On May 17, 2010, the 10-year licensing agreement for the exclusive ETF rights to the S&P 500 index in Europe between Standard & Poor’s and iShares expired. Since then, a host of other ETF providers have swiftly reached agreement with S&P to create their exchange-traded funds tracking the index. With one of the oldest and most-tracked equity indices now investable on a multitude of exchanges across Europe and at a much lower price, investors should seriously consider adding it to their equity portfolio.
What is the S&P 500?
Standard & Poor’s created this index in 1957 as a broad measure of the US stock market. Currently, the index represents about 75% of the entire US stock market by market value. It is a free-float market capitalisation-adjusted index of 500 of the most widely held publicly-traded companies based in the US (with a handful of non-US companies grandfathered in). The S&P 500 committee chooses companies for inclusion based on market size, liquidity, and sector representation, guided by the principle “leading companies in leading industries.”
Why Should You Invest in the S&P 500?
While the Dow Jones Industrial Average may get more headlines, there’s no question that the S&P 500 is the most important equity index in the United States, and probably the world. There is more than $900 billion in assets indexed to the S&P 500, and almost $3.5 trillion in assets benchmarked to the index. The SPDR S&P 500 ETF, which trades on the New York Stock Exchange, is the most heavily traded security on the planet, and the iShares S&P 500 ETF trading in London is not only the largest US ETF in Europe, but the largest overall. The index’s popularity makes it the lowest-cost way to gain broad exposure to the biggest equity market in the world.
An Analysis of the Underlying Stocks
Because the S&P 500 is such a widely-followed index, Morningstar Equity Research analysts cover almost the entire index (485 of 500 stocks), giving us great insight into its value. Overall, the index currently looks to be undervalued with current prices only about 85% of the market’s fair value.
These are the top 10 companies in the S&P 500 by market capitalisation, which covers nearly 19% of the index. Note that no single company has a weight greater than 3%. Despite the financial crisis of 2008, Financial Services remains the largest sector by weighting in the S&P 500, with nearly 17% of the index. Next are Energy, Hardware, Consumer Goods, Industrial Materials and Health Care, all at approximately 11% of the index. The broad diversification of this index across sectors and individual stocks makes it a good choice as a core holding in an equity portfolio.
Choosing an ETF
The end of iShares' monopoly on the S&P 500 index in Europe is a boon to investors looking for low-cost exposure to the US equity market, as all the new S&P 500 ETFs have a significantly lower expense ratio in a bid to draw in assets. Still, the iShares ETF may continue to be the preferred option for many investors, particularly larger players, as its size and volume lead to lower trading costs. Because of this, the new ETFs may not cut too much into iShares assets under management, but they will expand the market for the index in Europe as they are available on multiple exchanges and in multiple currencies. Also, most of the new entrants use swap-based replication and not physical replication, which some investors may prefer.
The db x-trackers ETF is the most widely available option, available on most exchanges in Europe where ETFs are traded. The Deutsche Borse is the exchange with the most options among these providers, with only HSBC and Source not offering their ETF on the Frankfurt-based exchange. All the ETFs except for those from ComStage and Credit Suisse are available on the London Stock Exchange (LSE). db x-trackers also has leveraged and short ETFs of the S&P 500, available on the LSE SETS for a 0.50% annual fee.
In combination with a EURO STOXX 50 ETF, an S&P 500 ETF will give you exposure to a large chunk of the developed world’s equity markets. The popularity of the two indices in ETF form makes them great low-cost choices to form the core of your equity portfolio. (Read more on investing in the EURO STOXX 50 here.)
