Invest in S&P 500 ETFs

Find out about S&P ETFs and how to invest in them.

The S&P 500 index has become the most widely-used representative for the performance of the US market. Unlike the Dow Jones, which is focused on just 30 US blue chips, the S&P 500 measures the performance of the 500 largest companies listed in the US.

The index includes a diversified range of established names such as Johnson & Johnson and Proctor & Gamble, but recently it has become increasingly dominated by higher growth technology companies such as Amazon, Netflix and Alphabet. The strong performance of the FAANG stocks has left it with a significant skew to technology. At just under a third, it is the largest sector in the index. The next two being healthcare and consumer discretionary.

Over the past decade, the S&P 500 has outpaced all of the other major global indices, delivering an average annual return of 14.45%. Its fortunes from here depend on sentiment towards the technology sector and the US market. Find out why investors choose to invest in S&P 500 ETFs, the difference between active and passive investing and some S&P 500 ETFs.

Why choose to invest in a S&P ETF?

One of the main advantages to investing in a S&P ETF is that it’s passive rather than active. We’ve compared active and passive investing to help you understand.

Active vs passive: what’s the difference?

Over the years, research has shown that it is difficult for active managers to outperform the wider index, but this is particularly hard in the US market, which is the largest and most liquid in the world.

The S&P Indices vs Active (SPIVA) scorecards are semiannual scorecards published by S&P Dow Jones Indices. They compare the performance of active equity and fixed income mutual funds against their benchmarks over a number of time horizons. The most recent scorecard showed the S&P 500 beat over 70% of active funds over one year, 71% over three years and 79% over five years.

With this in mind, investors across the world have tended to prefer to invest in passive vehicles, such as the S&P 500 ETFs, for their exposure to the US market. Funds tracking the S&P have grown to become some of the largest passive funds in the world.

What are the advantages of ETFs?

  • Lower fees. Three of the top five ETFs in the world are based on the S&P 500 – from Vanguard, iShares and State Street. Between them, they hold US$678 billion. Each of them has a low ongoing fee, making them one of the cheapest ways to get diversified exposure to the US market.
  • Low minimum investment. Depending on the brokerage platform, you may only need as little as £50 to get started.
  • Quick decisioning. ETFs have daily pricing and can be bought and sold during trading hours. This is different to mutual funds, which only trade once a day and where the sale price may not be clear. This means ETFs can be useful for taking quick decisions.

Major S&P 500 ETFs in the UK market

The ETFs in the UK are split evenly between those that employ physical replication of the index and those that use synthetic replication. With physical replication, the ETF issuer will hold the shares in the proportion they are held in the index; with synthetic replication, the ETF issuer uses a derivative to deliver the performance of an index. Synthetic replication is generally more expensive but is seen as more accurate.

  • iShares Core S&P 500 UCITS ETF. This ETF uses physical replication. The fund is the largest in the sector, at US$28.87 billion.
  • Vanguard S&P 500 UCITS ETF. This ETF uses physical replication and has assets of US$19.60 billion.
  • iShares Core S&P 500 UCITS ETF. This fund uses “optimised sampling” rather than full physical replication. It has an expense ratio of 0.07% and assets of US$8.12 billion.
  • Invesco S&P 500 UCITS ETF. This ETF uses synthetic replication. Its expense ratio is 0.05% and the fund was launched in 2010. It holds US$6.69 billion in assets.
  • Xtrackers S&P 500 Swap UCITS ETF. This ETF uses synthetic replication and has an expense ratio of 0.15%. It is US$5.04 billion in size and was launched in 2010.
  • SPDR S&P 500 UCITS ETF. State Street runs the largest ETF in the world, but its UK equivalent is smaller at US$3.46 billion. It has an expense ratio of 0.09% and was launched in 2012. It is a physical replication ETF.
  • HSBC S&P 500 UCITS ETF USD. This HSBC ETF has an expense ratio of 0.09% and uses full physical replication. It was launched in 2010 and holds US$2.93 billion in assets.
  • Amundi ETF S&P 500 UCITS ETF USD. This Amundi ETF has an expense ratio of 0.15% and employs synthetic replication. It was launched in 2018 and has US$2.54 billion in assets.
  • Lyxor S&P 500 UCITS ETF – Dist (USD). Lyxor uses synthetic replication for this ETF. It has an expense ratio of 0.15% and was launched in 2010. It has US$2.28 billion in assets.
  • Lyxor S&P 500 UCITS ETF – Acc. This is the “accumulation” option of the Lyxor ETF. It also has an expense ratio of 0.15%, but it was launched in 2014. It has US$1.35 billion in assets.

What drives the S&P 500?

The key driver for the S&P 500 is the health of the US and global economy and investors’ appetite for taking risk. That said, the S&P 500 has some specific nuances. The top five US companies in the S&P 500 are all the major technology names. The weighting varies, but Apple, Microsoft, Alphabet, Amazon and Facebook usually comprise around 20% of the total market capitalisation of the S&P 500. While the S&P 500 is a diversified index, its performance will be significantly influenced by these five names.

