Do you want a piece of one of the most successful stock markets in the world? Well, do you? I suspect so, which is why we’ve put together this guide to the Best S&P 500 ETFs and the best S&P 500 index funds.
In this post, we’ll explain how to pick the best S&P 500 trackers and narrow down the array of choices to a worthy few.
Best S&P 500 ETFs – compared
Source: Trustnet and fund provider’s data. Returns are nominal annualised returns.
S&P 500 ETFs are a type of index fund that track the performance of the 500 largest stocks in the US.
Index funds are designed to match – as closely as possible – the return of a particular section of an investible market. The part you gain exposure to is defined by the ETF’s benchmark index. That’s the S&P 500 in the case of the trackers we’re focussing on today.
By replicating the performance of their index, S&P 500 ETFs (and S&P 500 index funds) enable you to efficiently diversify across Corporate America’s most profitable companies at minimal effort and for an incredibly low cost.
Our post on ETFs vs index funds explains the key differences between the two types of investment tracker.
There isn’t normally much to choose between the two tracker flavours. But when it comes to the US stock market, the best S&P 500 ETFs are superior to the best S&P 500 index funds.
Best S&P 500 ETFs – what to look for
The table above lists the key criteria that separate the best S&P 500 ETFs from the also-rans.
As you can see from the 10-year return column, the practical difference between the top dogs is extraordinarily slight.
That said, it’s not quite like picking baked bean tins off the supermarket shelf. Some S&P 500 trackers are more equal than others…
The ETF’s index replication method matters when it comes to US stocks.
It follows, therefore, that lower-cost ETFs and index funds should dominate their pricier brethren.
The most visible measure of cost is a fund’s Ongoing Charges Figure (OCF). ETF providers compete on this measure in a ceaseless price war that does have a winner – the consumer. Yay!
But the OCF is not the last word in performance. Take a look at this chart:
The graph shows the cumulative return of the cheapest US large cap ETFs (including non-S&P 500 indices), with their current OCFs overlaid in green.
We’ve also added Xtrackers’ S&P 500 Swap ETF 1C. This is one of the most expensive S&P 500 ETFs around – and yet it is also a top performer.
There’s no clear correlation on OCFs here. Rather, the point is that the cost gaps between the best S&P 500 ETFs (and rival indices) are so slim that they’re not a deciding factor when it comes to performance.
By all means choose a keenly-priced tracker. But don’t stress about every last pip of difference.
Naturally we’re drawn like groupies to the best performers on the stage.
But two points of caution.
Firstly, the current Number One may not lead the pack in the future. There’s just no guarantee that any small advantage eked out today will persist.
Additionally, as the next chart shows the difference between leading S&P 500 ETFs is marginal anyway:
All of these ETFs have delivered exceptional performance over the last 11 years, because they mirror the S&P 500. And these US large caps have produced stellar returns over the period.
Every single one of those trackers did its job. True, we can see that some did it slightly better than others – in hindsight and with our magnifying glasses out – but you don’t need to get Sherlock Holmes on the case when you’re choosing between me-too products.
Note that every table and chart in this post uses a slightly different timeframe. And the single best S&P 500 ETF – as measured by return – changes with almost every time period.
There is a core set of five ETFs that have maintained a slight edge (as reflected in our Best S&P 500 ETFs table). But performance is only one factor worth thinking about.
Also, forget about any conclusions drawn from less than three years of data. The longer the timeframe, the better the perspective. Temporary wins are planed away by the law of averages.
Our approach is to find the best long-term data we can, then place our pick in the centre of the Venn diagram of relevant factors.
A balance of low cost, long-term performance, and an ongoing tax advantage will get you to the right place.
Best S&P 500 and US large cap index funds – compared
Cost = OCF (%)
10y returns (%)
HSBC American Index Fund C
Fidelity Index US Fund P
iShares US Equity Index Fund (UK)
L&G US Index Trust I
Vanguard US Equity Index Fund
S&P Total Market
Source: Trustnet and fund providers’ data. Returns are nominal annualised returns.
There are many fewer S&P 500 index funds available than ETFs. Hence we’ve drafted in other flavours of US large cap tracker fund to bolster your options.
You can see that the best S&P 500 index funds trail the best S&P 500 ETFs over the long-term.
But the lag isn’t egregious and is worth living with if you’ve chosen a percentage fee broker that offers zero-cost trading on index funds, since you’ll be saving extra dosh that way on investing fees.
Once your portfolio is worth over £12,000 in a stocks and shares ISA – or roughly £60,000 in a SIPP – then it’s time to think about the long-term cost advantages of switching to ETFs.
ETFs do not qualify for compensation under this scheme.
The only vehicle that is covered by the FSCS is a UK domiciled Unit Trust or OEIC (Open-Ended Investment Company).
All of the index funds listed in our table are one of those two types.
And just in case you’re wondering, index funds all physically replicate their indices. There’s no synthetic, withholding-tax-swerving option here.
Best S&P 500 ETFs vs MSCI USA ETFs
Finally, it’s worth knowing that trackers based on the S&P 500 have consistently beaten other indices that represent US large caps over the periods we’ve been looking at:
ETFs based on the MSCI USA index are the most commonly offered alternative to S&P 500 tracker funds. Our chart shows that they have consistently come off worse against S&P 500 stablemates.
The MSCI USA is slightly more mid-cap orientated than the S&P 500. But the US tech giants have swept all before them for well over a decade, benefitting the famed US mega-cap index.
We’d say it is the outsized returns from the largest technology companies that have driven the returns of the S&P 500 higher. And such companies make up a greater proportion of the less-diversified S&P 500.
That’s the most likely reason that S&P 500 trackers have also beaten FTSE USA and S&P Total Market index funds.
But academic research has previously found that smaller companies in aggregate beat large companies over the long-term.
There’s reason to believe then that recent returns will prove to be an anomaly.
S&P 500 forever?
On a related note, Corporate America has been the winning bet globally for more than a decade, too.
In fact if you’re looking for the best S&P 500 ETF or index fund then you’re probably motivated by the total ass-smashing our Trans-Atlantic cousins have handed the rest of the world in recent years:
In fact the dominance of the US is likely to contain the seeds of its future reversal.
If America looks like the only market worth investing in, then returns must decline eventually as prices are bid up.
The higher the price, the less likely it is that you’ll make outsized returns – because, ultimately, there’s no reward without risk.
We can’t know when any trend will reverse. But the reason we diversify is because it usually does.
US stocks seem overvalued by the best historical measures we have – though such metrics are not bulletproof, and they don’t explain why the S&P 500 has been apparently defying gravity for years now.
The Monevator view is that it’s best to spread your bets around the world. Easier said than done though when even the best global tracker funds are now 60% concentrated in the US, thanks to the latter’s outperformance.
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