The S&P 500 Index is a market cap-weighted index of 500 of the largest publicly traded companies in the U.S.

The S&P, explained

The Standard & Poor’s 500 Index, or S&P 500, is a market cap-weighted index containing 500 leading U.S.-based stocks. As it represents about 80% of the U.S. market cap, it’s considered one of the best gauges of the equities market.

Though you can’t invest in the index, you can buy index funds, ETFs and mutual funds that track its holdings.

How Does The S&P 500 Select Stocks?

The index doesn’t just look at market cap when selecting stocks. Companies must prove that they are both large and stable by meeting these criteria:

• Have a market cap of at least $14.6 billion
• Be based in the U.S.
• Be listed on an eligible U.S. exchange like the NYSE
• Have positive earnings in the most recent quarter and over the last year
• Be structured as a corporation that offers common stock

The S&P 500 considers only free-floating shares (those available for public trading) in its weighting. The index also adjusts to account for company mergers or new share sales. And because the index is weighted, not all companies have an equal impact on the S&P’s total value.

For example, as of February 2022, Apple has a weight of just over 7%. By comparison, Fox Corporation Class B only holds a weight of 0.0155%. If Apple tanks, the rest of the market will slip, but Fox tumbling would barely move the needle.

What this means for you

The S&P 500 often serves as a benchmark for various funds. Many ETFs and mutual funds passively track part or all of the S&P 500, allowing investors to gain broad exposure.

The index is also one of the best measures of the U.S. market’s overall health. As such, it’s a useful tool for measuring your own portfolio’s performance in a given timeframe.

What Is The Average Return?

For nearly 100 years, the S&P 500 has returned an annual average of about 10%. (Including dividends.) But realizing these returns means taking a long-term mindset—the index can post positive or negative returns in a given year. Ultimately, the average total return is just that: an average.

Still, as a buy-and-hold investor, raking in 10% average returns sounds pretty good.

In short: Investing in the S&P 500 is a quick, often affordable way to gain broad exposure to the U.S. market. Investing in a quality S&P-based fund means doing less research on individual stocks. And, best of all, historically, the index has proven it can produce strong results that you can mirror in your portfolio.