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Andrew Michael
Editor
Published: May 25, 2023, 4:14pm
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Kevin Pratt
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The is one of the world’s best-known stock market indices, reflecting the combined performance of the 500 largest companies in the US such as Apple, Microsoft and Amazon.
By value, the index accounts for about 80% of the 4,000-plus companies that are publicly listed in the US. It is therefore considered to be an excellent gauge of the country’s overall stock market performance.
The S&P 500 has also proven to be remarkably resilient. Despite the impact of the Covid-19 pandemic on returns worldwide, plus the pummelling endured by the majority of global markets last year, the 500 or so stocks that comprise the index have produced a net gain of more than 50% over the past five years.
UK investors looking for exposure to the US and, by definition, S&P 500 companies, have various options at their disposal – from buying individual US companies directly, to investing in funds that can do the job for them.
For investors who choose the funds route, one means of gaining exposure is via exchange-traded funds, or ETFs, that are focused on the S&P 500.
We’ve asked Nick Vaill, senior investment director at Investec Wealth, to suggest a list of S&P 500 ETFs for investors to consider. We’ve listed his choices below, along with details for each fund, plus his thinking behind each selection.
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- Featured Partner
- Methodology
- What other ETFs could fit the brief?
- Frequently Asked Questions (FAQs)
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Our Pick Of The Best S&P 500 ETFs
The terms ‘fund type’, ‘benchmark’ and ‘annual fund charge’ are explained in the FAQs below.
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Vanguard S&P 500 UCITS ETF
Fund size
$35.2 billion
Fund type
ETF
Benchmark
S&P 500
On interactive investor's Website
Fund size
$35.2 billion
Fund type
ETF
Benchmark
S&P 500
Why We Picked It
This fund provides core exposure to the US equity market and is one of the market leaders in this field. It is exceptionally low cost, easy to trade during normal market hours, and has a long-term track record. It is a straightforward fund that fulfills its role well.
In terms of sector exposure, information technology makes up just over a quarter of the fund (26%), followed by healthcare (14%), financials (13%) and consumer discretionary (10%).
In terms of the top 10 companies held within the fund, there is a 7.1% allocation to Apple, 6.2% to Microsoft and 3.4% to Alphabet Inc, the parent company behind Google. Other names in the top 10 include Amazon, Nvidia, Tesla, Berkshire Hathaway and Exxon Mobil.
The fund produced a return of 76.3% over the five years to 13 May 2023.
Who should invest?
This ETF would suit long-term investors looking for simple, low-cost exposure to the US equity market. The fund is appropriate for investors who want to gain exposure to the largest US listed companies including some of the world’s best businesses such as Apple, Microsoft, Amazon and Berkshire Hathaway.
The product is a ‘passive’ investment (see FAQs below) so, by its nature, investors need to accept a balance between the low costs on offer and the fact that it is not designed to outperform the S&P 500. As with any market-based investment, returns have the potential to be volatile so investors need to be focused on the long term.
It’s also worth noting that this ETF is quoted in dollars, so UK investors should be aware of the potential for pound/dollar currency volatility – a feature of any investment that’s priced differently to the investor’s ‘home’ currency.
As an example, the S&P 500 fell by 18.1% in 2022. But once the performance of this fund was calculated back into sterling terms, UK investors holding this fund only suffered a 9% fall overall. Although this meant losses were not so severe, the reverse scenario is also a possibility when currencies move in a different direction.
Annual fund charge
0.07%
Methodology
When it comes to choosing ETFs from the numerous versions available, Nick Vaill at Investec Wealth says his preference is for funds that are physically replicated (see FAQs below) and “hold what they say on the tin, rather than obtain their exposure via derivatives”.
Mr Vaill’s reference concerns the two types of ETFs that exist – physical and synthetic – which are covered in the FAQs below.
He explains: “The reason for this stance chiefly relates to times of market stress, when a derivatives-based approach could lead to an undesired tracking error around the benchmark.”
Tracking error is the divergence between the price behaviour of an investment portfolio and the price behaviour of the benchmark that it is following – for the purposes of this article, the S&P 500.
Mr Vaill adds: “We prefer ETFs backed by high-calibre, market-leading firms that have a strong track record of delivering effectively for clients, along with robust risk controls.
“Charges are an important consideration when selecting funds. However, we would not select an investment purely on cost. We would always focus on net expected, risk-adjusted returns.”
What other ETFs could fit the brief?
Mr Vaill also highlighted three other US ETFs that investors with specific requirements could consider including in their portfolio:
- SPDR S&P 500 Dividend Aristocrats: for investors looking for income
- iShares MSCI USA ESG Screened UCITS ETF: for investors looking for a fund invested along environmental, social and governance (ESG) lines
- JP Morgan US Research Enhanced Index ETF: aimed at ‘index plus’ returns at a reasonable cost.
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Frequently Asked Questions (FAQs)
Why invest in the stock market?
There are several reasons for investing in stocks and shares – from attempting to stay ahead of inflation and making your money work as hard as possible, to building up a retirement nest egg.
Every form of investing carries risk, and exposure to the stock market isn’t suitable for everyone. But assuming a potential investor has weighed up the pros and cons and is willing to take a long term view measured preferably in years, the next question would be how they’re going to gain exposure to the market.
