What is the S&P-500?
The S&P-500 is one of the most important stock market indices. Simply put, it is a basket of 500 of the largest publicly traded companies on U.S. stock exchanges. Like any other index, the S&P-500 serves as a metric that reflects the overall movement of these companies’ stock prices. Generally, when stock prices rise, the index goes up; when they fall, the index follows suit. In this way, the S&P-500 provides a broad representation of market performance.
The S&P-500 is often seen as a symbol of the U.S. stock market. Historically, it has been used as the primary indicator of the overall state of the American stock market. Although thousands of publicly traded companies are in the U.S. — far more than the 500 included in this index — the largest companies have the most significant market influence, making the S&P 500 a reliable benchmark for assessing market performance.
How Do Investors Actually Invest in the S&P-500?
The S&P-500 itself is just an index — a mathematical construct used to measure market performance. You cannot buy the index directly. In practice, investors gain exposure to the S&P-500 through index funds that track it, most commonly ETFs (exchange-traded funds). These funds hold shares of all (or nearly all) 500 companies included in the index in the same proportions. Well-known examples of S&P-500 ETFs include:
- SPY, IVV, VOO, and SPYM.
While these ETFs track the same index and deliver nearly identical market exposure, they may differ slightly in expense ratios, trading liquidity, and structure — differences that usually matter far less than long-term market performance. As a result, when the S&P-500 goes up or down, such ETFs closely follow its performance, minus a small management fee. This makes S&P-500 ETFs one of the simplest and most practical ways to participate in the overall U.S. stock market.
The S&P-500 as a Benchmark
The S&P-500 serves as a key benchmark for evaluating investment performance. Comparing your portfolio’s performance to the S&P 500 is a straightforward way to measure the success of your investments. For example:
- If the S&P-500 rises by 10%, but your portfolio grows by only 7%, you have underperformed the market by 300 basis points (1% = 100 basis points) — a disappointing result.
- Conversely, if your portfolio declines by 5%, but the S&P-500 drops by 7%, you have outperformed the market by 200 basis points — a positive outcome.
Because the S&P-500 represents the broad U.S. equity market, it provides a useful point of comparison for both individual and institutional investors. In practice, many investors use an S&P-500 ETF as a real-world proxy for the index when comparing performance, since it reflects the return an investor could realistically have achieved after minimal costs.
The S&P-500 and Market Risk
The S&P 500 also reflects market risk. Investors can allocate their capital to “risk-free” assets, such as short-term U.S. Treasury bills (T-Bills), which have minimal risk. However, investing in the S&P-500 means accepting market risk, as stock prices fluctuate significantly. Before taking any risk, the key questions that any investor should ask are:
- How much will the expected return of the S&P-500 exceed the return of risk-free T-Bills?
- Will taking on higher risk result in a higher expected return?
Historically, the S&P-500 has consistently outperformed T-Bills over long enough time horizons, rewarding investors for taking on additional risk.
Choosing the Right Benchmark
Now that you understand the importance of benchmarks, you can use them to evaluate your investment decisions. Whether you build your portfolio, pick individual stocks, or entrust portfolio management to someone else, you can compare expected (or actual) performance to an appropriate benchmark over the same period. You can also factor in fees and taxes to get a clearer picture of your net returns.
While the S&P-500 is widely used, it is not the only benchmark. The right benchmark depends on your investment strategy:
- If your portfolio consists of conservative assets, it would be more appropriate to compare it to T-Bills.
- If you invest in the technology sector, the Nasdaq-100 would be a better benchmark.
- If you hold a 60:40 portfolio (60% stocks, 40% bonds), a mix of the S&P-500 and bond indices, such as the Bloomberg U.S. Aggregate Bond Index, would provide a more accurate comparison.
- The Russell 2000 is a better benchmark if you focus on small-cap stocks.
- If you invest internationally, you might compare your performance to the MSCI World Index or the Emerging Markets Index.
Choosing the right benchmark helps investors set realistic expectations and measure performance more accurately.
So, is it possible to beat the S&P-500? Yes! However, achieving higher returns requires taking on additional risk, which is not always justified. Some investors successfully outperform the market, but many do not — especially after accounting for fees, taxes, and risk exposure.
Smart investing isn’t just about chasing returns; it’s about understanding risk, consistency, and long-term growth.