How to buy S&P 500 from Australia: Invest in the S&P 500

Investing in the S&P 500, one of the world’s most renowned stock market indices, has long been a popular choice for investors seeking exposure to the US equities market. However, if you are based in Australia, you might be wondering how to gain access to this investment and what is the best approach to invest in the S&P 500 from Australia.

In this comprehensive guide, we will provide you with a step-by-step process for buying the S&P 500 from Australia. We will cover important aspects such as choosing a suitable S&P 500 ETF, tips for selecting an ETF broker, and more.

How to invest in the S&P 500 from Australia (Step-by-step guide)

1. Pick an ETF tracking the S&P 500

The S&P 500 measures the performance of 500 large-cap US companies, including companies such as Apple, Microsoft and Amazon. These companies span various sectors and represent the overall US equity market. As such, investing in the S&P 500 exposes you to a broad range of companies and can serve as a cornerstone of a diversified investment portfolio.

When it comes to investing in the S&P 500 from Australia, it will be costly and inefficient for individual investors to attempt to invest in each of these 500 companies separately. However, Exchange-Traded Funds (ETFs) offer a practical solution by providing a single investment vehicle representing the entire index’s performance. By investing in S&P 500 ETFs, Australian investors can effectively participate in the potential growth of the index and enjoy the benefits of diversification.

The following table presents the major S&P 500 ETFs accessible to Australian investors. This list was derived from the ETFs listed on the Australian Stock Exchange (ASX) and based on the morningstar ETF screener.

Don’t worry if you are unfamiliar with what the “Replication method” and “Use of income” mean; we’ll explain them later in this guide. Now, let’s move to the second step on how to buy the S&P 500 from Australia.

2. Choose a good ETF broker

After selecting an ETF, the next step is to identify a reliable broker to let you invest in it. To do this, we’ll briefly summarize what each broker offers on their platforms.

Other important factors to consider when selecting an ETF broker are the fees, minimum deposit requirements, and the range of available ETFs. Here is a summary of these factors for each broker:

3. Place a “Buy Order”

Once you have chosen a suitable ETF broker and funded your account, you are ready to place a “Buy Order” for the S&P 500 ETF. For this example, we will use Interactive Brokers. However, you can follow these steps to execute your purchase with any broker:

a) Search for the desired S&P 500 ETF

Use the search function or browse through the available ETFs to find the specific S&P 500 ETF you have selected. Refer to the ticker symbol to locate the ETF accurately (in our case, we searched for SPY).

You may come across instances where the broker offers multiple versions of the same ETF, denominated in different currencies such as USD, AUD  or EUR. It is advisable to select the one that aligns with your account currency. For example, if your account currency is AUD, choosing an AUD-denominated ETF will help you avoid currency exchange fees.

b) Click on “Buy” or “Invest”

Usually, this tab is clear once you are on the ETF page, where you will find the chart and key information about the ETF.

c) Choose the order details

Now, you must choose the appropriate order type based on your preferences and trading strategy.

• Limit Order: It is set by default on IBKR. So you can set a specific price at which you are willing to buy the ETF. The trade will only be executed if the market price reaches or falls below your specified limit price.
• Market or Trader Order: This order executes the trade at the prevailing market price and provides immediate execution.
• Amount or Units: Specify the amount of money or the number of shares you wish to invest in the S&P 500 ETF.

d) Place the order

Finally, click “Submit But Order” to submit your order. At this point, the broker will process the transaction and attempt to execute the trade at the specified parameters.

What to look for in any ETF?

Not all ETFs are the same, and it’s important to consider several factors before deciding. Here are some factors to consider:

1. Fees (TER)

Different asset managers charge varying fees for their ETFs. For instance, providers like BlackRock (iShares) and Vanguard charge a small annual fee which is subtracted from the fund’s assets directly. As such, choosing an ETF with lower fees can result in higher returns on your investments. Ongoing charge (OCF) or total expense ratio (TER) are standard terms to describe this overall management fee.

2. Replication method

ETFs can employ two different replication methods:

• Physical replication, where the fund manager buys the actual stocks included in the index (either all of them or a representative sample).
• Synthetic replication, where the fund manager uses financial derivatives (typically swaps) to mirror the index’s performance without directly holding the underlying stocks.

You might also encounter ETFs that combine both approaches. Given the high liquidity of the S&P 500’s underlying companies, physical replication is generally preferred due to its lower costs and the reduced counterparty risk associated with derivatives. All major ASX-listed S&P 500 ETFs (IVV, IHVV, V500, V5AH, and SPY) use physical replication, so Australian investors don’t need to worry about synthetic exposure when accessing this index through their local market.

3. Use of Income

ETFs also differ in how they handle income generated by the underlying companies.

• Accumulating ETFs automatically reinvest dividends received from the underlying companies, increasing the ETF’s price over time. This avoids transaction fees on reinvestment and can simplify compounding for long-term investors.
• Distributing ETFs pay dividends directly to your brokerage account on a regular schedule (typically quarterly for S&P 500 ETFs), which you must then declare as income.

Choosing between the two depends on your circumstances and investment strategy. Accumulating ETFs are generally better suited to long-term investors who don’t need regular income, while distributing ETFs are preferred by those seeking a steady cash flow from their portfolio.

One important caveat for Australian investors: almost all ASX-listed S&P 500 ETFs are distributing, including IVV, IHVV, V500, V5AH, and SPY. Accumulating S&P 500 ETFs (such as those structured under the UCITS framework in Europe) are not directly available through standard Australian brokers. If you want a similar “auto-reinvest” effect with an ASX-listed ETF, most providers offer a Distribution Reinvestment Plan (DRP) that automatically uses your distributions to buy more units, usually without brokerage fees.

In Australia, investors are subject to tax on both dividends and capital gains. Long-term investors who hold their ETFs for more than 12 months benefit from the 50% capital gains tax (CGT) discount for individuals, which effectively halves the taxable capital gain. ETF distributions are taxed as income in the year they are received, even if reinvested through a DRP. We recommend speaking with a tax advisor for personalised advice and to ensure compliance with ATO rules.

4. Size

Consider the overall fund size when selecting an ETF. Larger funds generally carry a lower risk of liquidation compared to smaller ones. In the event of liquidation, a fund sells its holdings, settles obligations, and distributes the remaining funds to investors.

5. Hedging

Some ETFs employ hedging strategies using financial derivatives to mitigate the impact of currency fluctuations. While this protects against large currency swings, it also comes at an additional cost.

Bottom line

In conclusion, investing in the S&P 500 from Australia is a popular and accessible way to gain exposure to the US stock market. Here’s a summary of the steps to follow:

1. Pick an ETF tracking the S&P 500: The main ASX-listed options are IVV and V500 (unhedged), IHVV and V5AH (AUD-hedged), and SPY (CDI over the US-listed fund). All offer competitive management fees ranging from 0.04% to 0.10%, and the choice between hedged and unhedged comes down to your view on AUD/USD exposure.
2. Find a suitable broker: Choose an ASX-friendly broker with low brokerage fees, a low minimum deposit, and reliable order execution. Consider also FX conversion costs if you plan to buy US-listed funds directly.
3. Open an account and deposit money: Complete the account opening process (which usually requires ID verification and a TFN for tax reporting) and fund your account.
4. Place a buy order: Once your account is funded, search for the ETF ticker on your broker’s platform, choose between a market or limit order, and confirm the trade.

We hope this guide has addressed your questions and provided useful insights. Remember to conduct your own research and consider speaking with a financial or tax advisor to determine the best strategy for your circumstances.

Happy investing!

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