Best S&P 500 ETF For UK Investors (And How To Choose Yourself)

Hey guys, in today’s post we’re going to help you pick the best S&P 500 ETF to invest in for UK investors. There are many different ETF providers (such as Vanguard, iShares, Invesco, plus many more) each offering multiple S&P 500 ETFs. With so much choice, how do you know which is best?

Should you be investing in accumulation or distributing ETFs? Which fund domicile should you pick? Why does this S&P 500 ETF have a vastly different price to another similarly named one? What’s the difference between physical and synthetic replication? Should you choose a hedged ETF or not? Where do you go to research ETFs?

We’re not just going to tell you what our favourite S&P 500 ETF is because what’s right for us might not be right for you. We’re going to answer all these questions and more to give you the knowledge to pick the right S&P 500 ETF for your portfolio. Let’s check it out…

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To invest in any ETF, you’re going to need an investment platform. If you head over to the Best Investment Platforms page, there we have hand-picked our favourite investing platforms and put together a comprehensive cost comparison table.

Also check out the Offers page to get free stocks worth up to £200 with investing apps like Freetrade and cash welcome bonuses of £50 when new customers sign up to investing platforms like InvestEngine.

Why You Need An S&P 500 ETF

The S&P 500 is the leading index of US companies, making up about 80% of the market cap of the US and about 47% of the world’s market cap. Or in other words the constituents of the index are vital to every investor’s portfolio.

The S&P 500’s popularity as an index also means that there is huge demand by investors, which has led to a price war amongst the companies producing index trackers. As a result, you can invest in an S&P 500 ETF for almost free of charge.

Which S&P 500 ETF Is Best?

Our favourite is the Invesco S&P 500 ETF (SPXP), because it has excellent performance, is enormous with £8bn in assets, and has a rock bottom fee of just 0.05%, tight spreads, is listed in London, trades in GBP, is accumulating – and is synthetic.

This is a very popular ETF, so it is likely that it’s available on most investment platforms. The one downside to this ETF though is the market price, with each share currently priced at around £600.

In these circumstances it can very handy if your investment platform offers fractional investing. InvestEngine is one such app and as mentioned they are currently giving new customers a £50 welcome bonus when you sign up via this link.

Where To Begin Your Research?

First things first, we pretty much start all our ETF research using the ETF screener at It’s a super powerful tool that’s free to use and allows you to filter down on different criteria to find ETFs you can then research further. In this case we’re looking for S&P 500 ETFs, so we can select that index from the dropdown. Bear in mind if you’re looking for a hedged version or an equal weight version these will be listed as a separate index.

There’s big list of ETFs available and actually there’s even more than what is initially shown in the ETF screener because each of these will have multiple listings with different listed currencies and on different exchanges. We exclusively stick to those on the London Stock Exchange and stick to those traded in GBP where we can.

Which Currency Should You Choose?

Each ETF can have several currencies associated with them. Many people are exposed to currency risk without realising it because of confusion when it comes to the currency labels applied to ETFs. Just because an S&P 500 ETF is listed in pounds does not mean you have avoided exchange rate risk between pounds and dollars. This is about to get complicated, but we’ll do our best to clear this up.

Fund currency or base currency refers to the currency that an ETF reports in and distributes income in, which for most S&P 500 ETFs will be in USD. Your investment platform will convert any income you receive into pounds but will likely charge you an exchange rate fee for doing so. More on this shortly.

IUSA listings

Then there is the Trading Currency. Looking at the IUSA ETF as an example, if we look at the Listings section, we can see a bunch of listings on different exchanges and the currency of each. For this particular ETF there are two listed on The London Stock Exchange – one in dollars and one in pounds.

Because your investment platform will likely charge you FX fees you want to go for the one in pounds to avoid that fee. The trading currency has no impact on the returns of the ETF once they have been converted back into pounds.

And finally, there are currency hedged ETFs. These are designed to eliminate (as much as possible) currency risk. Hedged ETFs will normally have the term ‘GBP Hedged’ in their names, but always check the product’s factsheet or webpage to make sure.

Personally, we don’t use hedged ETFs because we think over the long-term currency movements don’t really matter too much. Hedged ETFs are often a little more expensive than their unhedged counterparts but for S&P 500 hedged ETFs they are still excellently priced.

Fund Domicile

Where your ETF is domiciled is super important. Typically, ETFs are domiciled in Ireland or Luxembourg due to tax reasons. Where possible we almost always pick ETFs domiciled in Ireland because Ireland has a tax treaty with the US whereby the dividends paid by US companies are only taxed 15% rather than 30%. But pick a synthetic ETF and that tax comes down to 0%.

Replication Method: Physical vs Synthetic ETFs

Okay so that last point was probably very clear until we mentioned the word synthetic. The goal of each ETF is to replicate its index as closely and as cost-effectively as possible and there are a few different methods that an ETF can use to achieve this.

The first and most straightforward is physical full replication. These literally buy all the stocks in the index, and hence it’s fully replicated.

Another method is Physical Optimised Sampling. This is where an ETF only invests in some of the stocks in the index as they determine this is all it takes to replicate the performance. This might be done to lower costs. In most cases we’ve seen these ETFs will buy the majority of the stocks in the index and sometimes even all of them. They may miss some of the tiny ones that have almost zero impact on the index.

