What is an index?

An index tracking stock markets is a value that represents the performance of the total valuation of a collection of companies. For example, the S&P 500 is an index that tracks the value of the largest 500 companies listed on US stock exchanges.

Typically, larger companies will be given a bigger proportional influence in the movement of an index.

What is an index fund?

An index mutual tracker fund or an exchange-traded fund (ETF) will hold portions of shares in all the companies currently in an index proportional to the weights.

To illustrate, a £500m index fund could have £500m invested into companies in the tracked index. It will therefore rise and fall in line with the index.

My £100k growth strategy

The Vanguard S&P 500 ETF (LSE:VUSA) is a liquid, low-cost exchange-traded fund tracking the S&P 500 index. ETFs are publicly traded on an exchange. New shares are created and dissolved as needed to match demand.

I can easily buy the Vanguard S&P 500 ETF in my Stocks and Shares ISA so that any gains are protected from tax.

The S&P 500 index over the past 100 years has annualised average returns of 9.6% accounting for likely dividends paid, management fees, and inflation associated with a tracker fund. With such a well-established track record, a similar rate of return could be achievable in the long term going forward.

Investing £5,000 into my chosen S&P 500 ETF and leaving it for 33 years could achieve £103,000 with 9.6% average annual returns.

Adding consistent monthly contributions of £200 could make that figure £109,000 in just 16 years!

Potential obstacles

This is certainly no “get rich quick” strategy. However, a financial advisor would still tell me this is a high-risk approach to investing my savings.

This is due to the volatility I am likely to witness in the value of my investment over the years. For example, holding the Vanguard S&P 500 ETF from 1998-2003 would have given me a -10% year-on-year return.

Losing patience and confidence during a sustained slide in the US stock market could quickly turn my projected £100k into a loss on my initial investment. This is where using a costlier actively managed fund could be more beneficial to me to help smooth out my gains and manage my expectations.

Conclusion

Investing in the performance of an index like the S&P 500 is like investing in the US equity market average. To do better than the market average would require skill, time, and competing against institutions. Even professionally managed funds have no guarantee of outperforming the average.

Market indices across the globe are starting to slide. So, I’m considering accumulating index ETFs to build capital over time and taking advantage of compounded potential average returns. However, it is not something that I plan to rely on as past performance is not to be relied on.

Losing interest

In theory, banks such as Lloyds (LSE: LLOY) usually stand to benefit from higher interest rates. This is because banks can charge more for loans. Moreover, the rapid increase in house prices has brought a healthy stream of revenue to Lloyds. Nonetheless, the Lloyds share price is down 10% this year.

I’m avoiding this stock as I’m worried the bank’s profit might take a considerable hit from lower borrowing numbers and a slew of potential bad debts. With the BoE set to continue increasing interest rates in the coming months, Lloyds’ best-case scenario seems unlikely to happen at this point. Why? Well, the bank rate could rise further, which would be a plus for the group. But the BoE predicts inflation to peak at 10% later this year, much higher than the 7.6% upper level Lloyds would like to see. And hoped-for house price growth of 5.3% is dubious, as Nationwide and Halifax predict a slowdown in the market.

Grocery wars

The other stock I’m avoiding is J Sainsbury (LSE: SBRY). Despite being the second largest supermarket in the UK, the orange grocer has been losing a substantial portion of its market share to Aldi and Lidl. Its most recent trading update provided a rather gloomy outlook as well. Management cited, “Significant external pressures and uncertainties, including higher operating cost inflation”. This sent its stock price lower to £2.27.

Prior to the current cost of living crisis, Sainsbury’s was already operating on slim profit margins (2.3%). Now with pressure to keep prices low in order to avoid losing more market share, the retailer could very well see its margins contracting. Ultimately, Sainsbury’s will have to perform a balancing act of maintaining margins and holding its market share. Having already such low margins, this is one stock I’m unwilling to gamble with.

An ETF to stock up on

But there’s a stock I believe can add value to my Stocks and Shares ISA. It’s an ETF — Vanguard’s S&P 500 UCITS ETF (LSE: VUSA). The ETF tracks the USA’s top 500 listed companies, and averages a return of approximately 10% per year. Research has shown that almost 80% of fund managers underperform Warren Buffett’s favourite index. Therefore, while I generally like to pick my own stocks, I’m unwilling to gamble on professional managers’ stock-picking to beat the market. Although the heavyweight index is almost 15% down this year, it has a solid record of recovering from crashes.

