The S&P 500 is a well-known index of the largest publicly traded companies in the US, offering investors exposure to some of the world’s most successful businesses. As an index, it allows investors to buy a single investment that tracks the performance of the entire market. Think of it as a diversified collection of stocks in one package.
For UK investors, the S&P 500 provides a great opportunity to tap into the world’s largest economy without having to buy stocks individually. So, how can you get into this popular index in the UK? Let's look at the options.
1. Open a brokerage account — Find a broker that offers access to the S&P 500.
3. Deposit funds — Fund the account with the capital you'd like to invest in the S&P 500.
4. Choose how to invest — Decide whether you want to buy the index directly or purchase shares in a fund that tracks this index.
5. Monitor your investment — You can complete the transaction with a few clicks of a button.
What Is the Standard and Poor’s 500?
The S&P 500, which stands for Standard and Poor's 500, is an American stock market index based on the market capitalisations of 500 large companies having common stock listed on the NYSE (New York Stock Exchange) or NASDAQ.
The index was launched on a small scale in 1923 and expanded in 1957 and covers about 80% of all U.S.-listed stocks with readily available price data. It contains many familiar names such as Apple, Microsoft, Amazon and Johnson & Johnson – some of the world’s biggest companies by their stock market values.
The S&P 500 has historically mirrored the performance of the US economy and is widely regarded as one of the best representations of US equities markets.
Due to the economic shock caused by the pandemic, the S&P 500 saw a sharp fall at the beginning of 2022 as investors reacted to the news with caution. Besides the pandemic, other factors such as geopolitical tensions and the US-China trade conflict also weighed heavily on markets. However, despite these short-term pressures, the S&P 500 recovered most of its losses, trading up to £3,200 by the end of 2020.
The index experienced some volatility again in the first quarter of 2021, but the S&P 500 was able to reach new heights, climbing steadily to an all-time high of around £3,840 in January 2022. Later, the index fell from its all-time high due to inflationary pressures and a series of interest rate hikes by the US Federal Reserve weighed on markets. The S&P 500 dropped sharply from £3, 840 in January to a yearly low of £2900 as of October 2022.
This drop was catalysed by the tightening of monetary policy, a squeeze in consumer spending, and the increasing risk of a second wave of COVID-19, leading to decreased investor confidence.
Which Companies Are in the S&P 500?
There are currently 500 companies included in the S&P 500 index, representing a wide variety of sectors such as technology, financials, consumer discretionary and healthcare. The five largest companies are;
1. Apple: Founded by Steve Jobs and Wozniak, Apple Inc. is the world’s most valuable company by market value.
2. Amazon: The US-based online retail giant founded by Jeff Bezos that sells a variety of products and services.
3. Alphabet Class A (formerly Google): An online search engine that was originally created as a research project by Larry Page and Sergey Brin.
4. Microsoft: The software company founded by Bill Gates in 1975 is one of the largest tech companies in the world today.
5. Meta Financial: A financial services holding company focused on providing consumer banking, lending, payments and investment services to individuals, businesses and government entities.
Index Weighting | Market Cap | |
|---|---|---|
Apple | 7.28% | £2.16 T |
Amazon | 2.68% | £984 B |
Microsoft | 6.6% | £1.984 T |
Alphabet Class A | 1.82% | £1.07 T |
Meta | 1.55% | £537.2 B |
Why Invest in the S&P 500?
Investing in the S&P 500 can offer several benefits to beginner and experienced investors alike.
1. Low-Cost — Allows investors to gain exposure to hundreds of companies with a single purchase. This helps to keep costs low as you won't have to pay individual commissions or management fees on each stock you buy.
2. Convenience — Investing in an index fund is incredibly convenient as it involves a single purchase rather than individual stock picking, thus, saving time.
3. Good Track Record — The S&P 500 has consistently beaten the returns of actively managed funds over the long term, making it a great option for investors who are looking to build wealth.
