The global nature of the financial markets means UK investors have the opportunity to invest in a range of international markets and instruments in order to optimise their returns. That trend is also supported by a revolution within the brokerage sector, which has resulted in trustworthy brokers offering convenient ways to invest outside of the UK.
One area that is an obvious target is the US stock market. North American investors have led the way for several decades and, as a result, there are a wide range of investment opportunities. A prime example is the S&P 500 index, which is made up of the 500 largest US listed stocks.
Investing in a US-based product might ,at first glance, appear a daunting prospect, but it is made easier by the fact that the performance of the S&P index is tracked by fund managers offering ETFs (Exchange Traded Funds). These are low-cost, user-friendly instruments, and some S&P 500 index tracker funds can be bought in GBP share class form to avoid currency market complications.
Analysis of the best S&P 500 index funds for UK investors reveals a list of funds that could offer relatively stable returns. That consistency is one of the main reasons why seasoned pros suggest an investment in an S&P index as a core part of most investment portfolios.
Let’s continue as we investigate which of these funds are worthwhile pursuits for UK-based traders.
Why are S&P 500 Index Funds so Popular?
At AskTraders, we’ve previously provided a detailed breakdown of how the S&P index was created and how it operates. However, the most important feature of the index and part of the reason why it can be considered so popular to UK investors ,is its ability to spread risk and exposure across a large number of the largest firms in the world.
The S&P 500 Index includes multinationals such as Apple Inc, Microsoft Corp and Tesla Inc, and some smaller firms that aren’t household names outside of the US. Diversifying investment across a large number of firms allows investors to catch the upside from large-cap firms, which offer stability, and growth stocks, which offer greater risk-return. It also hedges against the risk of a single stock pick going wrong.
The firms that make up the S&P index are listed on Tier-1 US exchanges such as the New York Stock Exchange and NASDAQ Exchange, but they are also outward-looking – many have global operations that have a track record of generating consistent revenues.
The way that S&P index funds spread risk doesn’t result in investors having to sacrifice returns. Between March 2016 and September 2022, the S&P index doubled in value. That growth is also relatively stable in nature, as reflected by the fact that, over a 10-year period, starting in 2012, the S&P index experienced only one down year, 2018. The best annual return was posted in 2019, when the index posted an impressive 31.49% increase in value.
S&P 500 index funds are also highly transparent. While it’s made up of 500 different firms, it’s still possible to dig into the details to find the key metrics that are used in the fundamental analysis favoured by long-term investors. For example, as of September 2022, the trailing P/E ratio was an attractive 22.89 and the average annual dividend yield was 1.7%.
S&P 500 Index Annual Return and Price Volatility
|Year||Total Calendar Return (including dividends)||Volatility ($)|
Source: SPGlobal / Netcials
Which S&P 500 Index Fund is Worth Investing in from the UK?
The S&P 500 index was created and continues to be managed by the market data firm Standard & Poor’s, which manages the index rather than offer instruments for investors to buy. Thanks to the popularity of the index and its role as a bellwether for the stock market in general, large reputable investment management firms offer fund products that track the index, which investors from all around the world can buy into.
Given the advantages of investing in the S&P index, there are a lot of tracker funds to choose from. The competition between firms helps keep costs down but finding the best S&P index fund for UK investors can be a daunting task. With the advantages of doing so clearly apparent, below is our list of the best British pound-denominated S&P 500 ETFs.
- Vanguard S&P 500 UCITS ETF – GBP (VUSA)
- Xtrackers S&P 500 UCITS ETF 2C – GBP Hedged (XDPG)
- iShares Core S&P 500 UCITS ETF GBP Hedged (GSPX)
One of the advantages of ETF tracker funds and ETFs, in general, are that they are typically associated with relatively low management costs. Research carried out by the fund manager Vanguard, estimates that the average expense ratio across the wider ETF sector is 0.24%. The expense ratio of S&P ETFs is usually even lower, thanks to the underlying instruments being highly liquid stocks with tight bid-offer spreads.
The expense ratio reflects the work the fund manager carries out going into the market to buy the 500 stocks in the index on behalf of their clients. For many, it’s a small price to pay for the convenience offered. If an investor opened a £10,000 position in an ETF with a 0.24% expense ratio, then the annual management fee would be £24.
One additional feature for UK investors in S&P tracker funds to consider is currency risk. As the index and its members are denominated in US dollars, movements in the forex markets can influence returns as much as changes to stock prices. Take, for example, a hypothetical situation where the S&P index didn’t change in value over a certain time period. If the conversion rate between USD and GBP moved by 10% at the same time, then the net return to investors would be 10% different, even though the underlying stock prices remained the same.