All stocks are influenced by monetary policy and the level of interest rates to some extent. In general, stock market indices will perform better when interest rates are low. This is particularly true for the S&P – the real beneficiaries from loose monetary policy are businesses with high earnings and fast revenue growth. These earnings become more valuable as interest rates fall. The S&P 500 has more of these fast-growing companies than many of its international peers.

The S&P 500 has a relatively low dividend yield, at around 1.6%. Again, this is influenced by the high weighting in technology names, which don’t tend to pay dividends. The market may value dividend stocks more highly at various points in the market cycle and this may influence pricing. There may also be more volatility around dividend announcements.

Risks

The biggest risk to the current performance of the S&P 500 is that investors lose their appetite for technology names. While the index has 70% in other sectors, technology companies have driven performance in recent years. Valuations are now expensive and there are threats to the sector in the form of higher regulation and political interference.

There is also a risk that investors lose their enthusiasm for the US market. It has outpaced other global markets for more than a decade, but political disruption and poor response to the coronavirus outbreak have seen the dollar slide and money move away from the US. Given that S&P 500 trackers are a popular means for international investors to gain access to the US market, they may suffer if sentiment turns.

There are other risks specific to ETFs. ETFs come with some counterparty risk. This is a greater risk with “synthetic” ETFs where there is an investment bank on the other side of the trade. That said, most ETFs have improved their risk management in recent years, bringing in more appropriate collateral in the event of default.

Equally, there are risks associated with passive investment. S&P 500 ETFs only replicate the returns from the S&P 500. If it falls, the ETF will fall with it. This is in contrast to active investments where a fund manager can move to cash, or switch holdings in a more difficult environment.

S&P 500 ETFs in summary

S&P 500 ETFs are an easy way to gain access to a diversified mix of US companies, including some of its most exciting growth companies. It has been a popular way to gain access to the US market, where active managers have struggled to perform better than the index.

The performance of technology companies has been crucial in this strong performance, as Facebook, Amazon, Apple, Netflix and Alphabet (owner of Google) – the so-called FAANGs – have grown fast and seen their share prices soar. However, changing sentiment towards the technology sector specifically and the US stock market in general will have an influence on its fortunes from here.

Compare investment services

Table: sorted by promoted deals first
Name Product Price per trade Frequent trader rate Platform fees Brand description
eToro Free Stocks
£0
N/A
£0
Capital at risk. 0% commission but other fees may apply. The minimum deposit with eToro is $50.
Hargreaves Lansdown Fund and Share Account
£11.95
£5.95
£0
Hargreaves Lansdown is the UK's number one platform for private investors, with the depth of features you'd expect from an established platform. The minimum deposit with HL is £1. Capital at risk.
Freetrade
Finder Award
Freetrade
£0
N/A
£0
Claim your free share worth between £3 and £200. Capital at risk.
Degiro Share Dealing
UK: £1.75 + 0.014% (max £5)
US: €0.50 + $0.004 per share
N/A
£0
Degiro is widely seen as one of the best low-cost share brokers, for people who are looking to trade regularly. The minimum deposit with Degiro is £0. Capital at risk.
interactive investor Trading Account
£7.99 (with one free trade per month)
£0
£9.99 per month
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. The minimum deposit with ii is £0. Capital at risk.
loading

Compare up to 4 providers

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

More guides on Finder

  • What is capital gains tax?

    Want to know what capital gains tax is, how it works and when you need to pay it? Read our comprehensive guide on what you need to know about capital gains tax including what your CGT allowance is for the 2021/2022 tax year.

  • Dividend ETFs

    Dividend ETFs are funds that are traded on stock exchanges that are heavily focused on companies that pay dividends.

  • A beginner’s guide to cryptocurrency ETFs

    If you’re looking for ways to gain exposure to Bitcoin and other digital currencies, cryptocurrency ETFs could be worth exploring. Find out what crypto ETFs are and how they work in this introductory guide.

  • Invest in bond ETFs

    Find out what Bond ETFs are and how to invest in them.

  • Scottish Friendly review

    Scottish Friendly is a mutual organisation in the UK that offers ISAs and investment bonds. Read our review to find out what we think of Scottish Friendly and how much it costs.

  • Ethereum (ETH) price prediction 2021

    What affects the value of Ethereum (ETH) and how might the price of ETH fluctuate in the year ahead? Find out in this comprehensive guide.

  • Tulipshare review

    Tulipshare pools together investors to get you better shareholder rights than you get individually. Read our review to find out how.

  • Sugi review

    Sugi assessed your existing investments to find out how ethical they are. We’ve reviewed its features, fees and pros and cons.

  • NAGA review

    Find out what we thought of NAGA, a trading platform that lets you t trade more than 500 financial instruments and copy other people’s trades.

  • Charles Stanley Direct review

    We reviewed Charles Stanley Direct, Charles Stanley’s online investment platform. Find out how it works and what we think in our review.

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked
Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site