?” became a way to ask whether someone’s investing decisions actually added value.

Originally, an index was something you could measure. You couldn’t buy the number on the evening news.

Then came index funds. In 1976, John Bogle’s Vanguard launched the first index mutual fund for individual investors, designed to track the S&P 500. The idea was simple: instead of paying someone to pick winning stocks, own the basket and aim to earn its return, minus costs.

Today, one example is VOO, the ticker symbol for Vanguard’s S&P 500 ETF. A ticker is just the short code you use to look up an investment. ETF stands for exchange-traded fund, which means you can buy and sell shares of the fund on an exchange, much like an individual stock.

VOO holds the stocks in the S&P 500 in roughly the same proportions as the index. When you buy a share of VOO, you own a little piece of a fund that owns all those companies. You don’t have to place 500 separate orders or update the list yourself. Thankfully.

You can look it up as “VOO” in a brokerage account. Vanguard manages the fund, but you don’t need a Vanguard account to buy it. Its annual fund fee is currently 0.03%, or about $3 per year for every $10,000 invested.

So when someone says “I invest in the S&P 500,” they usually mean they own a fund that tracks it. The index is the measurement; the fund is the investment.

You don’t have to! A basket of 500 large companies offers broad coverage, but there’s nothing magical about that number. Today, buying exposure to thousands of stocks can be just as simple.

For example, Vanguard’s total U.S. stock market ETF, VTI, tracks an index covering essentially the entire investable U.S. stock market. It includes large companies along with mid-sized, small, and even very small ones.

That makes it a more comprehensive picture of publicly traded American companies. “Total,” however, still means the U.S. stock market here, not all companies worldwide or privately owned businesses.

Would adding all those extra companies make your investment behave completely differently? Generally, no. VTI also gives larger companies more weight, so the same big businesses that dominate the S&P 500 still account for most of the investment.

That overlap gives you a reason to expect broadly similar performance, though not identical returns. Smaller companies can do better or worse than large ones for years at a time. More companies doesn’t automatically mean higher returns.

What investing term have you been nodding along to without really understanding? Hit reply. There are still no dumb questions.

And as always, none of this is investment advice!!!

P.S. Since so many people have mentioned it in the comments, i’ve been trying out Monarch Money to track my spending and budget, and I’m really liking it so far. I’ve used Copilot Money for a while, but some of its interface quirks have been getting on my nerves, so I wanted to try something different.

I’ll share more in a future video once I’ve spent more time with it. If you want to try it alongside me, you can check it out through my referral link for a free trial and 50% off if you decide to sign-up (I receive a small commission if you do).