Investing money is really only an investment when you make a return back on what you spent — so what better place to start than by choosing the biggest and most profitable companies?
Blue-chip companies, or well-established household brand names, are easiest to invest in via the popular index fund known as the Standard and Poor’s 500, or the S&P 500. It tracks the performance of the 500 biggest companies according to market cap.
Index funds have become one of the most popular ways to invest thanks to their cost-effective way to diversify one’s holdings across broad sectors or industries. Buying one share of the S&P 500 index fund equates to buying tiny shares of the top 500 blue-chip companies in the United States with a single transaction.
Let’s take a look at the S&P 500 – and ways to invest in it.
What Is the S&P 500?
The S&P 500 is an index that benchmarks performance for businesses with a large market capitalization. The S&P 500 index is a portfolio made up of around 500 of the largest companies that trade on the U.S. stock exchange. It’s one of the most widely recognized gauges of the U.S. economy.
This index is also weighted, meaning the largest stocks make up a bigger portion of the portfolio. For example, the largest stock in the index right now is Apple, which makes up around 6% of the S&P 500. The smallest stock belongs to News Corporation Class B, which is only .008% of the index. So Apple is about 777 times the weight of the smallest stock – but that doesn’t mean it’s small. News Corporation Class B has a market capitalization, or market value of the company’s equity, of $14.3 billion.
With the S&P 500, you’ll get exposure to these companies as well as other recognizable names like Coca-Cola, PayPal, Disney, Home Depot, and Netflix.
How Are Stocks Chosen for the S&P 500?
Not every stock can be included in the S&P 500. To be chosen, a company must be profitable for at least a year. That’s not to say that a company can’t lose money short-term due to operating costs and market conditions, but it must post cumulative profit, meaning profit over a longer-term period.
The company must also have a large market capitalization, which is calculated as the stock price multiplied by the number of outstanding shares of stock — and over 50% of that stock has to be held by the public, meaning individual investors like you and me.
“Companies need to be public, very liquid, and have shares outstanding that can be publicly traded. A committee chooses which companies will be included in the combination of 500 or so companies included in the index,” explains Jalife.
Finally, companies must file financial statements for public review with the Securities and Exchange Commission (SEC), be domiciled in the U.S., and of course, be listed on the U.S. stock exchange.
Investing in the S&P 500 Long-Term
Two ways to invest in S&P 500 companies are through mutual funds or ETFs, which are both versions of an index fund. An index fund allows investors to gain exposure to many securities in a single investment.
“An advantage of investing in an S&P 500 index fund is the ability to try to match the performance of the companies included in the S&P 500,” says Tiffany Welka, financial advisor and accredited wealth management advisor at VFG Associates. “You can use a buy-and-hold strategy with no need to actively monitor the stock market. You also get diversification because the index represents all the different sectors within the U.S. stock market. But one disadvantage is that it’s not representative of the global market.”
Jalife adds that you might consider an additional index fund that will give you exposure to smaller or growing companies, because an S&P 500 index fund only focuses on the 500 largest.
The best way to invest in S&P 500 companies is through an index fund, such as a mutual fund or ETF, that aims to match the S&P 500 performance. You might consider investing separately in small cap companies for more diversification.
Some of the biggest index funds in the world are S&P 500 funds. The second largest mutual fund in the world by assets managed is the Fidelity 500 Index Fund (FXAIX), and the largest ETF in the world by the same measure is the iShares Core S&P 500 Fund.
Virtually all of the biggest and most popular S&P 500 index funds are an excellent place for investors who want large market exposure without having to choose or manage individual stocks. Especially if there is a low expense ratio, or fee, for these funds.
Because of their popularity, competition has driven expense ratios for index funds down to nearly zero, making S&P 500 funds an affordable and historically reliable long-term investment. It’s also made it incredibly easy to open an account and start investing, even — and especially for beginner investors.
S&P 500 Annual Returns
Since its inception in 1926, the S&P 500 index’s average annual return has been between 10% and 11%. This includes the period from 1926 and 1957 when it was the S&P 90, comprising only 90 stocks. Since adopting 500 stocks in 1957, the average annual return has historically been around 8%.
But that doesn’t mean it’s always smooth sailing. “There are times when the market will be negative for a period of time,” says Jalife. “But the good times in the market will more than make up for it. Over a long period of time, you should expect a return in the single or double digits.” A buy a hold mentality will get investors through the ebbs and flows of the market.
In 40 of the past 50 years, the S&P 500 index gained value, which is a great track record. The market has sustained its share of dips and losses, but if you have a long horizon of several decades before retirement, the S&P 500 has proven itself to be a profitable and secure investment.
Compounding Interest From Investing in the S&P 500
With any investment, it’s the power of compound interest that does the heavy lifting over time. “Compounding means making money on money you didn’t have before. When you have time working for you, it’s going to really make a difference over the years,” says Jalife.
Here’s an example. If you’d put just $100 into an S&P 500 fund when it began in 1926, assuming a 10% annual return, you’d have over $855,999 today – that’s without ever adding another single cent to your original $100 investment.
With the same calculations, let’s suppose you start investing with $1,000 in an S&P 500 index fund. You plan to retire in 40 years and want to add $100 a month to your investments. You’d retire with over $604,000. Bump your contributions to $200 a month, and you’ll retire a millionaire.
Those gains are thanks to compound interest working on your behalf. If you have several years to invest, the returns can add up in your favor – in a big way. As with any investment, the most important things are to get started as soon as you can and to consistently invest as often as possible.
VCs eye investment in Polygon – Yahoo Movies Canada
A number of investors including Sequoia Capital India and Steadview Capital are in talks to back Polygon, which operates a framework for building and connecting Ethereum-compatible blockchain networks, by way of tokens purchase, three sources familiar with the matter told me.
