How To Invest In The S&P 500 – Forbes Advisor UK

Investors in US companies have enjoyed some excellent returns over the past five years thanks to the rise in prices of tech stocks like Apple and Microsoft.

According to Trustnet, North American equity mutual funds have been the second-highest-performing sector over the past five years, with a total return of 86%.

The US stock index S&P 500 has also benefited from strong investor appetite for US technology companies, more than doubling in value in the five years to September 2021.

However, this barometer of corporate performance has taken a tumble this year as high inflation, rising interest rates and an economic slowdown have taken their toll on the valuation of so-called growth stocks.

Here are the facts about the index, along with a closer look at whether now is a good time to invest in it.

Note: Market based investments can go down as well as up and you could lose some or all of your money. If in doubt, you should seek financial advice before making an investment decision.

What is the S&P 500?

Established in 1957, the S&P 500 is an index of the top 500 US companies, measured by their size or “market capitalization”.

The index accounts for 85% of the value of listed US companies and is considered one of the best indicators of the US stock market.

According to financial information provider S&P Global, the average market capitalization of an S&P 500 company is £61 billion. However, the equity universe is broad, with companies ranging in size from £3bn to a whopping £2trillion.

Technology stocks dominate the S&P 500, with Apple making up 7% of the overall index by market cap. The top 10 constituents make up just over a quarter (28%) of the overall index, with Apple, Microsoft, Amazon, Tesla, and Alphabet in this group.

The top 10 non-tech companies include investment group Berkshire Hathaway, healthcare companies UnitedHealth Group and Johnson & Johnson, and energy giant Exxon Mobil.

How has the S&P 500 performed?

The performance of the S&P 500 over the past five years is shown in Figure 1 below:

The S&P 500 rose steadily until a sharp drop in early 2020 at the onset of the pandemic. The index then doubled in just under two years, reaching an all-time high of over 4,800 in January 2022.

The price assigned to the index is based on the combined market capitalization of all companies in the index divided by a value that originally set the index at a base level of 100.

However, the S&P 500 has fallen significantly in 2022 due to the challenging macroeconomic environment. Rising inflation has caused interest rates to rise, which directly impacts the valuation of US growth stocks.

Technology companies also faced a slowdown in advertising due to pressure on consumer spending and broader geopolitical issues.

Alastair Power, Investment Research Manager at Redmayne Bentley, points to the index posting negative returns of 17% year-to-date in US dollar terms: Long-term tailwind for UK-based investors from sterling’s depreciation against the dollar.”

The pound recently fell to its lowest level against the US dollar since 1985 on budget plans announced by the new prime minister to support the cost of living crisis and recession fears.

This has had a positive impact on the value of UK investors’ US investments, which are worth more in pounds.

Looking at other indices, the tech-heavy Nasdaq index is also down a similar amount in 2022, although the FTSE 100 has been more resilient. It’s down just 3% so far this year, thanks to increased investor appetite for more defensive stocks that show more stable earnings in an economic downturn, such as US Dollars. B. Consumer staples, utilities and healthcare companies.

How to invest directly in the S&P 500

In theory, investors could buy shares of any or any company in the S&P 500. However, this requires a significant investment as it would currently cost over £1,800 to buy just one share from each of the top 10 companies.

Stock trading fees would also make this a prohibitively expensive option, coupled with the need to rebalance stocks to accommodate changes in companies’ relative market caps.

As a result, investing indirectly in the S&P 500 is a cheaper and more practical option, either by buying an index fund or an exchange-traded fund (ETF).

Invest indirectly via an index fund

Index or tracker funds attempt to replicate the performance of an index by buying and selling all of the stocks in it in relation to their market capitalization.

These “passive” funds, effectively managed by a computer algorithm, differ from “active” funds, where a fund management team attempts to outperform an index through research and stock selection.

As a result, passive funds tend to charge a lower annual management fee than active funds. According to trading platform AJ Bell, the average fee for North American passive funds is just 0.1% compared to 0.9% for active funds in this sector.

In other words, the average fee for £1,000 invested in a North American index fund would be £1, compared to £9 for a comparable stake in an active fund.

The best-performing index fund over the past five years is the UBS S&P 500 Index, with a total return of 100%, according to Trustnet. It has achieved a 10% annual total return and has an annual management fee of 0.09%.

Invest indirectly through an ETF

As with index funds, passively managed exchange-traded funds (ETFs) aim to duplicate the performance of an index like the S&P 500.

There is a wide range of S&P 500 ETFs. Some track the entire index, while others focus on niches, e.g. B. Companies that pay high dividends or companies that occupy a specific sector, e.g. B. Financials.

The best-performing ETF over the past five years is the iShares S&P 500 Consumer Discretionary Sector UCITS ETF, with a total return of 114%, according to Trustnet. It has achieved an annual return of 6% and has an annual management fee of 0.15%.

Redmayne Bentley’s Alastair Power highlights two ETFs to consider for investors looking for exposure to the S&P 500 index:

• The Vanguard S&P 500 UCITS ETF offers a full physical replication strategy with a low annual cost of 0.07%. Mr Power says, “The fund’s ability to generate additional performance through stock lending has enabled it to marginally outperform the benchmark by 1.8% over the five-year period ended August 31.” a fee can be temporarily lent to another investor.

• The iShares S&P 500 GBP Hedged UCITS ETF provides exposure to the benchmark along with US Dollar-GBP hedging. Hedging in this case smoothes exchange rate fluctuations to reduce the risk for UK investors of holding investments in dollars. Mr Power comments: “It’s higher than the Vanguard ETF at a price of 0.20% but allows investors to protect returns should sterling recover against the dollar.”

Should you invest in the S&P 500?

Investors will weigh whether the current low index price presents an opportunity to buy on a dip, or whether prices are likely to fall further given macroeconomic conditions.

In fact, the S&P 500 fell over 4% last week, posting its biggest one-day decline in over two years. Higher-than-expected US inflation numbers weighed on investor sentiment as the Federal Reserve, the central bank in the US, is likely to hike rates again.

Redmaybe Bentley’s Mr Power comments: “Longer term, we are positive on our outlook for the S&P 500 as we note the relative strength of the economy and the persistence of global trends underlying earnings growth in the larger constituents of the index.

“Consensus estimates for earnings and price-to-earnings multiples appear to point to a year-end 2022 price target in the $4,100 region.”

Overall, investors should seek to diversify their portfolio across a range of different assets and sectors to reduce the overall risk and volatility of their portfolio.

Investing in stocks such as the S&P 500 Index should also be viewed as a long-term investment of at least five years to smooth out stock market cycles.