One option would be to sink everything into shares in a single company. This is a high-risk strategy because companies can go bust, leaving investors potentially facing partial, or sometimes even total, losses.
What is an investment fund?
Instead of investing in a single or select handful of companies, investment funds allow investors to diversify their money across a range – or basket – of holdings invested on your behalf.
Contributions are pooled from potentially thousands of investors and managed by professionals in line with strict investment mandates, each with a particular aim. For example, a typical target might be to outperform a particular stock market return by 1% each year.
Investment funds hold an array of assets – from cash and bonds to property and shares – each with varying amounts of risk. Read our in-depth feature on investment funds to learn more about how they work.
What is an exchange-traded fund?
ETFs are an investment product that provides investors with access to stock and commodities markets without needing the share-picking skills associated with selecting individual stocks.
This is because ETFs concentrate less on individual businesses and more on a collection of the main investments within a particular stock (or commodities) market, or industrial sector.
How do ETFs work?
You can read more here about how ETFs work. In essence, they combine some of the characteristics of shares with some of those from index tracker funds.
Shares offer a slice of ownership of a particular company. An index tracker fund, meanwhile, is a collective investment that uses computer algorithms to help it invest in all the companies within a particular stock market index (or industrial sector) with the aim of repeating its performance.
For example, a FTSE 100 ETF would look to mimic the performance of a benchmark such as the UK’s blue chip stock index of 100 leading company shares, whereas a mining ETF would focus on the performance of mining shares, while a gold ETF would track the price of the precious metal.
With ETFs, an investment firm buys a basket of assets (shares, bonds, etc) to create a fund. It then sells shares that track the value of the fund, which is determined by the performance of the underlying assets. These shares can be traded on markets in the same way as conventional stocks.
Buying ETF shares does not mean you own a portion of the underlying assets in the way you would when buying shares directly in a company. The firm that runs the ETFs owns the assets and adjusts the number of associated ETF shares to keep the price synchronised with the value of the underlying assets or index.
As their name suggests, exchange-traded commodities, or ETCs, are similar to ETFs but, rather than track stock market indices, they follow the behaviour of commodities such as gold.
All of the funds we have suggested above for exposure to the US market are ETFs.
What types of ETFs are there?
So-called physical ETFs hold the assets linked to the index in question and, as with index trackers, either replicate the index in full – by buying an appropriately weighted amount in each stock depending on its size with the index – or rely on a technique called ‘sampling’.
In contrast, synthetic or swap-based ETFs use financial instruments called derivatives to follow an index.
ETF providers will indicate on their product literature whether they run physical or synthetic products.
As with other types of shares, it is possible to apply ‘stop’, ‘limit’ and ‘open’ orders when buying ETFs. These are broker instructions that apply when certain prices are reached and are designed to head off any surprises for would-be investors.
What’s the appeal of ETFs?
ETFs are ‘passive’ funds, which means that they look to copy the performance of an existing stock index, say, without the need for ‘active’ asset selection, making them cheaper to own because they cost less to run. The less investors pay in management fees, the more their money has the power to boost returns.
As well as competitive charges, ETFs also offer investors diversification. This helps defend against stock market shocks by spreading money around different sectors.
According to the London Stock Exchange (LSE), there are nearly 2,000 ETFs listed on its main market offered by around 50 issuers. Statista says there are nearly 9,000 ETFs in circulation worldwide.
The LSE says that assets under management in the European ETF industry stood at €1.34 trillion in April 2023.
How to invest in ETFs?
A convenient way to access a range of ETFs is via an online investment platform. They can also be bought directly from fund providers, via a financial advisor who specialises in investing, or through a robo-advisor.
Before signing up to a particular provider, it’s worth considering a platform with the widest spread of appropriate fund choices for your needs, ideally, at the most competitive price (see below).
What do ETFs cost?
Investors buying ETFs via an online investing platform usually face two fees: an annual fund charge from the fund provider (charged as a percentage on the amount invested), plus platform provider fees, which come in a variety of guises. These might be billed on a ‘per transaction’ basis or linked to the size of a portfolio.
A £1,000 investment in a fund that charges 0.5% annually would cost £5.
Generally speaking, investors will also have to pay a trading fee when buying or selling ETFs. This typically works out to between £5 and £10, in addition to any annual platform fee charged by the provider concerned.
When buying company shares listed on, say, the London Stock Exchange, investors may incur a stamp duty charge of 0.5% of the transaction. However, despite being traded on exchanges, ETFs are exempt from stamp duty in most jurisdictions, including the UK.
As with individual stocks and shares and other types of fund, it’s possible to hold ETFs within a tax-protected product such as an individual savings account. Doing this shields the investor from paying income tax on dividends or capital gains tax on profits.
Which companies are in the S&P 500?
Technology stocks dominate the S&P 500, accounting for 26% of the index, with Apple and Microsoft alone making up about half of this figure. At the beginning of May 2023, other top 10 S&P 500 stocks by market capitalisation included Amazon, Nvidia, Alphabet, Berkshire Hathaway, Meta and Exxon Mobil.
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Andrew MichaelEditor
Associate Editor at Forbes Advisor UK, Andrew Michael is a multiple award-winning financial journalist and editor with a special interest in investment and the stock market. His work has appeared in numerous titles including the Financial Times, The Times, the Mail on Sunday and Shares magazine. Find him on Twitter @moneyandmedia.
