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"Don't look for the needle in the haystack. Just buy the haystack!"
— Jack Bogle, founder of Vanguard
You may have heard friends talking about buying a fund that tracks the S&P 500 index. But what does investing through this US index mean for an investor? Here’s a simple way to learn about the S&P 500, and whether buying exposure to this index is suitable for you.
What is the S&P 500 index?
Apple, Amazon, Google — these are famous American brands that we as consumers are all too familiar with. But as investors, our aspiration goes beyond being their customers. We want to participate and profit off their growth as leaders in their industries.
The stock market is rightly created for investors to be able to become an owner to the profits and future growth of various businesses.
Now the problem is, it’s tough on the pocket for most retail investors to buy the shares of all listed companies in a country. There are thousands of companies listed on two major US stock exchanges, NYSE and Nasdaq, alone.
Then came a sampling benchmark to show how well a country’s top listed businesses are collectively performing, based on their share prices. One such index is the S&P 500 — it is built by combining the representative stock performance of the top 500 companies in the US. (S&P is short for the index constructor Standard and Poor’s.)
The S&P 500 index represents some US$40 trillion in market value of these 500 top firms.
These are usually large, stable companies that are leaders in their industries, and have shares that are actively traded. They include well-known names such as the Magnificent Seven, which includes Apple, Amazon, Alphabet (Google), Microsoft, and Tesla. The larger and more actively traded these companies are, the higher their represented portions would be in this market sample.
This scientific process of figuring how much a company’s share price should be reflected in a benchmark like the S&P 500 index is known as weighting; the weighting of the index, which has officially been around since 1957, is regularly reviewed so as to make sure that the S&P 500 index stays representative of the large companies listed in the US stock markets.
So by buying a fund that tracks the S&P 500 index, you are buying units of the index to be invested in a representative benchmark of big American brands — with these US corporate giants trading at a combined US$40-trillion valuation. Without this sample or benchmark, investors would have to buy the shares of hundreds of companies to get the same exposure — such trades would cost too much for the average individual investor.
The first S&P 500 fund was first available to individual investors in 1976 through fund house titan Vanguard. Jack Bogle, the founder of Vanguard, pioneered index investing using research showing that actively picking stocks does not consistently beat the market. It is better to just invest in the broad markets.
How does investing in the S&P 500 index work?
The easiest way for a retail investor to “buy the index” would be through an S&P 500 exchange-traded fund (ETF) or a mutual fund (also called a unit trust). The fund manager takes investors’ money to buy and own the underlying stocks, such as Apple and Google, so as to mimic the index performance. Fund managers are institutional investors and have access to faster trading systems and much cheaper trading fees that retail investors do not, so they are able to buy these individual stocks efficiently.
Investors earn not just the capital gains — that is, the returns from higher share prices — but also from receiving dividends that these companies offer to their shareholders. Depending on how the fund is structured, the dividends earned can either be distributed to investors, or reinvested into the markets on behalf of investors.
Investing in the US from Hong Kong
Investing in S&P 500 ETFs or unit trusts comes with various fees and cost considerations. Let’s break them down.
Investing in S&P 500 through ETFs or mutual funds
There are options for investing in the S&P 500 with cash that include US-listed ETFs, such as those with the ticker VOO, IVV and SPY. Their main draws are high liquidity, and low fees. Many low-cost brokerages also offer zero commissions for trades into the US markets.
But as a Hong Kong-based investor with no US tax treaty, do note that there is a dividend withholding tax of 30% levied at the fund level for US-listed ETFs.
Foreign investors investing in US-listed securities — such as US-listed ETFs — also have to watch for estate taxes. Once your investment holdings exceed US$60,000, you will be charged up to 40% on most of your holdings.
Read more: An inconvenient truth: Taxes on US-listed ETFs
On the other hand, investing in a HKD-denominated mutual fund (also called unit trust) does not incur estate tax liability, does not require currency conversion, and can automatically reinvest the dividends from the underlying stocks into the mutual fund.
