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Andrew Michael
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Published: Jun 23, 2023, 3:16pm
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Kevin Pratt
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The is one of the world’s most influential stock market indices, reflecting the combined performance of the 500 largest companies in the US, including a handful of trillion dollar giants such Apple, Microsoft and Alphabet, Google’s parent company.
In terms of value, the index accounts for about 80% of the 4,000-plus companies that are publicly listed in the US. It is therefore thought of as a reliable gauge of the country’s overall stock market performance.
Despite the impact of the Covid-19 pandemic on worldwide returns, not to mention the hammering endured by most global stock markets last year, the 500 or so stocks that make up this index have produced a net gain of more than 50% over the past five years.
UK investors looking for global exposure and large US companies in particular have various options at their disposal – from buying shares in individual businesses, to investing in funds that do the job for them.
For investors considering the funds route, one way of gaining blanket exposure to US corporations is via so-called ‘passive’ investments including index tracker funds.
We’ve asked Jason Hollands, managing director of the investment service Bestinvest, to pick a handful of S&P 500 index trackers that fit the bill for investors to consider. We’ve listed Jason’s choices below, plus an alternative that offers exposure to a wider selection of US companies.
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- Featured Partner Offer
- Fidelity Index US P
- HSBC American Index C
- iShares US Equity (UK) Index D
- Methodology
- Which other US index fund is worth considering?
- Frequently Asked Questions (FAQs)
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Our Pick Of The Best S&P 500 Index Tracker Funds
The terms ‘fund type’ ‘target index’ and ‘ongoing fund charge’ are explained in the FAQs below.
Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
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Fidelity Index US P
Fund size
£3.89 billion
Fund type
OEIC
Target index
S&P 500 Index
On Bestinvest's Website
Fund size
£3.89 billion
Fund type
OEIC
Target index
S&P 500 Index
Why We Picked It
The fund is managed by Geode Capital Management, a Boston-based, specialist manager of index strategies that is part of Fidelity.
The fund’s objective is to achieve long-term capital growth by closely matching the performance of the S&P 500 index.
To meet this objective, the fund holds company shares that represent the benchmark index. To achieve its objective, the fund may use stock index futures, a sophisticated type of investment known as a derivative.
The fund holds 501 stock positions weighted by market capitalisation. Market cap is determined by multiplying the number of shares of a company in circulation by the share price. Ongoing costs for this version of the fund are relatively low.
Who should consider investing?
This may appeal to anyone looking for a core US equity holding as part of a diversified portfolio while seeking to keep investing costs as low as possible.
Ongoing fund charge
0.06%
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HSBC American Index C
Fund size
£9.79 billion
Fund type
OEIC
Target index
S&P 500 Index
On Bestinvest's Website
Fund size
£9.79 billion
Fund type
OEIC
Target index
S&P 500 Index
Why We Picked It
The fund aims to provide growth over the long term, defined as five years or more, by tracking the performance of the S&P 500 index. To achieve its investment objective, the fund invests directly in shares of companies that make up the index.
Managed by HSBC Global Asset Management, this is one of the largest S&P 500 trackers available in the UK. It holds 499 stock positions as determined by the market cap of constituent companies. The fund features extremely low-cost fees on the ‘C’ share class version of the fund.
Who should consider investing?
This may appeal to investors who are considering a core US equity holding as part of a diversified portfolio and who are looking to keep investment costs as low as possible.
Ongoing fund charge
0.06%
Methodology
Bestinvest’s managing director, Jason Hollands, says there are a number of criteria to consider when selecting passive investments such as index funds: “First, there is the running cost of the fund. This will reduce investor returns to some degree, so the lower the fees the better when it comes to passives.
“Secondly, there’s the index replication approach that’s used. Our preference is for funds that fully replicate every holding in an index, not just a representative sample. Liquidity, the ease with which an asset or security can be converted into cash, is also an important consideration.”
Mr Hollands also reminds would-be investors it’s worth bearing in mind that different investing platforms, brokers and professional financial advisers may not all have access to the lowest cost share classes.
“This will depend on each provider’s respective buying power. It’s worth being aware of the share class available, usually denoted by letters or numbers at the end of the fund name.”
Which other US index fund is worth considering?
As an alternative to S&P 500 trackers, Bestinvest’s Jason Holland also highlighted the £12.5 billion Vanguard US Equity Index fund which follows the S&P Total Market Index and has an OCF of 0.10%: “This fund provides broader exposure to US equities than the S&P 500 does, including the entire S&P 500 along with exposure to medium and smaller-sized US companies. As such, the fund holds 4,192 stock positions weighted by market-capitalisation.
“With an ongoing charge of 0.1% the fund is still relatively low cost and is one to consider for investors looking for a highly diversified US equity holding as part of a balanced portfolio.”
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Frequently Asked Questions (FAQs)
What is an index tracker fund?
Index tracker funds – also referred to as ‘index’, ‘tracker’, or ‘passive’ funds – are a type of ‘pooled’ or ‘collective’ investment fund.
