AnalysisU.S.

What is the ‘best’ S&P 500 ETF to buy?

Investing in the U.S. market has long been a lucrative opportunity for investors worldwide. With its vast economy, diverse industries, and proven historical performance, the U.S. market offers unique advantages for those looking to grow their wealth over the long term. 

The U.S. market is enormous. As of December 2023, the total market capitalisation of the U.S. stock market reached an astonishing US$50.8 trillion, 83 times Singapore’s total market capitalisation and 138 times Malaysia’s. In addition to being a major global market, the U.S. hosts some of the largest companies worldwide, including Microsoft, Apple, and Nvidia. This market’s extensive scope and depth offer numerous opportunities and robust growth potential, increasingly drawing attention from investors across the globe.

Why choose the S&P 500

One of the most popular and more accessible ways to gain exposure to the U.S. market is through the S&P 500, a market index that tracks the top 500 largest publicly traded companies in the country, accounting for approximately 80% of U.S. market capitalisation. Investing in the S&P 500 provides investors with exposure to a broad range of industries, including technology, consumer goods and healthcare, providing inherent diversification.

Source

Historically, the S&P 500 has delivered a strong performance over the past 20 years. Most notably, the index returned an impressive 26% last year. And over the last two decades, it has maintained a steady average annualized return of over 10%.

Among the various ways to invest in the S&P 500, the SPDR S&P 500 ETF (SPY) by State Street stands out as a popular choice for many investors. The SPY is an exchange-traded fund (ETF) that tracks the performance of the S&P 500 index. It is the oldest and largest ETF, with assets under management (AUM) of over US$520 billion as of April 2024. The SPY is also highly liquid, meaning investors are able to buy and sell shares on the stock exchange quickly. It also has a solid, long track record of delivering returns that closely match the S&P 500 index’s performance, making it a reliable and convenient investment option for those looking to invest in the US market.

But hold on! Before you jump all in on the SPY, there are a few major drawbacks you need to know about.

Drawbacks of the SPY as a foreign investor

While investing in the U.S. market can be attractive, foreign investors face certain disadvantages. A major disadvantage for foreign investors is the 30% withholding tax on dividends imposed by the U.S. government. This tax reduces the dividends paid by U.S. companies to foreign investors by 30%, which can significantly diminish the overall return on investments over the long term.

The next disadvantage is U.S. estate tax. This means that if anything were to happen to you and you pass on (touch wood), your U.S. assets above US$60,000 are subject to estate tax rate of up to a 40%. This can pose a significant issue and complication for your family.

Finally, all U.S.-domiciled ETFs are distributing ETFs, meaning they periodically distribute dividends to investors. This is because they are required by tax regulations to distribute 90% of their net investment income to their shareholders. This may come down to personal preference, but if you’re an investor looking to reinvest the dividends you earn, an accumulating ETF is a better option because it automatically reinvests the dividends back into the ETF for you.

Solution: Irish-domiciled ETFs

Instead of investing in a U.S.-domiciled ETF, you can consider an Irish-domiciled ETF, which offers several advantages: a lower dividend withholding tax of 15%, avoidance of U.S. estate tax, and the availability of both accumulating and distributing ETF options.

DomicileU.S.Ireland
NameSPDR S&P 500 ETF TrustVanguard S&P 500 ETFiShares Core S&P 500 UCITS ETF USD (Acc)Vanguard S&P 500 UCITS ETF USD (Dis)Vanguard S&P 500 UCITS ETF USD (Acc)
Ticker SymbolSPYVOOCSPXVUSDVUAA
Listing exchangeNYSENYSELSELSELSE
Expense ratio0.09%0.03%0.07%0.07%0.07%
Dividend HandlingDistributingDistributingAccumulatingDistributingAccumulating
AUM‪$ 528.03B‪$ 435.82B‪$ 81.47B‪$40.77B‪$ 10.69B
Avg. Daily Trading Volume73.2M5.27M104.8K95.1K89.7K
Data as of April 2024.

Let’s compare U.S.-domiciled ETFs with Irish-domiciled ETFs that track the S&P 500. For the U.S., besides the SPY, we have the Vanguard S&P 500 ETF (VOO), known for its low expense ratio. For Irish-domiciled ETFs, we have CSPX issued by BlackRock, and VUSD and VUAA issued by Vanguard. These are listed on the London Stock Exchange (LSE) and also traded in U.S. dollars. Generally, Irish-domiciled ETFs typically feature slightly lower expense ratios compared to the SPY, although not as low as those of the VOO. Additionally, they usually have smaller AUMs and lower average trading volumes.

If you are investing for the long term, a lower expense ratio can be a great advantage, taking into consideration the compounding effect over a long investing period and the lower dividend withholding tax. The smaller AUMs and average trading volumes of Irish-domiciled ETFs compared to the SPY can be attributed to the SPY’s first-mover advantage as one of the first ETFs in the world, which has helped it build a reputable image among global investors. A lower trading volume in ETFs often results in a higher spread between the bid and ask prices, but this is generally not a significant concern for investors who are focused on long-term holdings.

The fifth perspective

In summary, for foreign investors like me, Irish-domiciled ETFs generally offer more advantages, primarily due to the lower withholding tax, exemption from U.S. estate tax, and the option to choose accumulating ETFs. Specifically, CSPX is my preferred Irish-domiciled ETF because it boasts a higher trading volume, a larger AUM size, and it accumulates, rather than distributes, dividends.

Of course, each individual’s preferences vary, so it’s important to consider all the mentioned factors and select the ETF that best suits your specific needs and investment strategy. Nonetheless, they all still track the same S&P 500.

Darren Yeo

Darren Yeo currently works for The Fifth Person as an investment analyst, where he offers insightful analysis to help readers make more informed investing decisions. Before joining The Fifth Person, Darren has two years of experience working at a bank. He has a keen interest in finance, and is dedicated to continuous learning and in the field of investing.

7 Comments

  1. Hi Darren,
    With regard to your article on Irish domiciled ETF’s, could you please also show the dealing costs involved for an investor. eg, UK stamp duty, stock exchange levies, etc when buying and on selling of such stocks.
    Many thanks.
    Allen

    1. Hi Allen,
      Take IBKR as an example since they have the lowest rate, the clearing fee is GBP 0.06, and you may refer to this link: https://www.interactivebrokers.com/en/accounts/fees/LSEstkfees.php for exchange fees calculation. In terms of commission, you can get the lowest fees of only 0.015% of trade value, but it is still based on different tiering, and you may refer to this link: https://www.interactivebrokers.com.sg/en/pricing/commissions-stocks-europe.php?re=europe. Luckily, there is no stamp duty on ETFs on LSE.
      Thanks

  2. If you buy a swap based UCITS ETF there is 0% dividend withholding tax. Domicile can be any European country, does not have to be Ireland. For example SPXS.L

    1. Hi Martin,
      Thanks for your comment and insights. I just wanted to share with you what we have found. The IRC Section 871(m) does give exceptions to some US equity derivatives, but it still depends on the derivative’s delta value and when the transaction is entered. And yeah, some investors may consider SPXS.L if they are comfortable with synthetic ETFs. However, we still need to take note that it might introduce counterparty risk, in which the other party of a contract may not fulfil their obligations.
      Thanks

  3. Darren, could you kindly share which is the current platforms/brokerages that offer low/competitive rates for investing in CSPX on LSE?

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