ETF: S&P500 ETFs unpacked

In ETF Blog, Latestby Kristia van Heerden

Even if you’re brand new to investing, you’ve probably heard of the S&P500. This famous index tracks the performance of the 500 biggest companies listed on the New York Stock Exchange. The index is weighted by market capitalisation, which means bigger companies take up more of the index and have a greater impact on its performance. While the companies are listed in the United States, they operate all over the world, making products that track this index appealing for a globally diversified portfolio.

TIP: An index is a way to track the price movement of a group of companies or products. ETF issuers mimic the index by buying shares in all the companies the index tracks according to the rules of the index. The price movement of an ETF reflects the price movement of the index, minus costs. An index can exist without an ETF, but an ETF can’t exist without an index.

Over the past three years, a number of products tracking the S&P500 index listed on the JSE. These products are available to South African investors through local stockbrokers in rands. Since they’re locally listed, they don’t affect the individual offshore investment allowance and are available within the tax-free investment environment. It should be noted, however, that any international dividend withholding taxes above the 20% local rate are still paid offshore.

While the products listed below all track the same index, they do it in different ways. Some of them are ordinary ETFs that buy the underlying shares according to their weighting in the index. This costs more, since the ETF issuers have to create ETF units by buying and selling shares that make up the index.

The S&P 500 index is also available in feeder funds. These are ETFs that buy other ETFs instead of all the individual constituents. Since these ETFs only have to buy one other share and are not responsible for the correct weightings of all the individual shares that make up the index, they are much cheaper.

What’s inside

The S&P500 index is designed to reflect what’s hot in the American market. At the moment, information technology firms like Microsoft and Apple and social media communications companies like Facebook and Google dominate the index. You can also expect to see some holdovers from a previous generation in the form of oil companies and banks affecting the performance of the ETF.

ETFs weighted by market capitalisation will always hold whatever is performing well at the moment and organically down-weight or eject companies that fall out of favour. If a huge company like Microsoft-which is currently the king of the 500 biggest companies in the index-should go bankrupt, the falling share price will negatively affect the share price in the short term. However, as other companies grow to take its place, the ETF will recover.

TIP: In this article we explain how this works using the example of Steinhoff in the Top 40.

Where you can get it

Below is a list of products that track the S&P500 index. If all of them perform exactly the same, the one with the lowest cost will make you most money. For that reason, we also list the last available total expense ratio (TER).

ETF TER
CoreShares S&P500 (CSP500) 0.50%
Satrix S&P 500 Feeder Portfolio (STX500) 0.25%
STANLIB S&P500 Index Feeder ETF (ETF500) 0.27%
Sygnia iTrix S&P500 (SYG500) 0.16%

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