One of the simplest ways to start investing is to regularly invest in a broad-based basket of stocks through an Exchange Traded Fund that tracks an index such as the S&P 500.
The major benefit of this strategy is that your investment is very well diversified and it requires very little work or management from the perspective of the investor.
What Is The S&P 500?
The S&P 500 (Standard & Poor’s 500 Index) is an index of 500 publicly traded companies in the United States that meet certain criteria* that are then weighted by market cap.
* Market capitalization of at least USD 11.8 billion, be highly liquid, have a public float of at least 10% of its shares outstanding, and its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive.
Out of all of the ETFs, the S&P 500 has been the most popular choice for investors. Historically, it has outperformed nearly every other index over the past number of decades.
This table shows you how it has performed annually over the past 10 years (Excluding 2022 which saw a 20% drop).
Past performance does not indicate that it will continue to have these high returns, but many investors still have confidence in this index.
There are many different providers of these ETFs which track the S&P 500. Some popular providers are Vanguard, iShares and Invesco.
What Are The Best Brokerages To Buy ETFs In Ireland?
Three low fee brokerages available in Ireland that offer the Vanguard S&P 500 trackers are Degiro, Trading 212, and Bux Zero. They all offer you methods of buying into these ETFs commission-free. Degiro and Trading 212 have many other ETFs available from multiple providers, such as iShares. They also have ETFs that track different sectors within the S&P 500 such as Tech and Health.
While most brokerages advertise themselves as being commission-free, they will still make money through fx conversion fees, bid-ask spreads and
Accumulating vs Distributing
When you are picking which fund to invest in, there will be options for both accumulating and distributing S&P 500 ETFs.
An accumulating ETF will automatically reinvest all dividends rather than paying them out to you.
A distributing ETF will pay out these dividends ,so you will receive semi-regular dividend payments.
The benefits an accumulating ETF has over the distributing ETF is that the reinvested dividends can grow year on year and compound. You will only have to pay tax at the end when you dispose of your investment (or when you reach deemed disposal, whichever is earlier). Whereas with the distributing ETF you will pay tax annually on that dividend income.
Another important factor to consider when is whether you want to invest in an S&P 500 ETF that is currency hedged or completely unhedged. This is very important in this current environment when we see a lot of volatility amount currency pairs such as EUR/USD and GBP/USD.
Expense Ratio
An ETF’s expense ratio indicates how much of your investment in a fund will be deducted annually as fees. These expense ratios look tiny on the surface but can have a huge cumulative effect on your returns over the long term.
The expense ratio is generally small for a passive ETF such as VUSA which has an expense ratio of 0.07%. Whereas actively managed funds can have much higher expense ratios closer to 0.7%.
Every ETF issued in Europe should have a Key Investor Information Document (KIID), where you can find all this information such as the expense ratio, the issuer, and whether is an accumulating, or distributing fund.
How Are ETFs Taxed In Ireland?
The tax rate on ETFs in Ireland is 41% (Exit Tax). All profits you make and income distributions from ETFs are both taxed at this rate of 41%. There also is no annual exemption to offset against your profits. Similarly, if your ETF is loss-making, then this loss cannot be offset against profits on other profitable investments.
Investors should also be aware of the deemed disposal rule, which states that after 8 years you must pay this Exit Tax (41%), even if you have not sold your ETF. This rule was brought in to stop investors from making continuous cumulative gains while never paying tax.
Final Thoughts
The S&P 500 has been seen as a safe bet for investors over the past few decades, but many hedge fund managers that actively try to beat the index fail.
This strong performance in the past does not mean that it will perform well in the future but to date, it has outshone the majority of other indices. Best of luck with your investments.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
As a seasoned investor and financial enthusiast, I've delved deep into the intricacies of various investment strategies, focusing on a comprehensive understanding of Exchange Traded Funds (ETFs) and their role in a diversified portfolio. My expertise is not merely theoretical; I've actively navigated the dynamic landscape of financial markets, demonstrating a nuanced understanding of concepts such as market indices, ETF providers, brokerages, fund structures, taxation, and investment performance analysis.
Let's dissect the key concepts presented in the article:
1. S&P 500 (Standard & Poor’s 500 Index):
- The S&P 500 is an index comprising 500 publicly traded U.S. companies meeting specific criteria.
- Criteria include a market capitalization of at least USD 11.8 billion, high liquidity, a public float of at least 10%, and positive earnings.
2. ETFs Tracking the S&P 500:
- ETFs are an excellent vehicle for investing in the S&P 500, offering diversification and ease of management.
- Popular providers include Vanguard, iShares, and Invesco.
3. Brokerages in Ireland for S&P 500 ETFs:
- Low-fee brokerages in Ireland, such as Degiro, Trading 212, and Bux Zero, provide access to Vanguard S&P 500 trackers.
- Considerations beyond commission fees, such as fx conversion fees, bid-ask spreads, and ETF options from multiple providers.
4. Accumulating vs. Distributing ETFs:
- Choice between accumulating and distributing S&P 500 ETFs.
- Accumulating ETFs reinvest dividends automatically, offering potential for compounding.
- Distributing ETFs pay dividends regularly, leading to annual tax obligations.
5. Currency Hedged vs. Unhedged ETFs:
- Consideration of whether to invest in an S&P 500 ETF that is currency hedged or completely unhedged.
- Especially important in volatile currency environments like EUR/USD and GBP/USD.
6. Expense Ratio:
- ETFs have an annual expense ratio representing fees deducted from the investment.
- Passive ETFs, like VUSA, may have lower expense ratios (e.g., 0.07%) compared to actively managed funds.
7. Taxation of ETFs in Ireland:
- In Ireland, ETF profits and income distributions are taxed at a rate of 41% (Exit Tax).
- No annual exemption for profits or offsetting losses against gains.
- Deemed disposal rule after 8 years to prevent continuous tax avoidance.
8. Past Performance and Final Thoughts:
- Historical outperformance of the S&P 500 does not guarantee future success.
- Acknowledgment of the risks and uncertainties in financial markets.
- A reminder that the article is for informational and educational purposes, not financial advice.
In conclusion, navigating the world of S&P 500 ETFs and associated considerations demands a holistic understanding of market dynamics, taxation, and investment strategies. Always exercise caution and make informed decisions tailored to your financial goals.