4. Diversification — The S&P 500 comprises hundreds of companies from different industries, offering investors exposure to a wide range of businesses and sectors.
5. Low Volatility — Investing in the index can help reduce volatility as this makes it easier for investors to ride out short-term market fluctuations without having to sell their positions.
Yes, over 400 of the companies that make up the S&P 500 pay dividends and you can earn dividends by investing:
in the companies directly
in index funds that track the S&P 500.
The dividend yield of the S&P 500 index is approximately 2%, meaning that if you invested £100 in a fund that tracks it, you would earn a dividend of £2 after a year.
How Much Does It Cost to Invest in the S&P 500?
The cost of investing in the S&P 500 depends on the broker you use. Generally, you'll pay a commission fee when buying and selling stocks or may also incur foreign transaction costs if investing in companies outside your own country.
Additionally, there may be other fees such as annual account maintenance fees and exchange rate mark-ups.
Do research and compare the different commission rates before investing in the S&P 500. You may also benefit from choosing a broker that offers dividends reinvestment plans which can help you earn more money over time.
Commission | Foreign Exchange Fee | |
|---|---|---|
eToro | £0 | 0.5% |
Interactive Investor | Varies | 0.25 - 1.5% |
IG | £0 for US shares | 0.5% |
How Do I Invest in the S&P 500 From the UK?
Investing in the S&P 500 from the UK is fairly easy and can be done through a few simple steps.
Find a Broker
A broker is an intermediary that helps investors to buy and sell stocks. In the UK, there are a number of brokers to choose from, including large banks, independent brokerages, and online investing platforms such as eToro.
Before choosing a broker, it's important to consider factors such as;
Trading Costs: The costs associated with trading the S&P 500 will depend on how you choose to invest. If you're investing in an ETF, you'll usually pay a commission fee and may also incur exchange rate mark-ups.
Market Reach: Some brokers will offer access to more markets than others, which is important if you're looking to diversify your portfolio beyond the S&P 500.
Usability: Some brokers offer trading platforms that are easier to use than others, reducing the learning curve and making it easier for investors to get started.
Regulatory Compliance: It's important to make sure that the broker you choose meets all regulatory requirements such as being licensed by the FCA or equivalent body in your country.
Account Features: Different brokers will offer different account features such as tax optimization and dividend reinvestment plans, so choose wisely.
Beginners can benefit from choosing a broker such as eToro, which offers an easy-to-use trading platform and plenty of educational resources.
Open an Account
Once you've chosen a broker, you'll need to open an account. Most brokers will require investors to provide some form of ID, proof of address, and other personal details.
Generally, UK investors have the choice of either opening an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP).
ISAs can be used to invest in stocks, bonds, and ETFs and offer tax-efficient returns, while SIPPs are a type of pension account that also allows you to invest in stocks and funds.
Deposit Your Funds
Once you've opened an account, you'll need to deposit funds in order to start trading.
Most brokers offer a variety of deposit methods, including bank transfer, credit/debit card payments, and e-wallets such as PayPal.
It's important to consider your financial goals and risk tolerance when deciding how much amount you want to invest. Consider consulting a financial advisor to get advice tailored to your individual circumstances.
Choose How to Invest
Once you've deposited funds, you'll need to decide how to invest in the S&P 500. There are two ways; buying individual stocks or investing in an exchange-traded fund (ETF).
Buying individual stocks can be a good option for investors who are looking to take a more hands-on approach and are comfortable with researching individual companies.
On the other hand, ETFs offer an easy way to access the entire S&P 500 index in one go, while also providing diversification and cost savings.
Monitor Your Investments
Finally, monitor your investments regularly. It's a good idea to review your holdings every few months and rebalance if necessary. Remember to keep an eye on any taxes that may be due on your investments and ensure that you stay compliant with all regulations.
Different Ways to Invest in S&P 500
There are several ways to invest in the S&P 500, each with its own pros and cons. These include;
buying individual stocks and shares,
investing through a fund,
trading derivatives.
