What is the S&P 500?
The S&P 500 index or the ‘Standard and Poor’s 500 Index’ tracks 500 of the biggest companies in the United States. Thanks to Jack Bogle you can invest in an ETF that passively tracks the movement of the S&P 500. The S&P 500 is weighted by market cap which means the larger companies make up a large portion of the index. For example, the top 10 stocks make up around 27% of the index and includes the big boys such as Amazon, Apple and Microsoft.
The S&P 500 is one of the most popular funds to invest in and it’s often the go to for comparing against mutual funds or an individuals portfolio.
Pros of a One Fund S&P 500
One of the main reasons investors love the S&P 500 is the diversity within the large cap fund which can provide a broad view of the economic health of the entire US market. Technology, healthcare, financials, consumer discretionary, communication services, industrials, stables, energy, utilities, real estate and materials can all be found within the fund.
Another reason why the S&P 500 might be a good choice as a ‘one fund portfolio’ is that the index is updated on a quarterly basis. A committee determines what companies should be included in the index and companies can be added or removed based on market performance.
The S&P 500 is also a relatively passive investment, if one company in the fund goes bust it will be replaced and won’t have a major impact on your portfolio. In our experience investing in index funds or market tracking ETFs generally prevent you from wanting to check your phone constantly to see how the market is performing.
The fees of investing in the S&P 500 are also very low. If we take Vanguards ‘VUSA’ for example the ongoing charge (OCF) is 0.07% which is one of the cheaper funds you’ll be able to find. This is one of the reasons the S&P 500 continues to outperform mutual funds most of the time.
The returns of the fund have also been excellent although we will discuss this in a bit more detail later.
Disadvantages of a One Fund S&P 500
There are some disadvantages to only investing in the S&P 500. There are some great companies outside of the US economy that will probably perform well into the future; Tencent, Samsung, Alibaba and the Taiwan Semiconductor Manufacturing Company to name a few. The emerging markets in general might be set for a good decade ahead, we discuss more about this here if you’re interested. By investing in a global fund you might mitigate some of the risk associated with the S&P 500 as it’s based on one economy (albeit a big one).
if you invest in only the S&P 500 you also don’t get any exposure to small caps, commodities, REITs or bonds. This may not necessarily be a bad thing but it’s something to bare in mind. If you’re risk tolerance is relatively low then you might want to consider diversifying a bit more to ease the blow of a market crash.
Whilst we included the fact a committee updates the companies in the S&P 500 on a quarterly basis as a positive, it could also be a negative. Should you just trust this committee to make the right decisions for you? Who’s on the committee? Would they be motivated by other factors? Some people argue that there are stocks on there that aren’t great long term investments, oil companies for example.
The S&P 500 vs it’s Competitors
The S&P 500 has returned 11% annually since its inception in 1926 although its only officially adopted 500 stocks in the 1950s with a return of 8% since then on average. The S&P 500 has returned close to 14% annually over the last decade blowing historical averages out of the water although it doesn’t give us the whole picture. The total US stock market has returned just over 9% over the last 10 years so whilst the S&P 500 has beat the total market, we’ve seen a pretty significant bull run throughout.
Global market index’s also underperformed the S&P 500 although you can still find funds that significantly outperformed the S&P if you try hard enough. The QQQ which tracks the top 100 non financial companies in the NASDAQ is heavily weighted to tech and returned over 21.5% annually over the last 10 years. The iShares S&P 500 Information & Tech Sector fund has returned closed to 30% over the last 5 years. It’s clear to see that you can find funds which have outperformed the S&P 500, the problem is we don’t have a crystal ball and these funds would have been considered a lot more speculative at the time.
Where can you Invest in the S&P 500 and What are the Fees?
We’ve already mentioned Vanguards ‘VUSA’ although you don’t need to be on Vanguards platform to invest in this, other brokers such as Freetrade offer the fund at an equally low price. Other popular options are the SPDR S&P 500 and the iShares S&P 500, both of these can also be found on most platforms. The management fees for all three funds range from 0.03-0.07% which is insanely cheap.
The S&P 500 is a great fund to have in your portfolio. It’s been endorsed by both Warren Buffett and Jack Bogle so that’s all you really need to know. It’s up to you to decide whether you think the fund is diversified enough to be your sole investment. Personally, we like to go with an all world fund such as the FTSE Global All Cap or the FTSE All World ETF which covers companies in the S&P 500 and some. Whilst the US stock market may be overvalued currently there is no doubt the S&P 500 will bounce back if it does experience a sharp decline in the future.
If you’re interested in learning more about the S&P 500 you can find Kenneth’s Koh’s book on Amazon ‘87% Win Trading S&P 500’.
The views expressed in this post are the authors and should not be construed as financial advice
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