S and P 500
In this article
Many people hear about the S&P 500 in the news, but few explain it or why it matters. Read on to understand how you can invest from South Africa in the S and P 500 .
As common as the name implies, the Standard & Poor’s 500 index is a stock market index that measures the performance of the 500 largest US companies listed on the stock exchange. The US stock market uses this measure to gauge its overall performance.
Current Updates on S and P 500
You’ll know if the S&P 500 index rises or drops by a lot on any given day. This is because there’s probably been a significant event that affects thousands of US companies and possibly the economy.
After a steady sell-off to start Q2, US equities have maintained support last week and started bouncing this week as the earnings season continues.
US stocks traded higher this morning following another sizable gap from Tesla after its earnings report was pretty intense. The indices are seeing a change from last week’s background and how they trended around Q2’s open. After a massive rally in stocks post-FOMC in late March, sellers began re-engaging as the Q2 open approached, weakening over the next three weeks until there was significant support in the S&P 500.
There are certainly a variety of risks associated with equities, including the potential for a significant switch in Fed policy later in the year. The FOMC is expected to hike rates nine times, which means more tightening is possible through QT, as some Fed members have discussed in recent media appearances.
After all, there are only eight months left for the Fed to impose the nine 25 basis point hikes expected, so the next rate decision on May 3-4 is likely to be the first of many 50 basis points increases this year.
Nevertheless, trends don’t follow a straight path, and at this point, the Federal Reserve has not made any announcements formally; we’re still waiting. Moreover, there still appears to be some expectation that the Fed will not make such an aggressively hawkish move since such a move would be wildly incompatible with the bank’s stance in the aftermath of the Financial Collapse.
Inflation is the issue this time, so Fed members are even saying that a soft landing is in the works. Even so, equities are moving higher due to Tesla’s impressive quarterly performance. This should set up an exciting backdrop for equities this year.
What is S&P 500?
In December, the S&P 500 index hit 4,500, marking a significant level for the index. The Omicron variant became an issue in late November, and a wave of fear swept through the market. The S&P hit the inflection point of turning at the 4500 level shortly after that, which provided a quick kick to stocks. As soon as it recovered, the S&P hit another high later in December.
In recent months, this zone was in play again in late March when it served as resistance, only to be turned into support as the prices turned around.
S&P 500 shorter-term
As of now, bulls are in control. However, a breach of support at 4500-4510 would open the doors for a run to the next resistance at 4538-4550. After 4572-4586, another critical zone lies between 4625-and 4642.
In bearish scenarios, you would like to see the market re-engage with support/previous resistance at 4445, and if sellers can begin testing through that price, the door would open for a run down to 4371-4383. This would indicate a return to the bearish trend, after which you would expect the pair to move back towards 4327.
How to invest in the S&P 500 from South Africa?
Investing in the S&P 500 is possible in several ways in South Africa. First, this index comprises 500 companies, so buy stocks in these companies or buy S&P500 index funds.
Contracts for difference (CFDs) are derivatives products that let you speculate on index price movements by trading S&P 500 stocks. You’re using leverage to increase profits and losses, which means it’s much riskier than investing in index funds.
The whole thing is vague, but when you hear someone in South Africa say they are trading S&P500 CFDs, they probably refer to foreign exchange trading. Index funds, by contrast, are more associated with investing in the S&P 500 index. Each approach has different risks, so it’s essential to understand this.
Investing in a single company is generally higher than investing in an index fund. However, trading in an index CFD is still riskier and should only be attempted by experienced traders.
How to find an S&P 500 index fund?
As exchange-traded funds (ETFs) or as unlisted funds, index funds can be listed on or unlisted from stock exchanges. Unlike listed funds and ETFs, unlisted funds have very few differences. Many fund managers offer both options through Vanguard and Blackrock.
ETFs offer a more accessible entry point for those new to investing since any common share trading platform can invest in them. The minimal investment requirement is also lower for ETFs than unlisted funds, which require a few thousand dollars.
Listed below are the current S&P500 ETFs available in South Africa:
- Satrix S&P 500 ETF: (STX500J)
- Satrix Quality South Africa ETF: (STXQUA)
- Satrix MSCI World ETF: (STXWDM)
- CoreShares Top50 ETF: (CTOP50)
- Sygnia Itrix SWIX 40 ETF: (SYGSW4)
How to invest in an S&P 500 ETF?
- Invest in an index fund tracking the S&P 500. The performance of some index funds includes all 500 S&P stocks, while others include only a few stocks or concentrate more on specific stocks. Actively managed funds tend to perform better than passively managed funds. Conduct your research before making a decision.
- Open an account for trading shares. You must open a trading account with either a broker or a platform to invest in an S&P 500 ETF.
- Set up a deposit. To open a trading account, you must deposit funds.
- Invest in index funds. Investing in the S&P 500 index fund is like investing in stocks once your money has been deposited. Most ETF fund managers charge you an annual (MER) fee deducted from your returns.
How to invest in S&P 500 stocks?
