When it comes to investing, few tools are trusted as much as the S&P 500. It serves as a benchmark, a tracker, and for some, the yardstick for financial decision-making. But understanding the S&P 500 is more than just knowing it's “an index.” It requires peeling back the layers to grasp how it’s managed, what it represents, and its implications for you as an investor.
Whether you're new to investing or a seasoned finance enthusiast, this guide will break down the S&P 500 in a simple, digestible way.
A Benchmark Worth Understanding
The S&P 500 is more than a collection of 500 companies; it’s the heartbeat of the U.S. stock market. Created in 1957, it quickly became one of the most closely watched indexes in the world. Why? Because it tracks the performance of the largest U.S. companies across various industries, offering a snapshot of the markets.
But understanding it fully, how it’s managed, structured, and what it represents, is critical, especially if you're using it to guide your investment strategy.
What Is the S&P 500?
The Basics of the Index
The S&P 500 is a stock market index that measures the performance of 500 of the largest publicly traded companies in the U.S. These companies are selected based on their market capitalization, essentially, the total value of their outstanding shares.
The index itself is "market-weighted", meaning larger companies like Apple and Microsoft carry more influence on the index than smaller ones.
Nerd Note: Did you know only 86 of the original 500 companies from the S&P 500’s 1957 debut are still part of the index today? The index evolves as businesses rise, fall, or fail to meet its criteria.
Who is in charge of the S&P 500?
The index is maintained by the S&P Dow Jones indices, which is a joint venture primarily owned by S&P Global. Another popular index called the "Dow Jones", which focuses on industrial companies, is also connected to the ownership structure.
Here is where this starts to really matter: The parent organization owning these is Newscorp, which also owns financial reporting agencies like The Wall Street Journal, Barrons & Marketwatch to name a few. Charles Dow created the Dow Jones index in 1882, and also was the founder of The Wall Street Journal, which helped popularize that index when industrial companies were a larger portion of the economy before gradually falling out of public favor.
This structure is important to know and points to how they are so widely publicized, becoming the household names that we know today.
How "Passive" Is the S&P 500?
The Role of Active Decision-Making
The S&P 500 is often marketed as a passive investment tool, but don’t be fooled, there’s a lot of active decision-making involved.
A committee meets monthly to review and revise the composition of the index. They consider factors like profitability, stability, and liquidity to decide which companies stay, join, or leave. For example, companies must show positive earnings for four consecutive quarters before being eligible.
Nerd Note: AT&T was once the largest company in the S&P 500. Today, it’s nowhere near the top. The index evolves as the economy and industries change.
How Diverse Is the S&P 500?
Sector Concentration
While the S&P 500 aims to represent the U.S. economy, it isn’t evenly distributed across industries. Over time, sector weightings have shifted dramatically.
For instance, technology has grown to dominate the index, while sectors like telecommunications have shrunk considerably. This evolution mirrors the changing priorities of the modern economy but also raises concentration risks.
See the picture from Morningstar of what the underlying sectors of the index are invested in as of 2025:
The Market’s Increasing Concentration
What’s even more striking is the growing influence of a few major companies. Giants like Apple, Microsoft, and Amazon make up a significant chunk of the S&P 500. While their success drives the index forward, it can also distort the broader market representation. This is shown by Morningstar’s “style box” which shows what percentage of the index is a middle sized companies (19% being invested in $2-10 Billion market capitalization companies). It also shows that there are more allocated to “value” companies, which tend to focus more on profit and distributions over growth.
Nerd Note: The top five companies now account for over 20% of the index’s value, a level of concentration not seen since the late 1960s.
Is the S&P 500 a Good Benchmark for Personal Investments?
The Benefits of Using the S&P 500
The S&P 500 shines as a benchmark for investors because of its historical performance and accessibility via index funds. Its passive nature makes it ideal for those who want to avoid the "return on hassle" associated with more nuanced and individual investments.
Pro Tip: Index funds tied to the S&P 500, or any index, simplify investing and often outperform actively managed funds over the long term, in large part due to their lower expense fees and consistency in the investments, rather than investing in the latest hot stock.
The Drawbacks to Consider
Despite its advantages, the S&P 500 has limitations. Its focus on U.S. companies means less exposure to international markets. The below chart from JP Morgan’s Guide to the Markets shows the long periods that either the U.S. or international markets may persist to outperform one-another based on unpredictable global events. With purple indicating international outpacing the U.S. and vice versa:
Additionally, its heavy concentration in certain sectors and companies might not align with your diversification goals. For instance, if technology experiences a downturn, the impact on the S&P 500, and your portfolio, could be substantial.
Lessons for Investors
The S&P 500 is an incredible tool, but it’s just that, a tool. It’s not a one-size-fits-all solution.
To make the most of it, consider diversifying your portfolio by adding other assets, such as international stocks or bonds. Understanding the rules and structure of the index can also prevent surprises and help you make more informed decisions.
A System That Evolves with You
The S&P 500 evolves alongside the market, making it a dynamic benchmark for tracking economic trends. But just like the index adapts, so should your personal investment strategy.
Investing can feel overwhelming, but it doesn’t have to be. Focus on your own goals, ability to take on risk, and financial rules to create a strategy that works for you. Outside of managing fees, one of the biggest determinants of investment success is determining a strategy and sticking with it through good and bad times.
If you’re ready for more educational content like this, subscribe to HealthyInsights for expert-driven tips, or consult a professional to tailor your investment approach.
The S&P 500 is more than just a list of stocks, it’s a living, breathing story of the U.S. markets. Understanding the narrative and structure can help make your financial story a success.
