What is the S&P 500? Why do investors like S&P 500 index funds?
While there can be almost any number of indexes, the most famous ones are based on the Dow Jones Industrial Average, the Standard & Poor’s 500 and the Nasdaq 100.
Of these, the S&P 500 Index has come to be seen as the bellwether for the [American stock market] It contains about 500 of the largest companies in the United States, and when investors talk about “beating the market,” the S&P 500 is often considered the benchmark.
In contrast, the Dow Jones Industrials contains just 30 companies, while the Nasdaq 100 contains about 100 companies. While the holdings of these indexes do overlap, the S&P 500 contains the widest variety of companies across industries and is the most broadly diversified of those three indexes.
S&P 500 index funds have become incredibly popular with investors, and the reasons are simple:
- Own many companies: These funds allow you to hold a stake in hundreds of stocks, even if you own just one share of the index fund.
- Diversification: This broad collection of companies means [you lower your risk through diversification]. The poor performance of one company won’t hurt you as much when you own many companies.
- Low cost: Index funds tend to be [low cost](low expense ratios) because they’re passively managed, rather than actively managed. As a result, more of your hard earned dollars are invested instead of paid to fund managers as fees.