The investors are looking to purchase tokens worth $50 million to $150 million, sources said, requesting anonymity as the talks are private. As is common with these token transactions, investors will be able to buy the coins at a slight discount. (20% discount on the average price of MATIC in the past one month, from what I have heard.)
Deliberations are ongoing, so the terms may change. Nobody had a comment early last week.
Polygon, formerly known as Matic, has established itself as one of the most popular layer two solutions. The firm, whose market cap has exceeded $14 billion, processes over 7.5 million transactions a day and allows thousands of decentralized apps to continue to use Ethereum as the settling layer but avoid the increasingly pricey gas fee.
Aave, Sushi Swap, and Curve Finance are among some of the largest bluechip projects that have deployed on Polygon, which has amassed one of the largest developer ecosystems (even when compared to some layer 1 blockchains).
Image credits: Polygon
An investment will mark a shift in the investors’ perception of India-based Polygon, which until recent years struggled to receive backing from most prominent venture firms in the South Asian market. (Most VCs in India, it’s worth noting, were also not actively tracking the web3 space until a few quarters ago.) Furthermore, Polygon has had to confront at least one episode where some of its early investors requested their money back during a bear cycle, according to two people familiar with the matter.
The firm returned money to some of those investors and survived. “It’s one of the themes with the Polygon team. Their perseverance is next level,” said a former employee.
Polygon, which received backing from entrepreneur and investor Mark Cuban this year, is among dozens of side-chains and roll-up networks that is hopeful that Ethereum will continue its dominance even as a handful of other layer one projects such as Polkadot, and Solana, which is backed by Multicoin Capital and A16z, are attempting to court the nascent but fast-growing developer ecosystem.
On Bankless podcast earlier this year, Polygon co-founder Sandeep Nailwal (pictured above) said the web3 developer ecosystem today is centred around Ethereum and he is hopeful that the network effect won’t dissipate. On the same podcast, Nailwal and Mihailo Bjelic, another co-founder of Polygon, said Polygon is increasingly expanding its offerings to build a blockchain infrastructure.
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China's Special Bonds Can't Halt Property-Led Investment Slump – BNN
(Bloomberg) — China is betting that a pickup in infrastructure spending can spur investment and cushion a property-led slowdown which has dragged economic growth down to almost its lowest pace in more than three decades.
But because the property curbs are hitting government revenue from selling land, Beijing will need to ease its tough campaign to crack down on “hidden” local government debt if it wants a long-lasting revival in infrastructure spending.
Premier Li Keqiang last month urged local governments to make better use of the proceeds from the sale of 3.65 trillion yuan ($573 billion) in “special” bonds to counteract “downward pressure” on the economy. The bonds are used to fund specific projects rather than general expenditures and regional authorities have almost completed the sale of this year’s quota.
The quota could be expanded to 4 trillion yuan next year, according to state media reports, but even that amount of funding would be small relative to China’s total infrastructure spending needs. Bloomberg Economics estimates infrastructure investment will reach about 23 trillion yuan in 2021, which implies special bonds can only around 16% of that expenditure.
The remainder is mainly paid for with money from land sales and local government financing vehicles, which are companies set up by local governments to raise debt from loans and bond sales and then keep that borrowing off of government balance sheets. Both those sources of financing are under strain from property sector curbs and a campaign against “financial risks.”
Those financing vehicles raised less money in 2021 as Beijing ordered local governments to cut their “hidden” off-balance sheet debt. LGFV’s net local bond issuance — the excess of newly sold bonds over repayments — in the first 11 months of the year was 1.95 trillion yuan, down from 2.19 trillion yuan in the same period last year, according to Bloomberg estimates.
The platforms have found it harder than in the past to obtain loans from banks and from non-bank “shadow” financing because Beijing has been shrinking the shadow finance sector as part of its financial de-risking effort. They have also raised less from foreign investors: LGFV’s net issuance of dollar-denominated bonds through the end of last month more than halved to $5.7 billion.
The property crackdown is also reducing local government’s sales of land to property developers, a major source of funds for local government investment. Infrastructure spending growth has moved almost exactly in line with land sales revenue growth in recent years, according to analysis from Goldman Sachs Group Inc., while the correlation with special bond and LGFV bond issuance is less significant.
Beijing’s efforts to slow the real estate market began cutting into land sales volumes and prices this summer. Local government income from land sales shrank by more than 10% year-on-year in August, September and October, the largest and most sustained decline since 2015, according to Wei He, an analyst at Gavekal Dragonomics.
In the first 10 months of the year, infrastructure investment rose just 1% compared with the same period a year earlier, leaving local governments with unspent funds.
“The positive factors such as money that hasn’t been spent this year will be countered by the negative impact from land sales,” He said. “Therefore I do not expect a significant acceleration in infrastructure spending to materialize next year.”
To be sure, “special” bond issuance has been concentrated at the end of this year, which could translate into a slight pick-up in infrastructure spending in the first half of 2022 if the funds are quickly put to use. But local governments have been struggling to find suitable projects to fund with special bonds whose conditions stipulate that investments must generate enough income to repay the bond principal and interest.
Local governments’ land sale revenue could fall 10% year-on-year in 2022, according to Gavekal’s He. That means if Beijing really wants infrastructure investment to increase, it will need to loosen the constraints on LGFVs, compromising on its goal to control debt-levels in the economy.
“If the economy softens in 2022 and the government needs to increase infrastructure spending to support economic growth, there would be easing in financing for LGFVs,” said Ivan Chung, associate managing director at Moody’s Investors Service in Hong Kong.
©2021 Bloomberg L.P.
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