To mitigate that risk and reduce barriers to entry for UK S&P index investors, some fund managers have set up products that are GBP denominated. There’s no need to convert sterling into dollars, instead, the fund manager does the background work required so that deposits and withdrawals are all sterling based.
VANGUARD S&P 500 UCITS ETF – GBP (VUSA)
The Vanguard S&P 500 UCITS ETF – GBP (VUSA) tracks the performance of the S&P 500 index and is denominated in GBP. It was first listed in 2012 and being an Irish UCITS type of investment product means it can form part of an ISA investment portfolio. The way this S&P tracker fund is tailored to UK investors doesn’t mean it moves away from its main aim of investing in the largest company stocks listed in the US.
As of September 2022, the fund had a market capitalisation of $30.1bn, and an expense ratio of 0.07%. Vanguard has a reputation for offering low-cost trading and that expense ratio rate means that for every £10,000 invested, only £7 per year is lost to fund management expenses.
Vanguard S&P 500 UCITS ETF – GBP – Weekly Price Chart – 2012 – 2022
To enable entry-level investors to get a foothold in the stock market, the minimum amount of cash needed to buy into the fund is £500. Long-term investors looking to gradually build into a position can make ongoing monthly instalments of £100 or more, which are paid via direct debit.
Xtrackers S&P 500 UCITS ETF 2C – GBP Hedged (XDPG)
London-based firm DWS Investments UK Limited offers its Xtrackers S&P 500 UCITS ETF 2C – GBP Hedged fund to UK investors looking to buy the S&P index in sterling. It has been in operation since 2015 and is domiciled in Ireland, so falls under the regulatory umbrella of the Central Bank of Ireland. The fund is listed on the London Stock Exchange under ticker XDPG but aims to track the performance of the S&P index, so it focuses on US stocks.
The total expense ratio is 0.09%, which is marginally higher than the Vanguard equivalent. In cash terms, that difference amounts to £2 more per year being allocated to management charges on investments of £10,000.
Xtrackers S&P 500 UCITS ETF 2C – GBP Hedged (XDPG) – Weekly Price Chart – 2016 – 2022
The price volatility data for the Xtrackers GBP fund offers additional insight into the appeal of S&P index tracker funds. Over the last five years, the volatility of the fund has been 21.39%. That relative stability makes it easier for investors to hold on to positions when markets suffer stress or even see dips as an opportunity to scale up their buying activity.
iShares Core S&P 500 UCITS ETF GBP Hedged (GSPX)
The iShares Core S&P 500 index ETF with GBP hedging is one of the range of funds offered by BlackRock Inc. It is registered in Ireland, has appointed State Street as fund Administrator, is regulated by the Central Bank of Ireland, and has a listing on the London Stock Exchange under ticker GSPX.
The pedigree of the fund manager, BlackRock, is one appealing feature of the fund. There’s additional security for investors when they sign up with what is arguably the largest investment manager in the world. Another factor that will attract long-term UK investors is that the product can be held in tax-efficient ‘wrappers’ such as a SIPP.
iShares Core S&P 500 index ETF – Weekly Price Chart – 2018 – 2022
With a market capitalisation in the region of $54.6bn iShares ETF is one of the largest GBP-denominated S&P 500 index tracking funds. The expense ratio of 0.10% is slightly higher than some of the competitors in the peer group. But given the management fee, the difference is small in cash terms, the GSPX continues to prove popular with investors who appreciate the added security of the iShares and BlackRock brand names.
Whether you’re new to investing or an experienced trader, the S&P 500 index is often recommended as an asset that should play an integral part in your portfolio. The way that low-cost ETF funds simplify the process of investing is another reason to select one of the above funds and buy the top 500 firms in the US in one transaction.
The GBP share class funds also take forex ‘noise’ out of the equation for UK citizens. It’s possible to opt for a USD-denominated S&P tracker fund, but for many UK S&P index investors, buying the sterling share class just makes sense.
The S&P 500 index suits buy-and-hold investors. For that reason, and although the funds track the same underlying instrument, it is worth considering the credentials of the fund manager you will be placing funds with. It is also important to consider the financial health of the broker you select to hold your positions.
AskTraders has compiled a shortlist of trustworthy brokers who have all been reviewed by the AskTraders team. Checks have been made to ensure these brokers offer high levels of service, are well regulated and offer the best route to buying one of the most popular investment products in the market.