The S&P 500 is a cornerstone of the U.S. stock market, tracking 500 leading companies across sectors. With over 70 ETFs available globally, investors can choose from traditional market-cap weighted funds like SPY, smart beta strategies such as Invesco S&P 500 Quality, or niche options like ESG-focused ETFs. Manie Marais’s guide explores the index’s workings, its major ETF categories, and tailored strategies to help investors balance growth, stability, and tax efficiency.
Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.
The seventh BizNews Conference, BNC#7, is to be held in Hermanus from March 11 to 13, 2025. The 2025 BizNews Conference is designed to provide an excellent opportunity for members of the BizNews community to interact directly with the keynote speakers, old (and new) friends from previous BNC events – and to interact with members of the BizNews team. Register for BNC#7 here.
By Manie Marais
The S&P 500 is one of the most widely followed stock market indices in the world, serving as a barometer for the overall health of the U.S. stock market and economy. This index tracks the performance of 500 large-cap U.S. companies across various sectors, providing investors with a broad representation of the American equity market.
How the S&P 500 Works
The S&P 500 is a market-capitalization-weighted index, meaning that companies with larger market values have a greater impact on the index’s performance. Currently the Magnificent 7 (Apple, Meta, Microsoft, Nvidia, Tesla, Alphabet and Amazon) plus Broadcom and Berkshire Hathaway contribute about 35% of the market cap of the index. The index is calculated by summing the float-adjusted market capitalizations of all constituent stocks and dividing by an index divisor, which is a proprietary figure developed by S&P. It serves to ensure continuity in the index when constituents companies have stock splits etc. to ensure that such corporate actions do not change the index in themselves.
To be included in the S&P 500, companies must meet specific criteria, including:
- A market capitalization of at least $15.8 billion as at March 2024.
- High liquidity.
- A public float of at least 10% of outstanding shares.
- Positive earnings in the most recent quarter and over the past four consecutive quarters.
The index is officially rebalanced quarterly on the 3rd Friday of March, June, September and December (but changes can occur at any time) to ensure it accurately reflects the current market landscape.
The S&P 500 is generally regarded as a passive investment which is not quite true as 20-25 annual changes are made to the index on average.
Evaluating S&P 500 ETFs
Investors cannot invest in an index (except with derivatives) so the only way to gain exposure is via Exchange-Traded Funds (ETFs) that track the index.
The first S&P 500 ETF, known as the SPDR S&P 500 ETF Trust (ticker symbol: SPY), was launched on 22 January 1993 by State Street Global Advisor with just $6.53m in assets. It faced significant technical challenges to be reliable in reflecting the index.
Today there is a plethora of S&P 500 based ETFs, 70 based on the USA and 103 on the London Stock Exchange (with significant overlap). Lack of space only allows evaluation of the most popular ETFs.
Some interesting ETFs are the S&P 500 Fossil Fuel Reserves Free ETF and S&P 500 PARIS-ALIGNED CLIMATE ETF for climate conscious investors.
Major ETF categories based on the S&P 500 index:
The below categories show the different approaches
- Traditional Market-Cap Weighted ETFs:
Track the S&P 500 Index with stocks weighted by market capitalization (larger companies have more influence).
– (SPY) SPDR S&P 500 ETF Trust
– (IVV) iShares Core S&P 500 ETF
– (VOO) Vanguard S&P 500 ETF
- Smart Beta / Factor ETFs:
Uses alternative weighting strategies or focuses on specific “factors” (e.g., low volatility, dividends, quality).
– (SPMO) Invesco S&P 500 Momentum
– (IVW) iShares S&P 500 Growth
– (SPHQ) Invesco S&P 500 Quality
– (IVE) iShares S&P 500 Value
– (RSP) Invesco S&P 500 Equal Weight
– (SPLV) Invesco S&P 500 Low Volatility
Many other strategies exist i.e. ETFs concentrating on the different S&P 500 sectors.
- Leveraged S&P 500 ETFs:
Provides 2x or 3x the daily returns of the S&P 500.
