Investment Guide
What It Is, Why It’s Important and How to Invest in NZ
The S&P 500: you've heard of it, but what exactly is it, why is it so important, and can Kiwis invest in it? Read on to find out all that and more.
What is the S&P 500?
The S&P 500, formally known as the Standard & Poor’s 500 Composite Stock Price Index, is a stock market index: a list of the 500 largest public companies in the United States.
What is the importance of the S&P 500?
The reason that the S&P 500 is so important is that it gives investors and economists a sense of the US economy as a whole, by tracking large-cap stocks across a wide range of industries and sectors, thereby giving markets a snapshot of the overall health and performance of U.S. stocks. In total, the 500 companies represented in the S&P 500 make up 80% of the value of the US stock market.
For investors, the S&P 500 forms a handy list of the world's most successful companies - including the likes of Apple, Microsoft, Nvidia, Alphabet, Meta and Berkshire Hathaway. Fund managers also create S&P 500-focused index funds that they offer to anyone who wants to spread their investment across a range of large and successful companies.
Investing in the S&P 500 in New Zealand
If the S&P 500 is an index made up of US companies, can you invest in it from New Zealand? The answer is yes... sort of.
You can't invest directly in the S&P 500, or any stock market index, because they are nothing more than company lists. However, you can invest in index funds, managed funds, mutual funds or exchange-traded funds (ETFs) containing S&P 500 companies, even if you live in New Zealand.
Investing in the S&P 500 with managed funds
Managed funds, AKA mutual funds, are investment funds that enjoy oversight from professionals. Some fund managers choose a more passive approach like index investing while others actively pick and choose stocks, including S&P 500 companies, that align with the investment preferences of certain groups. AMP Managed Funds, for example, are index funds that come in conservative, balanced and growth options that offer differing levels of risk and reward.
Investing in a managed fund featuring S&P 500 companies is as simple as opening an account and choosing your preferred fund.
How to invest in S&P 500 index funds for beginners
Another way to invest in the S&P 500 as a new investor from New Zealand is through index funds and exchange-traded funds (ETFs). These two fund types aim to match the performance of a financial index like the S&P 500, which they do in slightly different ways:
- An index fund invests in several different stocks.
- An exchange-traded fund (ETF) groups multiple stocks into a single security that can be bought and sold like an individual stock.
Pros and cons of investing in the S&P 500
Does an investment in the S&P 500 make sense for you? It's a question only you can answer. But by weighing up the pros and cons, you can get a clearer idea of whether this is the right choice.
Pros
- Gain exposure to the 500 leading US companies across all major sectors and industries and enjoy access to the world's largest economy.
- Allows beginners to passively invest with an index fund without the need for extensive research or prior investment knowledge.
- The S&P 500 has historically provided consistent annual returns over the long term, making it a popular investment option for those wanting to build wealth over the long term.
- Your investment will be relatively shielded if the NZ economy falters.
- Many S&P 500 companies regularly pay dividends.
Cons
- You limit your exposure to low-valuation stocks that could produce higher returns.
- While the S&P 500 historically provides consistent annual returns over the long term, it’s not immune to market volatility. Investors must be comfortable with the risk of short-term price swings and even sustained periods of market downturn.
- You might inadvertently expose yourself to foreign currency risk, depending on whether your investment is hedged or unhedged.
- If you were to only invest in the S&P 500 your investment would not be diversified as it only includes US based companies and does not provide exposure to companies in other parts of the world.
- Managed funds and index funds can make it difficult to exclude specific S&P 500 stocks that you'd rather not invest in.
- Your investment doesn't support New Zealand companies.
Tips and strategies for investing in S&P 500 managed funds
When you choose a flexible investment fund manager, like AMP, you're given the opportunity to define your level of risk and potential reward, by choosing from conservative, balanced or growth funds.
Stocks are generally considered one of the more volatile investments - at least when compared to more reliable investments like bonds - so they tend to feature more heavily in higher-risk, higher-reward growth funds. However, the comparatively blue-chip nature of S&P 500 stocks means that they will often form a part of balanced and even conservative managed funds.
When choosing between index funds/mutual funds featuring S&P 500 companies, you should ask yourself a few questions:
- What are my investment goals? Are you looking to have a bit of fun with your investment, or is this a primary way for you to grow your wealth?
- What is my risk profile? How comfortable are you with risk? You can find out with a tool likeSorted's Investor Profiler.
- How long do I plan to invest for? A more conservative approach may be suitable for shorter-term investing, while a higher-risk approach can be better for long-term investing, as the volatility of your investment is smoothed out over time.
- Do I care where my money is invested? Some S&P 500-focused investments, particularly ETFs, allow you to hone in on specific sectors and industries, or allow you to make ESG investments in companies that demonstrate positive environmental, social and governance principles.
- What is the fund's expense ratio? The expense ratio represents the amount of assets that are used to administer and operate a fund and shouldn't be too high.
Analysing the performance of the S&P 500 index
Exactly how well does the S&P 500 perform?
Established in 1957, the S&P 500 index has delivered an average annual return of 10.32%. If you invested $100 in a mutual fund that captured all S&P 500 companies and reinvested the dividends, you'd have $72,148 at the end of 2023. Adjusted for inflation, that same dollar would be worth a little over $11 today, so the S&P 500 would have delivered around a 65x return in real terms*.
The role of dividends shouldn't be ignored when analysing the performance of S&P 500 companies. These (often significant) payments can be reinvested or can form a nice passive income stream.
The S&P 500 is a broader and more diverse index than other famous indices like the Nasdaq and the Dow. Ironically this can make it more volatile, but also a truer reflection of the market at large.
*Past performance is not an indicator of future performance.
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While care has been taken to ensure that the information is accurate, AMP does not assume any responsibility arising from use of the information. This is general information and is not financial advice.
