To invest in the S&P 500 from the UK you need an investment account that offers access to US shares, ETFs or SPX derivatives. This is because all the different ways to invest in the Standard & Poors 500 index are denominated in USD. In this guide, we will explain what the S&P 500 is, the different ways to invest in it and what to watch out for.
What is the S&P 500?
The S&P 500 is a cap (valuation) weighted stock market index in the United States, which includes 500 of the largest public companies by market capitalization (market cap).
It’s a common misconception that the companies which make up the index are chosen solely based on this market cap, but in reality, the final decision on which companies are included is down to a committee.
As well as the market cap, the committee also considers metrics such as:
- Level of liquidity – how easy it is to buy and sell
- Average trading volume – how often it is bought and sold
- Listed exchange – must be on the Nasdaq or New York Stock Exchange
- Domicile – they prefer US-based rather than offshore
- Ongoing financial stability – is it a safe for investors
Broadly speaking, the S&P 500 is generally considered to be the best overall indicator of the US stock market, covering leaders in practically every sector and representing around 80% of total US market cap.
How to invest in the S&P 500 in the UK
There are three ways to invest in the S&P from the UK and all come with different risks and costs. The main ways for UK investors to buy the S&P index are:
- ETFs – exchange-traded funds that mirror the performance of the S&P 500
- Shares – buy all the shares in the S&P 500 index
- Derivatives – trade the S&P index and profit when it goes up or down
ETFs
For most investors, the best way to invest in the S&P 500 is to purchase an ETF that tracks the index. This allows any investor (even those with limited cash), to get exposure to the index through the purchase of a single fund, which can have fees as low as 0.05% for the Invesco S&P 500 UCITS ETF (SPXP).
Other options include the Vanguard S&P 500 ETF (VUSA), the iShares Core S&P 500 ETF (CSP1) and the SPDR S&P 500 ETF (SPY).
It’s worth keeping in mind that all ETFs have slight variations in how they track the index, meaning that their returns won’t always perfectly match it. This is known as ‘tracking error’ and investors will want to choose an ETF that offers a low tracking error at a competitive cost.
At the time of writing, the lowest tracking error out of these four ETFs was the SPDR S&P 500 ETF, with an average annual diversion from the index of 0.21%. You can see how SPY has performed against the benchmark (S&P500) in the graph below.
Compare ETF investing platforms. (Top tip: Choose an ETF platform with low account and dealing costs like InvestEngine)
Direct stocks
It’s also possible for investors to allocate funds to each of the 500 stocks in the index directly. This would involve making individual buys for every stock on the list. To correctly match the index, this would also need to be done in accordance with the cap weightings, which means having stock #1 as the largest holding in the portfolio, stock #500 as the smallest weighting and stocks in between weighted accordingly.
As you can imagine, this is likely to be very time consuming and very expensive, though it would mean avoiding investment management fees.
Full service brokers will charge a fee for every trade, such as Hargreaves Lansdown (£11.95) and AJ Bell (£9.95), plus a forex transfer fee (1% for Hargreaves Lansdown and 0.75% for AJ Bell).
This would mean buying the index directly with £100,000 could incur an initial cost up to £6,975 with Hargreaves Lansdown.
Even ‘commission free’ brokers will still charge a forex fee, such as Freetrade which charges 0.99%.
Compare platforms for buying US shares. (Top tip: choose a platform with low FX fees like Interactive Brokers)
Derivatives
Finally, it’s possible to invest in the S&P 500 by using derivatives. These are separate financial instruments who’s price movement is derived from another asset, but where the investor doesn’t own the underlying asset itself.
Financial spread betting is one such example, where a trader can place a bet on the future movement of an index, going long if they believe it will go up, or going short if they believe it will go down. The return is based on the bet per index point, and the movement of the index.
Contracts for difference (CFDs) are another common derivative, and these work in a similar way to spread betting. The difference is that you purchase a contract which represents a contract to buy or sell the underlying asset (the S&P 500) at a specified price.
Both of these derivatives come with in-built leverage, meaning both gains and losses are magnified. They usually aren’t recommended for beginner investors.
Futures & Options – these are for more sophisticated and advanced investors, but worth considering if you can be classified as a professional trader.
Compare brokers for trading the S&P 500 (Top tip: Beware high overnight financing charges. You can use a futures broker like Saxo Markets to avoid these).
Jason comes from a background of wealth management, spending over 15 years as a private client financial advisor. Over this time he developed a keen interest in broader economic issues, markets and financial trends, and eventually transitioned into working full time as a writer and financial commentator.
Jason’s work has been featured in publications such as TIME, Forbes, Barron’s, MarketWatch, Yahoo! Finance and FT Advisor.