Even better, Vanguard’s fund has outperformed the S&P 500 by 10%. This is due to its ability to hedge against the British pound by using the strength of the US dollar. On that basis, I think this is the best stock I can invest in to generate meaningful returns over a long period.

Selecting an ETF for my own portfolio

There are a lot of choices when it comes to S&P 500 funds, offered by most if not all of the large investment companies. The largest one listed in the UK is iShares Core S&P 500 UCITS ETF with a size of over £40bn. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.

For my own portfolio I’ve chosen VUSA, as this seems to sit in the middle in terms of size ($38bn) and costs (0.07%). It also pays a dividend, which is currently 1.12%.

Tracking the flagship US index means the ETF contains all 500 companies, which are selected by a committee. Firms must have a big enough market cap, have at least 10% of shares outstanding, and meet liquidity and profitability requirements. It includes big-name companies such as Microsoft, Apple, and Amazon and spans a variety of sectors such as technology, retailers, and banking.

One downside is that the ETF only includes companies from the US. It’s true that many of these firms derive some of their earnings from outside of that country, but this percentage has been falling over time.

Another issue with buying the S&P 500 is that I limit my returns to those of the index. I could be wrong, but by picking individual stocks I might be able to outperform it.

However, this ETF allows me to invest in 500 companies by holding a single share. For me, it’s a low-cost way of diversifying massively across companies and sectors. I’m happy to forgo the possibility of a higher return from investing in individual companies for the ease of this diversification.

Why VUSA is still one of my top picks

As the famous saying goes, ‘It’s tough to make predictions, especially about the future’ and I think this is particularly apt for 2022. No one can say for sure the course of inflation, interest rates, or the Russia-Ukraine conflict.

Stocks go up and down and it’s possible that over the next few months some of the companies in this ETF might take a hit. However, over the long run they’re very likely to recover. This is because of the S&P 500’s selection criteria. In essence, they must be fundamentally solid with a long history of earning positive average returns.

The S&P 500 has been around for decades, has proved enormously resilient and has averaged around 10% returns per year since 1957. Though there are no guarantees, I’m hopeful in the future we might see similar long-term performance. If so, this fund will see a good return.

This is why Vanguard S&P 500 ETF is one of my top ETF picks to stay on course during turbulent times. I’m happy to continue to include it among my holdings as part of a balanced portfolio.

Where I’m looking

For my own portfolio, I’m interested in the S&P 500. This is widely considered the most important index in the US. It contains 500 large companies that are selected by a committee. Firms must have a big enough market cap, have at least 10% of shares outstanding and meet liquidity and profitability requirements.

It includes big-name companies such as Microsoft, Apple and Amazon. In terms of industries, the index includes a variety of sectors such as technology, retailers and banking.

One issue is that the index only includes companies from the US. It’s true that many of these companies derive some of their earnings from outside the US, but this percentage has been falling over time.

Another downside of buying the S&P 500 is that I limit my returns to those of the index. I could be wrong, but by perhaps by picking individual stocks I might be able to outperform it.

However, this index allows me to invest in a massive 500 companies by holding a single share. For me, it’s a low-cost way of diversifying across companies and sectors. I’m happy to forgo the possibility of a higher return from investing in individual companies for the ease of this diversification.

How much can I earn with an S&P 500 ETF?

Although the index does experience short-term volatility, it has recovered from every crash it’s ever experienced. It’s also earned an average rate of return of around 10% per year since 1957.

By my calculations, assuming a 10% annual return, by investing £50 a month in an S&P 500 ETF for 25 years I’d have close to £70,000.

Of course, I know it might not achieve that return and some believe the S&P 500 is overvalued. Though nothing is certain in investing, I’m hopeful that in the future we might see a strong performance. That’s why I think that by investing consistently over a long period of time, this ETF can be an unstoppable way of building wealth. 

Selecting an ETF

As such an important index and essential barometer of US stock market health, it’s no surprise that there are lots of ETFs available. Most, if not all, of the major investment firms offer such a fund.

The largest one listed in the UK is iShares Core S&P 500 UCITS ETF worth over $57bn. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.

For my own portfolio, I’ve chosen Vanguard S&P 500 ETF, which takes a middle path in terms of size ($38bn) and costs (0.07%).

