S&P 500 – Best Index to Trade in 2023?

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S&P 500 – Best Index to Trade in 2023?

S&P 500 - Best Index to Trade in 2023?

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Back to the Basics

The S&P 500, also known as Standard and Poor’s 500 Index, features the 500 leading publicly traded companies in the U.S.

With a primary focus on market capitalization, the index was first launched in 1957 by the credit rating agency Standard and Poor’s.

However, unlike the name suggests, it is not an exact list of the top 500 U.S. companies by market cap, as there are other criteria that also come into play.

Because of its diversity and depth, the index is widely considered one of the best gauges of large U.S. stocks, and even the entire equities market’s performance.

It is also important to understand that there is no such thing as directly investing in the S&P 500 because it is an index – but you invest in one of the many funds that use it as a benchmark.

PS: The index actually contains 503 components, because three of them have two share classes listed.

The S&P 500 belongs to the S&P Global 1200 family of indices:

  • S&P MidCap 400: represents the mid-cap range of companies.
  • S&P SmallCap 600: represents small-cap companies.

Combined together, the three of them cover 90% of U.S. capitalization in an index known as the S&P Composite 1500.

Companies

Full of familiar names, the S&P 500 combines many blue-chip companies with strong performance histories of financial performance.

Some of the most popular are:

  • Apple Inc. (AAPL)
  • Microsoft (MSFT)
  • Alphabet Inc. Class C shares (GOOG)
  • Amazon Inc. (AMZN)
  • Tesla (TESLA)

… and the list goes on.

Calculating the SPX

The S&P 500 uses a market-cap weighting method, in which individual components of the index are included in certain amounts that correspond to their total market cap. This gives a higher percentage allocation to companies with the largest market capitalizations.

Company Weighting in S&P = Total of all market caps Company market cap

1. Determining the weighting of each component begins with adding up the total market cap for the index by adding together the market cap of every company in the index.

2.To review, the market cap of a company is calculated by taking the current stock price, and then multiplying it by the company’s outstanding shares.

The total market cap for the S&P 500, as well as the market caps of individual companies, are frequently published on financial websites – which saves investors the need to calculate them.

Best S&P 500 Index Funds

Index funds are passive investments that allow investors to match the performance of the S&P 500, and are considered ideal for investors who don’t want to own individual stocks, but still want to earn returns.

S&P 500 index funds can help with portfolio diversification, as they provide exposure to some of the biggest U.S. companies.

The best index fund actually depends on its minimum investment, costs, and how closely it aligns to the S&P 500 market index.

1.Fidelity 500 Index Fund: founded in 1988 and formerly known as Institutional Premium Class fund, Fidelity removed this fund’s investment minimum so investors with any budget size can get into the low-cost index fund action


2. Schwab S&P 500 Index Fund: launched in 1997, it is one of the cheapest and most accessible S&P 500 tracking funds out there. It is also considered very attractive for investors concerned about costs, as its expense ratio is relatively low.


3.Vanguard 500 Index Fund Admiral Shares: also known as the Vanguard S&P 500 Index fund, it was founded in 1976 and is the “OG of all index funds”.

Index Fund Minimum Investment  Expense Ratio
Vanguard 500 Index Fund – Admiral Shares (VFIAX $3,000  0.04%
Schwab S&P 500 Index Fund (SWPPX) No minimum 0.02%
Fidelity 500 Index Fund (FXAIX) No minimum  0.015%

*Data as of October 3, 2023.

Index funds do not necessarily try to beat the market, or earn higher returns compared to market averages.

Despite the fact that fund managers try their best to “beat the market”, they very rarely do – and even if they do, it won’t keep its momentum in the long run.

2023 - Interesting Year for SPX

The stock market’s summer swoon carried on throughout October, surprising many investors who were hoping that stocks would find their footing by now.

  • S&P 500 down 10% from its July peak.
  • The index dropped 2% during October.
  • This was seen as a decline big enough for Wall Street to consider it as a correction.

With the *Federal Reserve decision, Treasury borrowing plans, and continued earnings pressure on the horizon, we find investors overwhelmed by all the changing variables, and how it’s going to affect the markets.

*Following the Fed decision to keep rates unchanged (in a range of 5.25%-5.5%) on November 1st 2023, the S&P 500 initially pulled back just a bit during the session, only to turn around, and then show signs of strength again.

  • The index has initially fallen during the trading session on Wednesday, but managed to show signs of life again.

  • SPX climbed to 1.05% to 4,237.86 – briefly crossing its 200-day moving average.
S&P 500 chart

If we take a look at the above S&P 500 chart, we can see that it has been bullish for the majority of 2023.

  • It gained as much as 19.45% as a result of the Fed becoming less hawkish on monetary policy.

  • The effects of tightening reflected in the data with inflation indicators such as CPI and PCE slowing down towards the Fed’s 2% target.

  • As inflation cooled off, investors poured capital into riskier assets such as stocks, thus the S&P 500 increased.

  • We then began to see a dip in price action caused primarily by higher US bond yields, which started to increase rapidly in August.

    This influenced investors to shift out of risky assets such as the SPX.

  • Since yields began to rise, momentum has slowed down expressed by a declining RSI, which is correlated to the bearish price action.

  • With the trend aiming to the downside, it may be wise for investors to wait for the support areas indicated on the charts before deploying more cash into the index:
  1. Support 1: $4103.37
  2. Support 2: $3976.38

To sum it all up, S&P 500 has certainly seen major fluctuations within 2023. To say it is the best index to trade would be an overstatement, but it can certainly offer many opportunities to investors worldwide, depending on their strategy and vision.

This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice. The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.

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