SPDR S&P 500 funds is among the best investments for large-cap investors. It offers well-diversified, market-cap-weighted portfolios of 500 of the largest U.S. stocks. The funds accurately represent the large-cap opportunity set while charging rock-bottom fees, a recipe for success over the long run.

The funds track the flagship S&P 500, which selects 500 of the largest U.S. stocks roughly 80% of the U.S. equity market and weights them by market cap. An index committee has discretion over selecting companies that meet certain liquidity and profitability standards. While a committee based approach may lack clarity, it adds flexibility to reduce unnecessary changes during reconstitution, taming transaction costs compared with more-rigid rules-based indexes.

The end portfolio is well-diversified and accurately resembles the U.S. large-cap opportunity set. This allows the strategy to capitalize on its low fee, ultimately delivering sound long-term performance on both an absolute and risk-adjusted basis.

The bedrock of this strategy is market-cap weighting, which harnesses the market’s collective wisdom of the relative value of each holding with the added benefit of low turnover and associated trading costs. It’s a sensible approach because the market tends to do a good job pricing large-cap stocks. The companies in this portfolio attract liquidity and widespread investor attention, such that prices reflect new information quickly.

However, when few richly valued companies or sectors power most of the market gains, market-cap weighting may expose the strategy to stock or sector-level concentration risk, as is the case at year-end 2023. As of December 2023, the top 10 holdings made up the largest portion of the index (31%) in several decades and the 30% allocation to technology stocks was the highest since the dot-com bubble. But this is not a fault in design: The S&P 500 simply reflects the market composition. In the long run, its broad diversification, low turnover, and low fee outweigh these risks.