1. Buying Individual Stocks and Shares
Buying individual stocks and shares allows you to build a portfolio of stocks from different sectors, industries or countries. You can choose to focus on one area or spread your investments across a range of sectors for diversification.
This approach is best suited to active investors who are willing to devote time to researching individual companies with their overall performance and understand how markets behave as every company in the S&P 500 has a weighting within the index.
When buying individual stocks, consider the top companies in the index - the top 3 being Apple, Microsoft and Amazon.
2. Investing Through a Fund
Investing in a fund is a good option for investors who are looking for low-cost and easy access to the S&P 500. Funds track the performance of the index, so you don't have to worry about researching individual stocks.
Most funds charge a management fee, which is typically lower than what you'd pay for buying individual stocks and shares. Moreover, it can help provide diversification across different sectors and countries, making it easier to manage risk.
This approach is suitable for both beginners and experienced investors who may want to make use of the expertise of a professional fund manager. The 3 types of funds to consider when investing in the S&P 500.
Index Funds
An index fund seeks to replicate the performance of a particular index, in this case, the S&P 500. These funds provide low-cost and easy access to the entire index by buying or selling shares in proportion to the index's weightings.
These are passively managed, meaning the fund manager doesn’t need to actively manage or trade shares within the fund.
In some cases, they can be managed by computer algorithms and systems that automatically track the performance of the S&P 500, thereby eliminating hefty management fees
List of best-performing S&P 500 index funds:
Fidelity 500 Index Fund
Expense Ratio: 0.015%
1-Year Annual Return: -7.71%
5-Year Annual Return: 9.81%
Average Annual Return: 12.05%
Vanguard 500 Index Fund Admiral Shares
Expense Ratio: 0.02%
1-Year Annual Return: -7.73%
5-Year Annual Return: 9.79%
Average Annual Return: 12.2%
Schwab S&P 500 Index Fund
Expense Ratio: 0.04%
1-Year Annual Return: -7.74%
5-Year Annual Return: 9.78%
Average Annual Return: 12.26%
Exchange-Traded Funds (ETFs):
These are similar to index funds but they are traded on the stock exchange, just like individual stocks. This means they can be bought and sold easily at a relatively low cost, making them the efficient way to invest in a broad range of assets within the S&P 500 with minimal effort.
These are best suitable for active investors who want to have more control over their investments and tailor their portfolios to meet their individual needs.
Trading Derivatives
A derivative is a financial instrument whose value is derived from another asset, such as stocks or bonds. The goal here is to trade derivatives on the S&P 500 to take advantage of market movements without taking ownership of the underlying stocks.
The two most popular derivatives for trading the S&P 500 are Contracts for Difference (CFDs) and Spread Betting.
Contracts for Difference (CFDs)
CFDs are agreements between two parties (the buyer and the seller) to exchange the difference in the value of security from the opening and closing of the contract.
For example, if you think the S&P 500 index will rise over time, then you can open a buy position with a CFD provider. If your prediction turns out to be correct, then you will make money on your investment. Conversely, if your prediction is wrong and the index falls in value, then you could lose money.
Spread Betting
Spread betting involves taking a position on the future value of an asset. Just like CFDs, you can take a buy or sell position on the S&P 500 index and make money when it rises or falls in value.
Note: Spread betting and CFD trading are approached similarly, but the difference is that profits from CFD trading are subject to capital gains, while losses are tax deductible. On the other hand, spread betting profits (or losses) are not subject to capital gains tax or stamp duties.
Should I Invest in the S&P 500?
The choice to invest in the S&P 500 depends on your financial situation and goals. Investing in the index can provide diversified exposure to large companies with different risk levels, which is attractive for long-term investors who want a passive approach to investing.
Changes in interest rates tend to affect the index because when borrowing costs increase, companies may decide to pull back from investing in things like advertising or research and development.
