You’ve probably seen headlines in newspapers that say, “The U.S. Stock Market dropped today.” How is it possible to know if the market as a whole performed negatively? Well, whether the market rises or falls, there is an indicator that provides a clear picture of how the stock market is moving overall: stock indices, especially the S&P 500. Are you interested in understanding how it works? In this article from Hapi, we explain everything you need to know about the S&P 500 and other U.S. stock market indices.

What is an index and how is it constructed?

A stock index works like a thermometer for the stock market. It measures the change in the prices of different companies’ stocks collectively, calculated by averaging the prices of certain stocks, often weighted by market capitalization.

It’s a widely used tool by financial institutions and investors to compare the performance of specific investments and to describe the market. Indices vary in size—some track just a few stocks, while others track thousands. Each index has a unique purpose because different investors are interested in different sectors.

The first stock index in the world appeared in July 1884 when journalist Charles Dow published the Dow Jones Transportation Index in the United States. Later, this gave birth to the Dow Jones Industrial Average in 1896, which remains relevant to this day.

What are the main stock indices?

• S&P 500: One of the most well-known indices, it tracks the performance of the top 500 companies in the U.S. It is weighted by market capitalization.
• Dow Jones Industrial Average (DJIA): This index has a narrower focus, tracking the performance of just 30 U.S. companies known for their long-term financial strength. It includes stocks from various sectors like finance, technology, and healthcare.
• Nasdaq 100: This index tracks the 100 largest and most active companies listed on the Nasdaq stock exchange, excluding financial firms. It includes companies from sectors like retail, software, hardware, and biotechnology, and is particularly famous for featuring top global tech companies.

How is an index like the S&P 500 constructed?

A company must meet several criteria to be included in the S&P 500, such as having a market capitalization greater than $8.2 billion, being incorporated in the U.S., having at least half of its shares publicly traded, and posting positive earnings in the last quarter.

The weighting formula for S&P 500 stocks is quite straightforward. First, a company's market capitalization is calculated by multiplying the number of shares by the current stock price. Then, the market capitalizations of all S&P 500 components are added together. Finally, each company’s market cap is divided by the total to determine its weight in the index.

Beyond the technical aspect, you’re probably curious about which specific stocks make up this index. Here are the top stocks in the S&P 500 by their weight:

1. Apple (AAPL): 6.99%
2. Microsoft (MSFT): 5.63%
3. Amazon (AMZN): 3.32%
4. Tesla (TSLA): 1.96%
5. Alphabet Class A (GOOGL): 1.93%
6. Alphabet Class C (GOOG): 1.71%
7. Berkshire Hathaway Class B (BRK.B): 1.59%
8. UnitedHealth Group (UNH): 1.54%
9. Johnson & Johnson (JNJ): 1.39%
10. Exxon Mobil (XOM): 1.36%

• These are not investment recommendations, and returns in the stock market are not guaranteed.

What ETFs track stock indices?

Investing in an ETF that tracks one of the major indices can be an excellent investment strategy. An ETF is a basket of various assets (in this case, stocks) that you can trade like an individual stock. They’re useful for reducing transaction costs and having a diversified portfolio.

The three most popular ETFs tracking the S&P 500 are SPDR (SPY), Vanguard (VOO), and iShares (IVV). All three have low management fees compared to the industry average.

The Invesco NASDAQ 100 ETF and the Invesco QQQ Trust provide exposure to the Nasdaq-100 index, consisting of approximately 100 of the largest non-financial companies. Apple Inc., Microsoft Corp., and Amazon.com Inc. are the top holdings in these ETFs.

Why invest in ETFs that track U.S. stock market indices?

Following this strategy offers multiple benefits to help you reach your financial goals. Some of the most notable advantages include:

• Strong returns: These ETFs are excellent long-term investments. Despite market ups and downs, indices have generally delivered positive average returns. For instance, since its inception, the SPDR S&P 500 ETF Trust (SPY) has achieved an average annual return of nearly 10%. This makes it difficult for active investors to outperform.
• Diversification and lower risk: Like individual stocks, ETFs fluctuate in price daily. However, they tend to be less volatile because they allow you to invest in many high-quality stocks. Plus, indices have consistently rebounded from every recession and market crash.
• Lower cost: The average costs of owning an ETF are lower than building a similar portfolio with the same stocks due to transaction fees and tax efficiency. However, if you invest with Hapi, transaction fees won’t be a concern.

How has the S&P 500 performed throughout history?

As mentioned earlier, the S&P 500 has had an average return of 10% since its inception, and this has risen to over 12% in the past two decades. These returns have persisted despite significant drops during the dot-com bubble, the 2008 financial crisis, and COVID-19. That’s why the U.S. stock market is considered one of the best long-term investments available.

Don’t wait any longer to benefit from the incredible returns of U.S. stock indices like the S&P 500. If you want to start investing in stocks and ETFs without commissions, open an account with Hapi now. This investment app gives you access to the best investment options from Latin America. Plus, by following Hapi’s social media, you can find out which Nasdaq 100 and S&P 500 stocks had the best returns. To open an account, click here.