I believe that a long-term outlook and giving my money as much time as possible to grow is key to building retirement wealth. I’m going to continue investing as much as I can afford each month into this ETF as part of a balanced portfolio. 

The stock market has already had a bumpy start to the year and in case the markets take a turn for the worse, I’m now thinking about how I can make the most of it with this Vanguard exchange traded fund (ETF).

Vanguard S&P 500 ETF

For my own portfolio, during a downturn, I would choose Vanguard S&P 500 ETF (LSE: VUSA). Out of all the S&P 500 ETF options in the market, this sits in the middle in terms of size ($37bn) and management costs (0.07%).

This fund includes all the companies from the index, which are some of the strongest and most stable corporations in the US. It contains 500 large companies that are selected by a committee. Firms must have a big enough market cap, have at least 10% of shares outstanding and meet liquidity and profitability requirements.

It includes big-name companies such as Microsoft, Apple and Amazon. In terms of industries, the index includes a variety of sectors such as technology, retailers and banking.

One downside is that the index only includes companies from the US. It’s true that many of these firms derive some of their earnings from outside of that country, but this percentage has been falling over time.

Another issue with buying the S&P 500 is that I limit my returns to those of the index. I could be wrong, but by picking individual stocks I might be able to outperform it.

However, this ETF allows me to invest in 500 companies by holding a single share. For me, it’s a low-cost way of diversifying massively across companies and sectors. I’m happy to forgo the possibility of a higher return from investing in individual companies for the ease of this diversification.

Performance and reasoning

In 2021 the share price of this ETF increased by around 30%. However, year to date it’s been a different story. At the time of writing, the fund is down around 5%. That said, it’s already bounced up from its four-month low and is possibly set for a further rise.

If there’s a stock market crash, while some of these companies might take a hit in the short term, they’re very likely to recover. This is because of the S&P 500’s selection criteria. In essence, they must be fundamentally solid with a long history of earning positive average returns.

Indeed, the US index has averaged around 10% returns per year since 1957 and though nothing is certain, I’m hopeful that even after a brief interlude during a market decline, we might see a similar performance.

Also, this fund pays a dividend, which means that even if the share price declines, I’m still earning a return.

All things considered, I believe the ETF could be a strong investment for my portfolio. Even in the case of a stock market crash.

For my own ISA I firmly believe in having a long-term outlook. I invest in stocks I expect to hold for 10 years or more and that ideally provide dividends I can reinvest to help build my wealth. If I’m lucky, hopefully the investment will grow to be worth a lot more and because of the tax-free wrapper, I should get to keep all of the gains.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

I could pick individual stocks, but I prefer to use exchange traded funds (ETFs) and for my 2022 Stocks and Shares ISA, my first pick is going to be an S&P 500 ETF.

Why the S&P 500?

At the end of 2020, the total value of the worldwide stock market was estimated to be almost $94trn. Out of that, the US accounted for over 55%. Therefore I feel that the US is a good starting point.

The S&P 500 is the key important index in the US. with 500 large companies selected by a committee. Firms must have a big market cap, at least 10% of shares outstanding and meet liquidity and profitability requirements.

It includes big-name companies such as Microsoft, Apple and Amazon and covers a wide a variety of sectors.

Not that it’s perfect. One issue is that the index only includes US companies. It’s true that many of them derive some earnings from outside of that country, but this percentage has been falling over time.

Another downside of buying the S&P 500 is that I limit my returns to those of the index. I could be wrong, but by picking individual stocks I might be able to outperform it.

However, this fund allows me to invest in 500 companies by holding a single share. It’s a low-cost way of diversifying across companies and sectors. I’m happy to give up the possibility of a higher return from investing in individual companies for the ease of this diversification.

Selecting a fund

As such an important index and essential barometer of US stock market health, it’s no surprise that there are lots of ETFs available. 

The largest one listed here in the UK is iShares Core S&P 500 UCITS ETF. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.

For my own ISA, I’m again choosing Vanguard S&P 500 ETF (LSE: VUSA). It sits in the middle in terms of size ($47m) and costs (0.07%) and pays a dividends of 1.12% that I’m planning to reinvest into my ISA.

During 2021 its price rose around 30%. However, year-to-date, it’s down around 6%. That said, it’s been a turbulent start to 2022 and much of the stock market is down. However, for my ISA I’m more interested in the long term and over 10 years, it has seen a 320% increase.

