The Standard & Poor 500 (S&P 500) is the world’s largest stock market index. The index consist of 500 largest companies listed on the US stock exchanges and similar to the other main US benchmark, NASDAQ is weighted by market capitalization.
The index is rebalanced quarterly and as part of the process the companies which no longer meet the benchmark requirements are removed and new companies are added. This means the index today reflect the latest top 500 stocks in the US.
The index represents some of the most well known US and global brands. The strength of the liquidity in the index is reflected in the size of the index components. Typically, a company has to have a market capitalization of at least $3 billion US market cap before it is considered for index inclusion. The size is a stark contrast where the smallest company in the ASX 300 is usually around $100 million market capitalization.
A major risk investing in the local market like the ASX Top 200 is the heavy bias towards the financials and material sectors. Similarly for the other major us equity benchmarks Dow Jones which only includes 30 stocks and the NASDAQ is heavily weighted to technology and biotechnology shares. The S&P 500 index stands out by being broadly diversified across a number of sectors representative of the us economy.
Standard & Poor’s 500 Performance
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The returns above shows the US market usually outperforms the other major markets. The relatively strong performance can be attributed to heavy reliance to the technology sector which makes up the largest industry exposure in the index.
S&P 500 Chart
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Looking at the overall index return can miss the out performances within the individual sectors.
S&P 500 Index Sector Segments
Information technology makes up the largest industry sector in the S&P 500 index, followed by health care, consumer discretionary, communication services and financials.
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Companies in the S&P 500 represent US based companies and those with global presence which operate out of the US. Investing the index hence provides a good proxy for the performance of the US and investors long have used the index as proxy for the health of the global equity market.
The S&P 500 index has outperformed the ASX 200 index recently due to looser monetary policy with the US Federal Reserve implementing unprecedented policies in response to Covid-19. As result the Fed has expanded its balance to its largest ever in its existence.
The Australian market with heavy weighting towards miners and financials is still reliant on the health of the Chinese economy. Further to this, the performance of the share market is also affected by the movement through the appreciation or the depreciation of the AUD against the US dollar. Historically, a falling AUD helps the local market as the earnings of the miners increase due to their revenue being in US dollars but costs are in Australian dollars.
List of Standard and Poor’s 500 Companies
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The index is now reliant on technology companies where 5 of the top 10 largest companies in the index are technology firms.
- Apple
- Microsoft
- Amazon
How to Invest in the S&P 500?
There are multiple ways investors can gain exposure to the S&P 500 Index. The easiest way is through exchange traded funds either trade on the US exchanges or the Australian exchanges.
SPDR S&P 500 (SPY ETF)
Index funds provides a cheap and efficient way for investors to gain exposure to a particular index. SPY ETF tracks the S&P 500 index and is listed on the US stock market and by all measurements it is the largest ETF in the world.
SPY is the best vehicle for investors with direct access to trading or investing in the US market.
S&P 500 Index Fund (ASX IVV)
There are a number of ETFs which tracks the S&P 500 trading on the ASX. The two largest ones are iShares Core S&P 500 (ASX IVV) and iShares S&P 500 AUD Hedged (ASX IHVV).
IVV ETF is a straight index fund for the benchmark and the most liquid of the two options. As the underlying benchmark is a US index, all of the companies in the index are traded in US dollars and for Australia investors investing in the ETF the final return will also be dependent on the FX movements.
IHVV ETF is partially redesigned with Australian investors in mind who does not want to take FX risk. Embedded in the fund are AUD/USD hedges which removes the impact of the exchange rate movements on the performance of the ETF.
The fees are slightly higher at (0.10% vs 0.04% for IVV) to compensate for this but it is still more cost effective for investors to own IHVV rather than hedging the exposure themselves. As it can be seen the FX hedged ETF option is not materially higher than the pure index tracker.
See our article on the best index funds on the ASX for more details on other index funds.
iShares Core S&P 500 ETF (IVV)
Important features:
- IVV does exactly as promised, a low cost index fund with annual management expense ratio of 0.04% per annum.
- The fund provides a unhedged S&P 500 index exposure. Total return is based on the combined S&P 500 return and changes in AUD/USD exchange rate.
- Distribution are paid quarterly. All distribution are in USD and converted to Australian dollars. Just like the change in the index fund value is impacted by variation in the Aus dollar to US. The final distribution received by investors is also dependent on the FX rate at time of payment.
- As IVV ETF is traded on the ASX it allows investors intraday liquidity in the fund. Investors can open and close position at a time of their choosing rather than daily pricing provided by managed funds.
ASX IVV ETF Dividend History
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Recent IVV ETF dividends in Australian dollars shows a steady upward trend. Dividends paid are sum of the all the dividends paid by the underlying companies. The dividend amount in AUD has outpaced the dividends in US dollar as the Australian dollar has depreciated since the end of the mining boom in 2013. Note as the companies are listed overseas there are no franking credit attached to any dividend from IVV.
As the Australian dollar depreciates, the value of the US dividend is supercharged in the short term. We expect this to be a headwind going forward as currency changes are cyclical and never a one way street.
Interestingly this means buying IVV ETF on the ASX provides some level of cushion during market downturn as AUD is known as a risk on currency where the value typically fall during periods of market dislocation. The depreciation of the AUD in this instance could buffer the extent of fall in the value of the ETF share price.
This would have the opposite impact during periods of AUD appreciation and the fund on the ASX will underperform the underlying benchmark in US dollar terms.
S&P Index Futures (ES Futures)
Index future contracts are best designed for traders that are looking to trade the index on a short term basis. Futures on the S&P index are called ES futures and are available at quarterly expiries for the next 5 quarters but the most liquid contract is the front month contract which is the upcoming quarterly expiration period.
S&P 500 Futures vs S&P 500 e-minis
The equity futures contract for the index is traded on the Chicago Mercantile Exchange.
Futures contract are fix price per point contracts which means that the value of the contract is the fixed price per point x the index value.
For example if the index is at 3,000 points. The value of the futures contract is $250 x 3,000 =$750k. The full contract value will be out of reach for most investors and is designed for funds to trade or hedge their index exposure.
The S&P 500 e-mini contracts are designed for smaller investors where each index point is worht $50. Therefore using the same calculation above each e-mini contract is 1/5 of the size of a norma Standard and Poors 500 index futures. i.e $50 x 3,000 = $150k.