With some of these funds, the headline fee may appear to be higher, but Endowus rebates distributor commissions known as trailer fees to our clients, so that brings your total cost of investing down. More importantly, it does not include the other forex and estate tax-related costs associated with investing in US-listed ETFs that may not be so obvious at first glance.
A low-cost HKD denominated unit trust that tracks the S&P 500 Index is the HSBC ICAV US Equity Index Fund that has a fund-level fee of 0.31%. As part of HSBC’s well-established passive management platform with over 30 years of experience, the Fund enables Hong Kong-based investors to gain efficient exposure to the S&P 500 Index with low tracking error. The Fund adds further value through its ESG-based exclusions to not invest in companies that are involved in banned weapons.
Correlation between HSBC AM US Equity Index Fund and main US indices
High correlation with major US equity market indices
A high correlation between the HSBC AM US Equity Index und and main US indices ensures that the fund's returns closely mirror the movements of the indices, allowing investors to track the performance of the broader market with greater accuracy. Additionally, it simplifies portfolio management by aligning the fund's performance with widely recognised market indicators, facilitating more informed investment decisions. This alignment also aids in risk management, as it enables investors to respond to market trends more effectively.
Other options for investing in the index include UCITs ETFs such as CSPX or VUAA. Domiciled in Ireland, these funds are not subjected to estate taxes, and reinvest dividends directly. However, they still have dividend-withholding taxes of 15%, reflecting the relatively favourable tax treaty between the US and Ireland.
Invest in index funds easily through Endowus Fund Smart
A simple way to invest in index funds is through Endowus Fund Smart platform — you can buy a single fund or customise your ideal portfolio with multiple funds in just a few minutes.
Besides the S&P 500 Index, you can also invest in other global indices such as the MSCI World Index through the HSBC ICAV Global Equity Index Fund or the Bloomberg Global Aggregate Bond Index through the HSBC ICAV Global Aggregate Bond UCITS ETF Fund.
When you invest in a single fund, you will pay an all-in Endowus Fee of 0.4% per annum to Endowus, as well as the fund-level fee, net of all the trailer fee rebate Endowus returns as Cashback. Find out more about our transparent pricing here.
We offer an additional suite of even lower cost index funds for our Professional Investors clients, such as the Blackrock iShares US Index strategy which also tracks the S&P 500 index at a total expense ratio of only 0.08%.
Final checklist: beware of the S&P 500 lost decade
The S&P 500 has performed well historically, with an annualised return of 9.49% between June 2014 to June 2024.
That said, an S&P 500 fund is fully invested in equities and is only exposed to the top 500 US companies. To add, an investor needs to be comfortable with tolerating market volatility, including large fluctuations in a short time.
Data showed that the worst historical 12-month return in recent history (from June 2004 to May 2024) is minus 43.75%. The worst drawdown assumed a starting investment in March 2008, during the Global Financial Crisis, through February 2009.
S&P 500 may also underperform more global portfolios over certain periods. Between 2000 and 2009, the S&P 500 total return during the period was only -9.1%, compared to the MSCI Emerging Market Index of 162%. Some have called this period of 2000 to 2009 "The Lost Decade" for the S&P 500.
Therefore, to further diversify your investment portfolio beyond just the S&P 500, consider investing in index funds that have a mandate to replicate all the developed markets or even the MSCI All Country World Index. Endowus uses Dimensional funds to construct our core one-stop solution Flagship Portfolios, giving our clients global exposure to more than 10,000 companies for your core wealth accumulation goals.
While investors with a lower risk appetite and shorter-term investment objective will need to look at a more risk-appropriate portfolio.
Read more:
- S&P 500 reaches a new all-time high. What’s next?
- An inconvenient truth: Taxes on US-listed ETFs
- Introducing Endowus Flagship Portfolios: a core strategy for your financial goals
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