The S&P 500 index can be invested by purchasing individual stocks from the 500 companies. If you wanted to, you could purchase shares in selected companies or all 500.
Although you need to pay brokerage fees for every trade you make when you purchase shares in hundreds of companies, this is a costly method of investing. S&P 500 stocks can also sell for hundreds of dollars, so to have exposure to all companies in the index, you would have to invest hundreds of thousands of rands.
You probably won’t be able to get a much better deal and more efficient return if you invest in S&P 500 ETFs or index funds if you want to diversify your portfolio.
What does the S&P 500 measure?
It measures the stock market value of the roughly 500 companies included in the index, with around $500 billion in market capitalisation.
To calculate market capitalisation, multiply the number of outstanding shares by the current stock price.
Thus, if shareholders currently hold 2 million shares, and a share price of $5 is current, then the company’s market cap is $10 million. Or, to put it simply, the company is valued at $10 million.
S&P 500 values are calculated by taking into account only the number of publicly traded shares for each company. As of February 2020, the value of the S&P 500 would be about $24.47 trillion if we added up all the companies’ market caps in the index.
There is, however, a specific weighting for each company in the S&P 500, which consists of dividing the company’s market capitalisation by the S&P 500’s total market capitalisation. So, companies with larger market capitalisations are given more weight than those with smaller market capitalisations. In the S&P 500, these are the ten stocks with the highest weighting:
- Apple Inc.
- Microsoft Corporation
- com Inc.
- Alphabet Inc. Class A
- Facebook Inc. Class A
- Alphabet Inc. Class C
- Tesla Inc.
- NVIDIA Corporation
- Berkshire Hathaway Inc. Class B
- JPMorgan Chase & Co.
What is the purpose of assigning weights?
To provide as accurate an overview of the stock market as possible. This is significant because a 10% rally (or fall) in Microsoft’s stock could mean a gain or loss of hundreds of billions of dollars. Compared to clothing retailer The Gap, which currently occupies the bottom spot on the list.
An increase or decrease of 10% in its share price could mean a gain or a several hundred million dollars loss. Microsoft’s price movement in this scenario illustrates the magnitude of the economic disruption far more significant than that of The Gap.
S&P 500’s market capitalisation is divided by a proprietary factor to arrive at the number we see on the ticker. Each change in the share prices of companies in the S&P 500 throughout the day contributes to the value of the index, though companies near the top of the list are more likely to have a significant impact than those near the bottom.
What is the average return of the S and P 500?
Historically, the S&P 500’s annual total returns (including dividends) have been about 10%, not adjusted for inflation. However, please remember that this does not mean that an S&P 500 index fund will return 10% every year.
S&P 500 stocks, for instance, finished the year down 37%. Yet, the following year, it increased by 26%. To earn a 10% annual total return, it is essential to have a long-term investing mindset and be willing to ride out market volatility. Read about the average stock market return.
Why should I invest in the S and P 500?
Investors have historically gotten a decent return on their investment when they invest in the S&P 500, including some of the world’s largest and most successful companies.
If you invest exclusively in equities listed on the Johannesburg Stock Exchange (JSE), the number of equities you can buy will be limited. Instead, you can diversify your portfolio by investing in an S&P 500 index fund, opening a US stock trading account, and increasing your gains from American stocks.
Is now a good time to invest in the S&P 500?
Since the Coronavirus pandemic has hit, stock indices have seen significant declines in 2020. While many investors have lost money on the S&P 500 at the start of the year, they will likely see the recent crash as an opportunity to invest in S&P 500 stocks or funds.
Over the past decade, the S&P 500 has averaged a compound return of 7.5% a year. It has been profitable each year except for 2018 over the last decade.
A variety of factors need to be considered before choosing an investment, but an S&P fund is generally a good choice if you wish to have broad exposure to the South African stock market. Take a look at the following factors:
It may be necessary to invest a minimum amount of money to begin investing in a fund. For example, Vanguard’s 500 Index Fund (VFIAX) requires a $3,000 minimum investment. On the other hand, Fidelity’s 500 Index Fund (FXAIX) requires no minimum investment.
As a percentage of your investment, an expense ratio represents your annual expenses. For example, you will pay the mutual fund $10 per year for every $1,000 invested in a fund with a 1% expense ratio. The fee is automatically deducted from your investment, so you won’t worry about getting billed. The expense ratios for index funds and exchange-traded funds are typically lower than those of actively managed mutual funds, but it is still valuable to know what you will pay.
It is certainly possible to earn superior investment returns over the long run compared to the S&P 500 if you have the necessary time, knowledge, and desire to research stocks and maintain a portfolio.
The task of investing in stocks that way is not for everyone, and beginners, in particular, may benefit more from investing in an S&P 500 index fund until they have more experience.
The S&P 500 offers broad exposure to the profitability of South African companies without being overly exposed to the performance of any one individual company. As a result, it is possible to produce solid returns for your portfolio over time by investing in the S&P 500 with little to no effort.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst