Index investing continues to gain popularity with Italian investors. The most famous index is the S&P 500, which has the 500 top American companies, weighted by market capitalization. We’ll walk you through why the S&P 500 is so popular and look at some of the downsides for investors. Then we’ll discuss three different ways of investing in the S&P 500 from Italy.
What is the S&P 500?
Let's start with a definition: the Standard & Poor's 500 is a stock index created in 1957 to represent the 500 leading companies in the American market (Apple, Microsoft, Alphabet, Amazon, J&J, NVIDIA, JPMorgan, etc.). So, when we talk about the S&P 500, we are not just referring to an index, but to the real beating heart of US economic strength.
Its popularity is continuing to grow even among younger people, given its excellent performance in recent years. The US economy has grown tremendously over the past 30 years, and as a result, every day a large number of investors around the world choose to invest in the index, which contains a large chunk of the US stock market, all at once.
As you can tell from the graph above via Backtest, the S&P 500 has returned an average return of 10.8% per year since 1992. That’s a considerable return, especially if you began investing in the early nineties.
How to buy the S&P 500 in Italy
Being an index, you cannot invest directly in the S&P, but rather in a fund that uses it as a benchmark, replicating its composition and performance. If you are an Italian investor, you can choose one of several ETFs with these characteristics.
Start by going to justETF.com. Searching for "S&P 500" you will find a list of possible ETFs to choose from.
How to choose the right ETF? Not all ETFs that replicate the S&P 500 are the same. Each ETF has its own peculiarities: some are cheaper, others offer more liquidity. The choice will often require a bit of study and information, and a pinch of instinct. For this example, we highlighted four ETFs for you.
An excellent option is the iShares Core S&P 500 UCITS ETF USD (Acc) for the following reasons: it's cost, size of the fund, it's offered by iShares and lastly that it's an accumulating fund which is important for long-term investors.
Investing in the S&P 500 with DEGIRO
ETFs are traded on exchanges. So to buy an ETF, you will have to turn to a broker. As an example, today we will choose DEGIRO.
DEGIRO is one of the most popular brokers in Europe and offers thousands of ETFs to choose from, including 200 'core selection' ETFs, for which it only charges a transaction fee of €1, instead of €3 for all other ETFs. If you do not have an account with DEGIRO, the first step is to open an account with them. The next step is to deposit cash into your DEGIRO account. It can take a couple of days for the cash to arrive, depending on your bank.
When the money arrives, you can buy the ETF. Search for S&P 500 by typing its ISIN code 'IE00B5BMR087' into the search bar. The second confusion is that you will see several results. They all correspond to the same ETF, but on different exchanges. For example, Vanguard trades on XETRA, Tradegate Exchange, Borsa Italiana... To pay €1 instead of €3, with DEGIRO it is important to buy on XETRA ('XET').
Note that DEGIRO also charges a connectivity fee. This is an annual fee that you pay for each exchange you operate on. You can find out all the details on DEGIRO's pricing in our article on the costs of investing with DEGIRO. Note that you also have to handle the taxes yourself as an Italian investor as well as the declarations every year.
Once you are ready, click on 'Place Order'. Congratulations, you have just purchased your ETF on DEGIRO!
The disadvantages of investing in the S&P 500
The S&P 500 is a good index to invest in, but it does have some downsides:
- it's concentrated in the US stock market
- it consists of only the largest companies
- it's volatile, meaning its price fluctuates a lot
Concentrated in the US stock market
The S&P 500 represents only about 40% of the global stock market. This means that by investing in the S&P 500, you leave aside returns from many other companies around the world. For instance, countries like China or Brazil have the potential to grow significantly over the next decades.
The US stock market has performed exceptionally well during the last 50 years compared to most other countries in the world. But the past does not guarantee future returns. The American economy may continue to do well over the next 50 years, but it also may not. Betting on one single country like the US, no matter how dominant its market is at the moment, increases the likelihood of a bad outcome.
Consists of only the largest companies
The S&P 500 is made up of only the largest American companies. But good investment returns can be achieved in mid-size and smaller companies too. Just like it pays off to diversify across multiple countries, it's a good idea to spread across different company sizes as well.
Lastly, the stock market is volatile. So a sole investment in the S&P 500 index may not match your risk profile. We’ve previously written about the role of bonds in your portfolio and you ideally want a portfolio that helps you sleep easy at night. Putting all your eggs in one basket is probably not ideal, especially if the economy of that country starts to falter.
Alternatives to the S&P 500
As mentioned above, the S&P 500 index isn’t as diversified as we would like. It's possible that the next dominating country won't be the US, so an investment in the S&P 500 means you'll pass up on a great opportunity for high returns.
Some consider the Nasdaq-100 index, which consists of the 100 largest American technology companies, to be a good substitute for the S&P 500. But it is even more concentrated and less diversified, so we don't think it's a good option.
Instead, we think there are better alternatives.
1) IWDA (MSCI World index)
The MSCI World index tracks over 1,500 large-cap companies from 23 "developed" countries. This includes the US, but also Japan, Germany, Australia, etc… Compared to the S&P 500, the MSCI World is more diversified geographically and exposes you to other countries besides the US. But it does invest only in the largest companies.
2) VWCE (FTSE All-World index)
The "Vanguard FTSE All-World Accumulation" ETF, most commonly known by its ticker VWCE, is one of the most popular ETFs with Belgians and tracks the FTSE All-World index.
As its name suggests, this index is global: it consists of over 4,000 companies from more than 40 countries. Furthermore, it contains both large and mid-size companies, from both "developed" markets (US, Germany, UK, Japan…) and "emerging" markets (Brazil, China, Chile…).
VWCE offers great diversification in a single fund. There aren't many ETFs that are more diversified than VWCE.
More diversification with the Growth portfolio through Curvo
An option for Belgian passive investors is to invest through Curvo with NNEK, a Dutch investment firm licensed by the AFM. In particular, the Growth portfolio is a good alternative to the S&P 500 index. It's composed of two funds, both offered by Vanguard, with the combination being similar to the FTSE All-World, the index that VWCE tracks:
- FTSE Developed All Cap Choice index (ISIN: IE00B5456744)
- FTSE Emerging All Cap Choice index (ISIN: IE00BKV0W243)
The Growth portfolio, along with the other portfolios, are managed by NNEK, a Dutch investment firm licensed by the Dutch regulator (AFM).
The Growth portfolio is more diversified than the S&P 500
First of all, the indexes in Growth are globally diversified. They include smaller companies too. As a consequence, the portfolio invests in over 7,500 companies spread across 40 countries, compared to the 500 companies in an S&P 500 ETF. This allows you to broaden your investments and not make a single bet on one country or company size.
Sustainable investing is challenging because everyone has different beliefs and values. The funds chosen in Growth focus on one guiding principle: they don't invest in companies that are considered destructive to the planet. This means the following sectors are excluded:
- non-renewable energy (nuclear power, fossil fuels)
- vice products (adult entertainment, alcohol, gambling, tobacco)
- weapons (civilian firearms, military weapons)
- controversial companies that do not meet the labour, human rights, environmental and anti-corruption standards defined by the United Nations Global Compact
This is in contrast to the S&P 500, which doesn’t set any sustainability standards and invests in even the "worst" companies.
All your money is invested
By investing with Curvo, you have the opportunity to invest in fractions of shares, bypassing the obligation to buy the entire share unit. For example, to buy one share of the S&P 500 ETF, valued at around €400, with a monthly commitment of €150, the traditional investor would have to wait three months to accumulate the necessary sum. With Curvo, on the other hand, it is possible to start investing from the very first month, with a minimum stake of 50 euros, ensuring that every euro invested is actually allocated to the purchase of shares. Furthermore, Curvo allows you to define a monthly savings plan, facilitating the management of investments in a systematic and automated manner, thus offering an advantageous option for efficient and frictionless capital management.
The S&P 500 index is still a great way to invest and has historically provided significant returns to investors. The main downside is that you’re essentially betting on the US. No matter how dominant its market is at the moment, investing in a single country increases the likelihood of a bad outcome. When investing your savings for the long term, it's a better mindset to maximise diversification when putting together your portfolio. Through IWDA, VWCE and the Growth portfolio available through Curvo, we’ve shown three different ways to invest that are similar to the S&P 500 index, but have a global exposure.