How To Invest in the S&P 500 – A Practical Guide

by | Aug 5, 2022 | Investing

How To Invest in the S&P 500 – A Practical Guide

TABLE OF CONTENTS

1. Introduction
2. Easiest Way to Invest in the S&P 500 Index
3. What is the Best Brokerage Platform?
4. Funding Your Account From Outside the US
5. Is Index Fund Investing Profitable?
6. Conclusion

1. Introduction

Picture 1: Visualized S&P 500 Performance (Source: FinViz)

The S&P 500 Index could potentially help you grow your money at a relatively consistent rate of about 10% per year. You’ve searched the internet on how to invest and for some reason, you’ve ended up in my blog, thanks to the wonderful thing known as SEO. Fret not, you are in the right place! I will show you everything you need to know, including the steps to start investing in the S&P 500 Index!

2. Easiest Way to Invest in the S&P 500 Index

The first step in starting this journey, is weirdly enough, choosing the right financial instrument. There is only 1 S&P 500 Index, but you are actually unable to buy the index directly. In order to invest in the S&P 500 Index, you’ll need to invest in what is known as Mutual Funds or Exchange-Traded Funds (ETFs).

Exchange-Traded Funds (ETFs) and Mutual Funds are essentially financial instruments that track the performance of these indices. ETFs that track indices are also generally known as Index Funds.

To keep it brief, it’s almost impossible to invest in US Mutual Funds if you’re not a resident of the United States. This is due to the fact that there are some financial limitations as mutual funds are not publicly-traded like ETFs. It’s still technically possible to invest in mutual funds if you’re not from the US, but it’s significantly more complex. Check out this guide from PocketSense to learn more about this.

Picture 2: ETF Venn Diagram

For ETFs, it behaves almost like a stock, but it’s a basket of stocks that are traded under 1 ticker symbol. You can take a look at my step-by-step guide, all about ETF investing here.

For the sake of simplicity, I would highly recommend just sticking with ETFs, as they are typically managed by big financial institutions, fees that are somewhat negligible and more-easily accessible, etc.

3. What is the Best Brokerage Platform?

Now that you know that Exchange-Traded Funds (ETFs) are the way to go for this, we’ll get to the fundamentals of choosing your brokerage account.

A brokerage account is essentially the medium or platform that connects you to your financial investments. I’d recommend slowly researching different brokers as different brokers offer different features and functionalities.

A good example would be if you’re looking to buy VOO, one of the index funds that track the S&P 500 Index. In order to buy this ETF, you’ll need access to a broker that is able to provide access to the US stock market.

If you come from a European country, you might be restricted from investing in US ETFs due to the PRIIP Regulations set by the European Parliament. A work-around for this problem would be to opt for European ETFs that track the similar indices, for example the CSPX ETF (listed on the London Stock Exchange, UK) that is a mirror-image of VOO that tracks the S&P 500 index closely at an affordable expense ratio of 0.07% p.a. In this case, you’ll need a broker that enables you to trade stocks and ETFs in the London Stock Exchange. If you need more help in choosing the right broker, I’ve made a video about comparing 14 different brokers that cover many different aspects. I’d highly recommend checking it out.

My Personal Choice

For me, I personally really like Interactive Brokers (IBKR), as they tend to have the lowest fees, is heavily-regulated and are one of the most flexible brokers, outside of the US. I’ve been researching and creating content on different brokers for as long as I can remember, and I can say with confidence; no other broker comes close to what IBKR has to offer.

If you’re looking for a hassle-free broker that probably has one of the best features that any brokerage platform has to offer, IBKR is definitely for you.

Check out my informative video guide on how to kick-start your investing journey with IBKR:

4. Funding Your Account From Outside the US

Once you’ve had your brokerage account set-up, it’s time to fund it with the right currency for the index fund you’re looking to invest in. If you’re looking to buy a unit of the VOO ETF, the currency is denominated in USD. Likewise for CSPX, it’s also denominated in USD despite being listed on the London Stock Exchange.

In order to buy these ETFs, you’ll need to have US Dollars in your brokerage account, in order to buy or sell stocks and ETFs. Brokers like Rakuten Trade do not have a multi-currency account built into them, and hence they will automatically convert your local currency to USD, at the point of trade.

They’ll likely charge a fee or take a small cut out of each transaction; which might not be the most cost-effective way to do it. For this instance, I will speak in the context of Interactive Brokers (IBKR), which allows you to deposit using almost any currency in the world, and convert it to USD at the spot market rate – alongside a relatively small fee of $2. And the best part? You get to hold cash in USD, in your account, just like a multi-currency account!

5. Is Index Fund Investing Profitable?

In any investment, there is a possibility of profiting, as well as making losses. Let’s talk about how you can profit from investing in the S&P 500 Index.

There are primarily 2 ways to profit from your investments, which are:

a) Capital Gains

Capital gains would be considered by most to be the primary way of gaining profit. Let me give you an example:

Picture 3: Capital Gains Illustration

Say you bought the US VOO ETF at $416 per share. Two years later, you’ve decided to sell it at $450 per share. $450 – $416 = $34. Essentially, you’ve made $34 per share; this isn’t inclusive of any fees that you might face. For most countries outside of the US, there is no capital gains tax on this profit. However, please verify with relevant tax accountants or advisors if this is the case for your particular country.

b) Dividends

The second way to profit would be from Dividends. Distributing ETFs like VOO will usually pay about 1.0%-1.5% per annum in dividends, split into 4 quarterly payments. This dividend payment will usually be paid in cash into your brokerage account on the dividend payment date. Usually, foreign brokers like Interactive Brokers will not charge a fee for handling matters relating to dividends.

However, please keep in mind that withholding tax (usually 30% for US-Domiciled ETFs like VOO, as opposed to 15% for Irish-Domiciled ETFs such as CSPX)* will have already been deducted from this amount. Therefore, you don’t have to do anything extra because the broker will typically already settle it for you automatically.

*Note that these tax rates apply to selected countries without a tax treaty with the US. For more information, please refer to the withholding tax rates provided by PwC.

6. Conclusion

S&P 500 ETF investing is really something that you should be looking at, whether you are a beginner or an experienced investor. The S&P 500 Index’s expense ratio is some of the lowest around, at about 0.03% per annum.

Additionally, you won’t have to do much in terms of researching individual stocks, as big financial institutions have a dedicated team doing that for you. Moreover, the S&P 500 Index has some of the most stringent requirements out there in terms of including companies.

You can check out my video to find out more interesting facts about the S&P 500 Index. Technically speaking, this is pretty much all you need to know to get started on investing in S&P 500 ETFs!

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