– (SSO) ProShares Ultra S&P 500 (2x)
– (UPRO) ProShares UltraPro S&P 500 (3x)
- Inverse S&P 500 ETFs:
Offers negative exposure to the S&P 500, moving in the opposite direction of the index.
– (SH) ProShares Short S&P 500
– (SDS) ProShares UltraShort S&P 500
– (SPXU) ProShares UltraPro Short S&P 500
- ESG Version:
Focuses on companies within the S&P 500 that meet strict environmental, social, and governance (ESG) criteria.
– (SNPE) Xtrackers S&P 500 ESG ETF
Returns of the major different strategies (excluding Inverse and Leveraged ETFs)
Cumulative performance figures as of 31 October 2024 (in USD)
Exposure to the Top 10 shares, number of holdings and MAG 7 stocks representation
Calendar year performance in down years (in USD)
Evaluation of S&P 500 ETFs
Based on the above data, we can evaluate various S&P 500 ETFs:
- SPDR S&P 500 Trust (SPY): This is the benchmark ETF, closely tracking the S&P 500 index. It offers broad market exposure and has shown solid long-term performance.
- Invesco S&P 500 Momentum: This ETF has outperformed the SPY over 1, 3, and 5-year periods, indicating strong momentum-based returns. However, it has higher concentration risk with only 98 holdings. It has also done well in down markets in 2018 and 2022.
- iShares S&P 500 Growth: While it has outperformed SPY in the 1-year and 10-year periods, it underperformed in the 3-year period as well as in down years. It has a high concentration in the “Magnificent Seven” stocks (55.43%) and only about half the number of stocks compared to the S&P 500 ETF. As there is a high correlation with the Nasdaq it may be better to get technology sector exposure through QQQ (the Nasdaq 100 ETF).
- Invesco S&P 500 Quality: This ETF tracks the performance of S&P 500 stocks, selecting them based on a quality score that considers return on equity, accruals ratio, and financial leverage ratio. It has shown consistent outperformance to the S&P 500 index across different time frames despite lower exposure to the Magnificent Seven stocks. It fared better even in down years.
- iShares S&P 500 Value: This ETF has underperformed SPY in most periods but showed resilience during the 2022 downturn. With no exposure to the MAG 7 stocks that have high valuations this ETF may warrant an inclusion in one’s portfolio.
- Invesco S&P 500 Equal Weight: This ETF offers more diversification but has underperformed SPY in recent years. The reason is, once again, the low relative exposure to the MAG 7 stocks. However, it may have lower risk going forward due to its low concentration in any single stock.
Strategy Recommendation
For most investors, especially those with a long-term horizon, simply investing in SPY might be sufficient. It offers broad market exposure, low fees and simplicity. The additional complexity and potential higher fees of a multi-ETF strategy may not be worth it for all investors.
In my view, it is important that S&P 500-based instruments form a strategic part of any portfolio. The summary below should be tailored to each investor’s financial goals, risk tolerance, and other investment considerations. For example, tax implications must be considered. ETFs listed on the London Stock Exchange or other European exchanges are often preferable for South African investors seeking to avoid US Situs Tax. These exchanges typically list ETFs domiciled in jurisdictions with more favourable tax treaties and estate tax regulations. These exchanges also offer accumulating ETFs, which are not available in the USA or certain other regions.
While SPY remains a solid choice for broad market exposure, a combination of ETFs could potentially enhance returns and help manage risk.
- Core Holding: Invesco S&P 500 Quality ETF for exposure to high-quality companies with lower volatility and shielded for the current risk of the high valuation of the MAG 7 stocks.
- Growth Component: Invesco S&P 500 Momentum as well as iShares S&P 500 Growth
- Defensive Component: iShares S&P Value as a defensive element in the current market.
This strategy aims to balance growth potential with quality and stability.
However, it’s important to note that past performance doesn’t guarantee future results, and the high concentration in certain stocks (like the Magnificent Seven) in some ETFs could pose concentration risks.
Ultimately, the choice depends on individual risk tolerance, investment goals, and market outlook. Regular rebalancing and monitoring of the portfolio would be necessary if adopting a multi-ETF strategy.
Read also:
