What Is the USA 500 (S&P 500) and Is It Worth the Hype?

As the young generation of traders likes to say, this isn't your grandfather's index.

The benchmark index's value is calculated based on the company's share price multiplied by the total number of outstanding shares, otherwise known as the market cap. It has become a critical and popular index because it is large and diverse, providing a reliable gauge of how the broader equities arena might be doing in any given session.

Potential Benefits and Risks of Investing in the USA 500

Benefits

1. Diversification While the S&P 500 is heavily weighted in tech, the rest of the benchmark is diverse. From energy to financial to retail, there could be something for every investor.
2. Accessibility Microsoft shares are trading above $300, NVIDIA is at $400, and Amazon is around $120. This can be expensive for many mom-and-pop armchair traders. Therefore, buying an exchange-traded fund (ETF) or mutual fund that mirrors the S&P 500 offers exposure to these companies.
3. Yield and real returns Many of the stocks in the S&P 500 pay a quarterly dividend, providing future potential yields.

Risks

1. Concentration risk As noted, the S&P 500 is heavily concentrated in the financial and tech sectors. This can be dangerous, as seen in 2022 when the Federal Reserve's rising-rate environment devastated the tech industry. Some will call it the S&P 490 because the top ten stocks represent about a third of the index.
2. Market volatility While volatility in the S&P 500 has not been intense this year, the index has seen violent swings comparable to what happened in the early days of the coronavirus pandemic.
3. Lack of individual stock analysis The problem with modern retail traders is the lack of individual stock analysis, especially as more investors embrace index investing as they become more passive. But this can be an issue when certain businesses come into trouble, like Exxon Mobil during the crude oil selloff and Home Depot during a recession.

» Want to learn more? Take a look at the USA 500 Index

Is It Worth the Hype?

Ultimately, the S&P 500 is popular because many of the companies listed in the index are some of the best in the U.S. economy today, be it JPMorgan Chase or Apple. This index might suit active and passive traders and short- and long-term investors seeking capital appreciation and potential income generation.