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S&P 500 enters bull market. Which is the best S&P 500 ETF for Singaporeans?

10 Jun 2023

The S&P 500 index tracks the top companies listed in the US, such as Apple, Tesla and Nvidia. Find out more about S&P 500 ETFs and uncover how to choose the best S&P 500 ETF as a Singaporean investor.

What happened?

The S&P 500 index entered a bull market earlier this week after rising more than 20% from its recent low in October 2022. 

This led to a discussion in the Beansprout community about how investors in Singapore can get exposure to the S&P 500 through an ETF.

Let us dive deeper to understand what is a S&P 500 ETF, and how can can choose the best S&P 500 ETF. 

What is the S&P 500 index?

The S&P 500 is a market-capitalization-weighted index that measures the performance of 500 large-cap US stocks.

These stocks cover a wide range of industries, including technology, healthcare, finance, consumer goods etc,. 

The S&P 500 serves an important benchmark and has broad appeal, not only in the US but also globally (including Singapore) because of its broad exposure that offers diversification.

It tracks well-established companies that are usually global leaders in their own fields - offering investors the ability to invest in high quality, usually global companies with a track record of growing their businesses over time.

What is the S&P 500 ETF?

ETFs are popular low-cost instruments for investors to invest in a diversified portfolio of stocks.

S&P 500 ETFs aim to track the S&P 500 index and provide investors the ability to invest in a diversified portfolio of 500 large US companies.

Why consider investing in the S&P 500 ETF?

Investing in S&P 500 ETFs provides numerous advantages, including the opportunity to partake in the long-term capital growth of global, US-listed companies like Microsoft, Apple and Nvidia. 

In fact, a single ETF provides exposure to more than 500 companies diversified across industries.

S&P 500 ETFs are known for their relatively low expense ratios compared to actively managed funds, which an average expense ratio of less than 0.1% annually. 

This cost-efficiency allows investors to keep investment costs low, grow more of their investment returns and compound their wealth over time.

S&P 500 ETFs are among the most popular ETFs being traded in the market, and their high trading volumes ensure ample liquidity and low bid-ask spreads - you can buy or sell shares at any time during market hours and easily enter or exit your positions without significant price impact. This is less important if you’re a long-term buy-and-hold investor.

What are ETFs that track the S&P 500?

When it comes to ETFs tracking the S&P 500, there are dozens of them that attempt to track the S&P 500’s performance.

The way the ETFs differ may be in their costs, currency, fund manager and fund domicile, and investors may choose between them based on their own choices and preferences.

Here is a table showing quick facts about a few of the most popular S&P 500 ETFs, including the SPY, IVV, VOO and CSPX. 

Best S&P 500 ETF.png
Source: Company websites as of June 2023

What are the factors to consider when investing in S&P 500 ETFs?

#1 - Fees

When investing in US-listed ETFs, it’s worth noting that you pay fees in various parts of the investing journey. 

Some of the fees are paid explicitly, for example, foreign currency exchange fees to convert SGD to USD, to trading fees/commission fees when you purchase these ETFs on a broker.

There are other implicit charges that are paid but these fees may not necessarily come out of your own pocket. 

For example, at the fund level, these ETFs may charge an ongoing fund management fee, of which the effects of the fee is already reflected in the Net Asset Value of the ETF. 

The good news is, investing in S&P 500 ETFs are extremely low cost, mainly because they are passive in nature, and simply track the index they are supposed to track. 

There is no active management where the fund manager aims to outperform the benchmark - and this keeps fund management costs low, among the lowest in the industry!

For example, both the VOO and IVV ETFs have a total expense ratio (TER) of 0.03% annually. On the other hand, the SPY ETF has a TER of 0.09%.

#2 - Dividend distributions

Some of the S&P 500 ETFs distribute the dividends collected from the portfolio companies as part of a quarterly payout - we call this distributing ETFs. 

This may be a good thing if you want to experience the rich life of collecting dividends, but it may sometimes be more of a hassle since you need to reinvest the dividends and that eats into your fees and returns.

This is where accumulating ETFs come into play. If you see a S&P 500 ETF that’s accumulating in nature, that means the ETF accumulates the dividends for you at the fund level, and reinvests them into the ETF automatically without you having to do anything.

The SPY, VOO and IVV ETFs are all distributing ETFs, while the CSPX ETF is an accumulating ETF. 

#3 - Fund domicile

Non-US residents should consider the tax implications of investing in US-listed ETFs. 

There is because of dividend withholding taxes, when the ETF pays out a dividend, and depending on where the fund is domiciled, the withholding tax may differ for US-residents and non-US residents.

In this specific example, Singapore investors investing in US listed ETFs do not have the benefit of an attractive withholding tax treatment on dividends, and dividends are subjected to withholding tax at 30%.

ETFs can be domiciled in different countries, which basically means where the home of the fund is. For practical purposes, the domicile of the S&P 500 ETF may impact the tax implications of the funds’ dividend distributions.

For a non-US resident whose country of residence has no tax treaty with the US (like Singapore), dividends from S&P 500 ETFs domiciled in the US would be withheld at 30%. 

In contrast, if you invest in a Ireland-domiciled S&P 500 ETF, you can benefit from the US-Ireland tax treaty rate of 15% on dividends, and insulate yourself from the US estate taxes on US asset balances above US$60K.

The SPY, VOO and IVV are domiciled in the US. The CSPX is the most popular Ireland-domiciled ETFs and is traded on the LSE.

What are the risks of investing in the S&P 500 ETF?

The S&P 500 can be volatile, so investors should be mindful of the market risks that come with investing in a S&P 500 ETF. In addition, investors in Singapore should also take note of the foreign currency risks.

#1 – Foreign currency risk

One significant factor for non-US residents investing in US-listed S&P 500 ETFs is the impact of currency fluctuations. 

Since these ETFs are traded in US dollars, you’d need to consider the impact of exchange rates, especially when you eventually want to liquidate and convert the ETFs back into your home currency (e.g. Singapore dollar).

What are alternatives to the S&P 500 ETF? 

While the S&P 500 ETF is a standard, market-capitalization weighted basket of the top 500 companies listed in the US, there are a few ETF variations that you may come across.

The Vanguard Total Stock Market Index Fund (VTI) is a similar but not identical fund that invests in US-listed stocks. 

It tracks the CRSP US Total Market Index, which includes more than 4000 large, mid, and small-cap stocks. 

It is also capitalisation weighted, which means that the top stocks in both index funds would be similar. 

The main difference is that VTI also includes small cap stocks. This could make the VTI ETF slightly more risky due to the addition of small-cap stocks.

What would Beansprout do?

With so many S&P 500 ETFs out there, it may be easy to get lost in the woods. Fortunately, investing in them has gotten more simple and cost effective with time. 

For long-term investors looking for a low-cost ETF that is Ireland-domiciled and offering exposure to the S&P 500, then the CSPX ETF would be an ETF to consider.

Amongst the US-listed ETFs, the VOO and IVV ETFs have the lowest expense ratios.

On the other hand, the SPY ETF has the highest AUM and liquidity, and also offer a breadth of options for investors to trade. 

For investors who find investing in only US-listed companies too concentrated for their liking, we can consider a global ETF such as the VWRA ETF instead. 

If you would prefer to invest in a familiar market like Singapore, then find out more about the ETFs that track the Straits Times Index (STI). 

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Derrick

Derrick

The best things in life are simple. I keep investing simple, and enjoy the best things in life.