The US index has averaged around 10% growth a year since 1957 and though nothing in investing is certain, I’m hopeful that can continue. I’m happy to make this S&P 500 ETF the first pick for my 2022 Stocks and Shares ISA.

Selecting a fund

The Standard and Poor’s 500 is widely considered the most important index in the United States and an essential barometer of US stock market health.

It contains 500 large companies selected by a committee. Firms must have a big enough market capitalisation and have at least 10% of shares outstanding. This is in addition to meeting liquidity and profitability requirements. With companies like Microsoft and Amazon included, this index includes not only the biggest but also possibly the best firms that Wall Street has to offer.

For my own holdings, I believe that buying a low-cost ETF (Exchange Traded Fund) is the easiest way for me to invest in the index. An ETF is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers. In this case, it allows me to invest in the S&P 500 by owning a single share listed on the London Stock Exchange.

There is a myriad of choices in this space and most of the big investment companies offer similar products. Two of the factors I like to use in selecting an ETF are the size and management charge. For my own portfolio, I feel that Vanguard S&P 500 ETF (LSE:VUSA) is the best fit. It’s one of the largest, with over $37bn in assets. It’s also very low cost, with a 0.07% ongoing charge.

Does this S&P 500 ETF still make sense?

The fund is not without its faults. First, as it follows the index, it only includes US companies. Second, in buying it, I can only get the returns of the S&P 500. Perhaps if I can pick the right individual stocks then maybe I can outperform the index.

Indeed, Warren Buffett has made his fortune by picking individual stocks. From Apple alone, it’s estimated that Berkshire Hathaway has made over $100bn in profit already.

During 2021 this ETF increased by around 30%. However, year to date it’s a different story. At the time of writing, this fund is down 8%. That said, most of the stock market is down. Worries about increasing US interest rates and rising Russia-Ukraine tensions continue to drive shares lower.

However, I like to think about the long term and the US index has averaged around 10% per year since 1957. Though nothing is certain in investing, I’m hopeful that in the future we might see something similar. Also, this fund allows me to invest in 500 companies by holding a single share. For me, it’s a low-cost way of diversifying across companies and sectors.

Therefore, as part of a balanced portfolio, I’m happy to follow Warren Buffett’s advice and continue to hold — and maybe buy more of — Vanguard S&P 500 ETF.

I’ve already invested in an equivalent London-listed ETF for my own portfolio, but with 2022 approaching, I’m revisiting this ETF strategy again.

S&P 500 ETFs

The S&P 500 is widely considered the most important index in the US. It contains 500 large companies that are selected by a committee. Firms must have a big enough market cap, at least 10% of their shares outstanding and meet liquidity and profitability requirements.

It includes big-name companies such as Microsoft, Apple and Amazon. In terms of industries, the index includes a variety of sectors such as technology, retailers and banking.

As such an important index and essential barometer of US stock market health, it’s no surprise that there are lots of ETFs available.

The funds I’m interested in for my own portfolio are the ones listed on the London Stock Exchange. These allow me to easily and cheaply buy shares in an S&P 500 ETF using GBP. Most, if not all, of the major investment companies offer such an ETF and there’s just so much choice.

The largest one listed in the UK is iShares Core S&P 500 UCITS ETF at over £40bn. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.

There’s also the question of dividends. Some of the ETFs pay out dividends, some don’t. Personally, I like the income stream.

For my own portfolio, I’ve previously chosen Vanguard S&P 500 ETF (LSE: VUSA), as this seems to sit in the middle in terms of size ($47m) and costs (0.07%). The Vanguard fund has a current yield of 1.12%.

It’s no secret that over the last two years, the S&P 500 has performed well. This is reflected in the returns of the Vanguard ETF. At the time of writing, the share price is up over 30% for the year with a similar return over a 12-month period. The five-year performance is even better with a return of around 100%.

Should I still invest?

Despite the fantastic returns, looking ahead to next year, there are no guarantees of how the ETF will perform. Questions about inflation, government policy and potential Covid lockdowns are all on the horizon.

One downside of buying the ETF is that I limit my returns to those of the index. I could be wrong, but it’s possible that an uncertain market creates opportunities. By picking individual stocks I might be able to outperform it.