We’re not big fans of Optimised Sampling because you don’t really know what and why certain stocks are missing. Before investing in this type of ETF do check that the past returns are in line with the index by looking at the tracking difference. Any major difference or wild yearly swings should be a red flag. It’s also worth checking the number of holdings in the index by downloading the index factsheet (search google for this) and comparing it to the number of holdings in the ETF. The closer the better.

And finally, there is Synthetic or Swap based replication. The ETF doesn’t buy the exact stocks within the index, instead it owns a different basket of stocks or securities and swaps the return of this basket with an investment bank or banks for the return of the index.

The advantages of doing this is it can be cheaper, and it avoids certain dividend withholding taxes such as those collected by the US. So, in the case of an S&P 500 synthetic ETF, they have a performance enhancement over their physical counterparts.

Typically, the S&P 500 yields 2% and the tax is 15%, so the improvement is 30 basis points every year. That is in our opinion not to be sniffed at and is why this is our favourite method of replication whenever it enhances performance as in the case of US stocks.

However, not all synthetic ETFs are created equal, and they do carry more risk than a physically replicated ETF. If you don’t understand them, we suggest you avoid them. If you’re interested in learning about how synthetic ETFs reduce counterparty risk, here is some bedtime reading.

Distribution vs Accumulation

Either you choose an ETF that distributes the dividend to you or one that automatically reinvests the cash within the fund. With accumulation funds you don’t receive more shares but instead the value (and the share price) of the ETF increases.

If your intention is to reinvest the dividend into the same fund and you’re investing within an ISA, then it makes financial sense to opt for an accumulation fund. S&P 500 funds are very likely to have their fund currency in US dollars and so will distribute their dividends in dollars. Your platform will convert this to pounds and will likely charge you an FX Fee for the privilege.

Moreover, if you have to manually reinvest the income yourself, then you will have to pay the bid offer spread and possibly trading commissions. Long story short, accumulation funds will save you money.

Despite the small savings, if you’re investing outside of an ISA we suggest going with the distributing type because otherwise it can get very complicated for tax purposes. You could end up paying tax twice with accumulation funds. Dividends rolled up into accumulation units are known as a ‘notional distribution’. They are taxable in exactly the same way as income units.

As we invest in ETFs primarily through an ISA, the only time we’d want the dividend paid out is if we needed to live on that income.

UK Reporting Status

You want to make sure your ETF has UK Reporting Fund Status otherwise you will have to pay up to 45% tax on the gains. You can check this on the ETF factsheet and webpage. As we only ever invest in London listed ETFs, all the ETFs we have ever looked at have had UK reporting status but it’s worth double checking.

OCFs, Tracking Difference, And Spreads

ETFs should be very cheap because you’re not paying for an expert fund manager, and S&P 500 ETFs are especially cheap. A good place to start for the least amount of effort is to choose an ETF with a low Ongoing Charges Figure (OCF).

However, it’s important to note that the quoted fee is not necessarily what you pay. ETFs will not match the index return exactly and the difference is known as the tracking difference. The difference between the index return and the ETF return is the real cost that you incur.

That’s the theory. In practice, what we do to find the best performing ETF is to sort them by their 3-year performance on Towards the top happens to be our favourite, the Invesco S&P 500 ETF.

Another thing investors want to keep an eye out for is the size of the spread when you buy and sell. A big spread is bad. A general rule of thumb is that the larger the fund size, the lower the spread due to increased trading volume. Most of the S&P 500 ETFs have billions of dollars of assets under management, so this is probably not a major concern, but it’s definitely something you might want to check for any other ETF.

We check spreads using Hargreaves Lansdown’s website for free and you don’t need to be a customer. Bang in the ticker in the search box and scroll down to the Costs section. The indicative spread is listed here. For our favourite, it is tiny at just 0.03%.

Does The Price Of An ETF Matter?

This is a common question we get asked. The market price of an ETF is not important. What matters, is the percentage change in the ETF price. If the index goes up 10%, you want your ETF to also go up by 10%.

The price of an ETF will usually correspond to its Net Asset Value (NAV). The NAV equals the value of the ETF’s securities and other assets, minus its liabilities, divided by its number of shares.

There’s a great article on that explains it very well, linked to here.

Finding The Best S&P 500 ETF For You

Now that you’re armed with the necessary knowledge you can use the ETF screener on to find the best S&P 500 ETF for you.

The best S&P500 ETFs

Some of you may still feel you need your hand holding, so to finish off we’ve put together this table with our favourite S&P 500 ETFs for various circumstances. The tickers are all for the GBP versions listed in London.

If you’re new to investing and are not 100% sure what you’re doing, we think you won’t go far wrong with Vanguard and iShares. Most of their funds are huge, competitively priced, and are in most cases physically replicated, which many investors feel more comfortable with. The last 2 in the table are hedged ETFs.

What’s your favourite S&P 500 ETF and why? Join the conversation in the comments below.

Written by Andy


Featured image credit: Imagentle/

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  1. What about the i500 you recommend for the ultimate portfolio?

    • The i500 is great is you’re a fan of synthetic ETFs, llike we are, but they are not everyone’s cup of tea. Synthetic S&P500 ETFs give the best returns as they avoid dividend withholding tax.

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