Experts have discovered that only 20 stocks have driven the returns from the S&P 500 so far in 2023, with tech and AI stocks leading the charge. This presents a good opportunity for active and DIY investors who want to take advantage of the market’s movements to gain exposure to stocks.
However, if you decide to invest in ETFs that mirror all the stocks in the S&P 500 index, then think of it as a long-term investment that will require some patience and discipline.
Whichever approach you choose, always remember to manage your risk by investing within your risk appetite and never invest more than you can afford to lose.
- Diversified exposure to large companies
- Passive returns
- Cost-effective ETFs and easy trading options
- Good opportunity for active investors to create their own portfolio from a selection of stocks in the index.
- Volatile in nature due to changes in monetary policies and interest rates
- Risk of significant losses if investments are not managed correctly
- Subject to capital gains tax for CFD trading, or stamp duties for spread betting
- Limited customization as components of the index have been chosen by an external entity.
How Does the S&P 500 Compare to Other Major Indexes?
The S&P 500 provides an excellent diversified portfolio of large companies with different risk levels, but it is important to compare the index to other major indexes before making a decision.
The Nasdaq Composite Index covers a large selection of stocks listed on the Nasdaq exchange, with over 3,500 companies included in its scope. It takes into account the market capitalisation of the different companies and assigns weightings accordingly. The top three companies represented are Apple, Microsoft, and Amazon, as with the S&P 500 index.
The Dow Jones Industrial Average is a price-weighted index that tracks the performance of 30 large-cap stocks. It is different from other indices like the S&P 500 where it does not consider market capitalization and excludes transportation and utility companies.
The Dow Jones has increased by 32% in the past 3 years (June 2020 - June 2023) while the S&P 500 has grown by 40%. This disparity can be attributed to the fact that the S&P 500 is more diversified and exposed to a broad range of industries.
When it comes to risk, all three indexes come with their own levels. The S&P 500 is considered to be the least risky due to its diversification across different sectors, while the Dow Jones Industrial Average and Nasdaq Composite Index are seen as more volatile due to their high engagement in tech stocks.
Best Brokers to Invest in S&P 500
Here are our top 3 picks for brokers that offer access to the S&P 500:
1. eToro - Best for Copy Trading
Commission | £0 |
|---|---|
Minimum investment | £8 |
Accounts available | Personal accounts |
eToro’s versatile social and copy trading feature, has made it the world's leading social trading platform. The app lets users invest in the S&P 500, as well as other major US indices.
If you're not investment-savvy, the copy trading feature can be a great way to get started. It allows users to copy the trades of experienced investors and benefit from their experience.
2. Interactive Investor - Best for Beginners
Commission | varies |
|---|---|
Minimum investment | £25 |
Accounts available | Stocks and Shares ISA, General Investment Account (GIA), Junior ISA, and Self-Invested Personal Pension (SIPP) |
Interactive Investor offers index funds and exchange-traded funds (ETFs) that track the performance of the S&P 500. The platform offers access to over 90 ETFs from some of the world’s largest asset managers, including Vanguard and iShares.
It provides plenty of educational resources and tools to help users get started including a free newsletter, knowledge centre and catalogue of investment ideas.
3. IG - Best for Advanced Traders
Commission | £3 for UK shares |
|---|---|
Minimum investment | £250 by card and £50 by bank transfer |
Accounts available | CFD trading account |
IG provides access to the S&P 500, as well as other indices and stocks from around the world. It is one of the world's largest CFD providers, offering advanced trading tools for users who want to take their investments to the next level.
The platform has a range of helpful features including an economic calendar, news alerts and charting tools.
Before trading the S&P 500 on IG, you need to open a 'CFD trading account' which allows you to trade the index directly or opt for ETFs and shares that track it.
| Name | Score | Visit | Disclaimer | |
|---|---|---|---|---|
 | 8.9 | Visitig.com | Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. |