Also, this fund and the index itself only include US companies. Yes, many of these companies have revenue streams from outside the States, but the percentage has been falling over time.

However, on balance, going into 2022 I’m still comfortable including an S&P 500 ETF in my holdings as part of a diversified portfolio.

Possibly most interesting is the advice he left to the trustees of his wife’s estate. In 2013 in his letters to shareholders he wrote that he’s advising the trustees to invest 90% of the assets “in a very low-cost S&P 500 index fund”.  

This advocacy for S&P 500 index funds is something that the Sage of Omagh is known for and it got me thinking. I decided to follow the route he’s advising that he thinks will protect one of the most important people in his life.

My thinking

The S&P 500 is widely considered the most important index in the US and an essential barometer of American stock market health.

It contains 500 large companies that a committee selects. Firms must have a big enough market cap and have at least 10% of shares outstanding. This is in addition to liquidity and profitability requirements.

I believe that buying a low-cost S&P 500 exchange traded fund (ETF) is the easiest way for me to replicate his advice. An ETF is a fund that that tracks an index or sector and can be bought and sold like a share through most online brokers. ETFs allow me to invest in multiple companies in a single fund and are usually low-cost.

I’m looking at one in particular. Vanguard S&P 500 ETF (LSE:VUSA) is the one I’m exploring. This is huge in size with over $37bn in assets and is very low cost, with a 0.07% ongoing charge.

As the ETF follows the S&P 500, it includes big-name companies such as Microsoft, Apple and Amazon. In terms of industries, the index includes a variety of sectors such as technology, retailers and banking.

Am I going to invest?

Though it might not be for everyone, I think that I’ll include this ETF in my own holdings as part of a balanced portfolio.  

That said, the ETF and the index itself are not without their faults. Most noticeably the index only includes US companies. It’s true that many of these companies derive some of their earnings from outside the US, but this percentage has been falling over time.

Also, the index is market-cap-weighted. This gives a higher percentage allocation to companies with the biggest market capitalisations. This can mean that the biggest few firms come to dominate the index.

Finally, if I buy, I can only get the return of the index rather than possibly outperforming if I pick individual stocks. 

But on balance, I think that if this advice from Warren Buffett is good enough for the trustees of his wife’s inheritance, I think it’s good enough for me too!

Vanguard S&P 500 UCITS ETF (GBP) (LSE:VUSA)

The first ETF I would like to hold in my Stocks and Shares Lifetime ISA is one that tracks the S&P 500. This is a collection of 500 US shares known as an index. The index is designed to track the performance of all major industries in the US economy. The creator of this ETF, Vanguard, aims to pool all the investors’ money together and use it to buy these 500 shares. The performance of this ETF will rely on the combined return of all 500.

Due to the strength of the US economy, the relative stability and the strong legal system that allows companies to protect their property, it has had a good return historically. Between 1957 and 2018 its annual return averaged 8%, and I think something similar should be able to continue. This is also helped by the US’s dominance in tech. This ETF seems like a good choice for steady growth of my Lifetime ISA.

Vanguard FTSE All-World UCITS ETF (LSE:VWRL)

This ETF is another index tracker fund like the last. The difference here is that instead of aiming to track the performance of the US economy, this ETF follows the FTSE All-World index, which aims to track the performance of the entire world economy. However, there is more exposure to the US (55.8%) than other countries. Thus, bad performance of the US economy would affect this ETF significantly. That said, this index still offers me the opportunity to benefit from the overall growth of the world economy. I would view this ETF as safer than the S&P 500 ETF because it does not rely on only one country’s economy, which can be affected by political decisions or national disasters. It also offers 11.6% exposure to emerging markets, which can potentially allow for greater growth, although they can be riskier than developed markets.

iShares Core FTSE 100 UCITS ETF (LSE:ISF)

The last ETF that I’d like to mention is an FTSE 100 index tracker. This tracks the performance of 100 companies listed on the London Stock Exchange with the highest market capitalisation. I picked this because I think that in the next few years it will experience good returns. Brexit uncertainty is shrinking, and the London Stock Exchange has some exciting new listings such as Trustpilot on 23^rd of March, and Deliveroo is preparing to go public in a highly anticipated IPO. I hope that new interest in London shares may help to give the FTSE 100 a boost. However, the next years could be bad for the UK economy; if so, this ETF probably wouldn’t perform very well.