The S&P 500 Index Demystified: A Beginner's Guide

The most widely touted advice among financial influencers on the internet is to “just invest in the S&P 500.” But what exactly is the S&P 500 Index, and how do you buy it?

To answer these questions, I need to take you back to basics. If you are new to investing, this will be a good primer for you; for those already investing, you may be getting a refresher here, but I hope you’ll bear with me. You might learn something new. So, let’s dive into it!

What is an Index?

An index is a grouping of different securities that can be used as a standard, measurement, or benchmark to track specific market segments. Indexes or Indices are indicators of the health of the current financial environment, which is why you often see them reported about and in the news. Each index has a set of rules to govern what is included within them.

Some indexes you may be familiar with are:

The S & P 500
The Dow Jones Industrial Average
Nasdaq 100
S&P/TSX Composite
S&P/TSX 60
Wilshire 5000
FTSE 100
MSCI ACWI
MSCI EAFE
MSCI World
And more.

An index can focus on a country, industry, or trend. You’ll want to look at the index provider and whether they are reputable, as well as the methodology, selection criteria, etc. Understand the rules regarding what is included in the index.

Who are Standard and Poor, and why should you care?

Standard and Poor, or S&P Global, is a credit rating agency and index provider. It researches, evaluates, and grades credit risk or creditworthiness. They are responsible for the S&P 500 Index.

What Is The Standard And Poor’s 500 Index?

The S&P 500 index includes the top 503 – 505 large-cap companies in the US listed on the New York and Nasdaq Stock Exchanges. You can review the full list of S&P 500-included companies. It has become so ubiquitous that when people refer to “the market,” they usually mean the S&P 500 Index.

What Is An Index ETF?

An index ETF tracks a specific index (such as the S&P 500 or others) and holds all the stocks within that index under one fund. It allows investors to purchase parts of all those companies by executing a single trade. Instead of buying 500 companies within your portfolio with individual trades, an index ETF comprises parts of all the companies within the index, so you can make one purchase and own them all.

When discussing an Index Fund, this usually means an Index Mutual Fund. With this kind of fund, trades are made once a day. An S&P 500 Index ETF is a fund that tracks an index and can trade whenever the market is open.

An Index ETF often makes investing much more affordable because the price of an ETF compared to the cost of an individual stock can sometimes be much less, allowing more people to become shareholders at lower price points.

Below is a rough composition of one of the most well-known S&P 500 ETFs (VOO) by its top holdings.

Why people love to invest in S&P 500 Index ETFs

Recommended by top investors

Warren Buffet, one of the best investors in the world, was famous for recommending an index fund approach, even for his own family.

John Bogle, who founded the Vanguard Group, made index investing affordable and available to everyday investors. His Book The Little Book of Common Sense Investing is a worldwide hit.

Reasons People love S&P 500 Index ETFs

Passive Investing Strategy: You can get exposure to growth and dividends simply and without much effort—it’s an attractive strategy.
Investors gain diversification and low-cost investing in a single purchase.
The S&P 500 is the best indicator of the strength of the American Economy
Many active Investors try to beat the market – but end up underperforming – “the market” usually refers to the S&P 500 and is often used as a benchmark for performance
More affordable than purchasing individual shares of all companies.
Many of the best personal finance books recommend a strategy of index investing.

The S and P 500 Index Historical Returns

When investing, it is always important to remember that past performance is not an indicator of future performance. However, many people look to the average return of the S&P500 over time and use that as the benchmark for average stock market returns. On Average, the S&P 500 returns around 10 percent per year. This great chart by Personalfinanceclub.com shows the movement up and down, resulting in that 10% average.

This great chart from the Personal Finance Club shows the historical return over time, specifically focusing on the index’s dips or downturns. It shows it has still returned 10% on average, even in those bad years. Past performance never indicates future performance, but this track record gives people confidence.

How To Buy S&P 500 Index ETFs In Canada

The S and P 500 Index ETFs listed below are on the Toronto Stock Exchange. I am not here to tout the “best Canadian S&P 500 ETF” but to give you several options to research and decide for yourself as a starting point.

Before purchasing stocks or ETFs, you need to open a brokerage account, select your account type (TFSA, RRSP, etc.), and fund the account with a transfer from your bank account.

Do note that there are also ETFs from US stock exchanges that are not on this list—the most well-known ones are VOO: The S and P 500 Vanguard Index fund and IVV: iShares S&P 500.

Canadian S&P 500 Index ETFs

Here are six Canadian-listed S&P 500 Index ETFs for you to begin your research.

Some of these funds are CAD-Hedged. ETF Market Canada did a great article on whether Canadians should buy CAD Hedged or non-hedged funds. This issue can be confusing, but the article presents the ideas clearly.

Ticker Symbol: ZSP

Provider: BMO