A pooled fund collects contributions from lots of different investors into one large pot of money allowing it to be managed on their behalf by a professional investment management firm.
Pooled funds are often structured as an entity known as an ‘open ended investment company’, or OEIC. Open-ended means the fund can create new units of ownership to satisfy investor demand.
Using extensive computing power, index trackers aim to copy the performance of a certain stock market index, such as the UK’s FTSE 100 barometer of blue-chip company shares, or the S&P 500 in the US. These are often referred to as ‘target indices’ or ‘benchmarks’ for the index fund in question.
As an investor in a tracker fund, you can only (at best) expect to mimic the performance of a particular index. It’s important to bear in mind that the money invested in a tracker will, over time, follow the movements of an index – both down as well as up.
Index tracking is different to that of so-called ‘actively managed’ investment funds that are run by professionals who pick specific stocks in order to beat an underlying index.
Index tracker funds come in a variety of guises. As well as those that track specific stock indices, products may also focus on particular industries or sectors (such as technology or healthcare), countries, or particular investing styles (such as environmental, social and governance, often shortened to ESG).
How do index trackers work?
If you were to put money into an index tracker, the cash is used to invest in all the companies that make up a particular index. This provides would-be investors with a more diverse portfolio compared with buying, say, just a handful of stocks.
Index trackers aim to mirror a specific index as closely as possible, and they do this in one of two ways.
The first method is by a process known as ‘full replication’, which essentially means buying all the components of a particular index. For example, in the case of an S&P 500 tracker, the fund will buy shares in all 500 companies within the index in proportion to the size of each company as it appears within the index.
The second process is called ‘partial replication’. Rather than just buy all the shares in an index, trackers in this camp invest in a representative sample of companies that feature on a particular index.
How do I buy an index tracker fund?
Index trackers can be bought direct from fund providers and also be arranged through both professional financial advisors and robo-advisor investment services. But it’s typically more usual to gain exposure by buying tracking funds that are available via online investing platforms and investment trading apps.
What is tracking error?
One way to weigh up the performance of a passive investment fund is to consider its tracking error. This reflects how much a tracker fund’s performance deviates from the index or any other benchmark that it’s meant to be copying.
Tracking error is measured as a percentage, so a tracking error of 0% indicates perfect replication. A tracking error that is just the cost of the fund (see below) would reflect a passive investment that is doing its job exactly as it should.
How much do index tracker funds cost?
Because of the way they function, with a greater emphasis on computing power, passive funds tend to be cheaper than their actively managed counterparts.
The reason for this is because, regardless of whether an index tracker relies on full or partial replication, the fund ought to cost less to administer overall than it would if it employed a team of active managers.
The three tracker funds identified above each have an ongoing fund charge (OCF) of 0.06%. The OCF reflects the fund’s running costs as set out by the fund provider.
A £1,000 investment in our funds in the spotlight would therefore cost £0.60p although, depending on where the fund was bought, additional administrative/dealing charges may also apply. In contrast, the OCF for an actively managed fund might typically fall in the range between 0.5% and 1%.
Can I lose all my money in an index tracker?
Any kind of stock market-based investing incorporates arisk of some kind. That said, an index tracker fund that owns dozens, if not hundreds, of shares is better diversified than a portfolio that holds just a handful of companies, therefore typically lower risk.
For an S&P 500 tracker to effectively become worthless, each component company would technically have to fail before investors lost everything. That said, depending on its focus, an index could underperform and lose money for several years if, say, a sector or investment region fell out of favour.
What is the S&P 500?
The S&P 500 Index of large, US listed companies is the world’s most replicated investment benchmark.
According to Bestinvest’s Jason Hollands, it is also “one that is notoriously difficult for active fund managers to beat on a consistent basis”. A challenge adds Mr Hollands “that has become steadily tougher as the index has become increasingly concentrated around a handful of mega-cap technology and online stocks that have accounted for the majority of its returns over the last decade”.
S&P 500 index tracker funds have become the default choice of many investors when it comes to investing in US equities. Even Warren Buffet, the world’s most famous investor, is a fan of the approach.
The good news is that the costs of S&P 500 index funds have become cheaper in recent years thanks to a price war between providers and a fraction of the fees on an actively managed fund as providers slug it out for market share.
Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
What’s an alternative to S&P 500 index trackers?
As mentioned above, index trackers form part of a stable of investment funds collectively referred to as ‘passives’. Another member of the passive family is the increasingly popular exchange-traded fund, or ETF.
Similarities exist between index trackers and ETFs, but there are differences as well. Read more here about our pick of the .
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Andrew MichaelEditor
Associate Editor at Forbes Advisor UK, Andrew Michael is a multiple award-winning financial journalist and editor with a special interest in investment and the stock market. His work has appeared in numerous titles including the Financial Times, The Times, the Mail on Sunday and Shares magazine. Find him on Twitter @moneyandmedia.
