How to buy S&P 500 from Malaysia: 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 Malaysia, you might be wondering how to gain access to this investment and what the best approach is to invest in the S&P 500 from Malaysia.

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

How to invest in the S&P 500 from Malaysia (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.

When it comes to investing in the S&P 500 from Malaysia, 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.

The table below shows the five biggest S&P 500 ETFs available to Malaysian investors. These ETFs are listed on international exchanges as the Malaysian stock exchange, Bursa Malaysia, currently lacks ETFs that track the S&P 500. This list was generated 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 Malaysia.

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 provide a brief summary of 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, EUR or GBP. It is advisable to select the one that aligns with your account currency. For example, if your account currency is USD, choosing a USD-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, which involves purchasing the actual assets outlined in the index,
• Synthetic replication, where the fund manager utilizes financial derivatives to mirror index performance.

Additionally, you might encounter some ETFs that combine both approaches. Given the high liquidity of the S&P 500’s underlying companies, physical replication is often preferred due to its lower costs and reduced risks associated with derivatives.

3. Use of income

ETFs also differ in handling income generated by the underlying companies.

• Accumulating ETFs reinvest dividends received from the companies included in the index, leading to a higher ETF price. You won’t need to pay transaction fees or trading costs for dividend reinvestment, as it is done automatically. 
• Distributing ETFs, on the other hand, provide regular dividend payments directly to your brokerage account, requiring you to declare the received dividends.

Ultimately, deciding between accumulating and distributing ETFs depends on your circumstances and investment strategy. Assess your long-term goals and income requirements to select the best option for your needs. For instance, if you plan to hold your investment for a relatively long period without the need for regular income, an accumulating ETF may be more suitable. However, if you aim to earn regular income from your investment, a distributing ETF would be a better choice.

In Malaysia, the tax regulations regarding investments offer certain advantages. Capital gains from investment sales are not subject to the capital gains tax, and dividend income received from ETFs may also be tax-free, provided specific criteria are met. This gives you the flexibility to choose between accumulating or distributing ETFs based on your preferences. However, it is highly recommended to consult with a tax advisor to receive individualized guidance and ensure adherence to tax laws, as certain exceptions may still apply.

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.

6. Domicile

The ETF domicile refers to the country in which it is registered and regulated. It plays a significant role in determining the tax implications for investors. Different domiciles may have varying tax treaties and regulations that can affect the withholding tax on dividends and capital gains. For example, Ireland-domiciled ETFs often benefit from favorable tax treaties with the United States, resulting in lower withholding tax rates on dividends. 

For Malaysian investors, while both US and Ireland-based ETFs expose the S&P 500, one notable distinction is that Ireland-domiciled ETFs can benefit from the US-Ireland tax treaty, which imposes only a 15% withholding tax on dividends. In contrast, US-listed ETFs typically have a higher withholding tax rate of 30%. So, investing in Ireland-domiciled ETFs could result in lower taxes on dividends. However, individual tax circumstances can vary, and we recommend that you consult with a tax advisor to receive personalised recommendations based on your situation.

Bottom Line

In conclusion, investing in the S&P 500 from Malaysia is a popular option for individuals seeking exposure to the US stock market. Here’s a summary of the steps to follow:

1. Pick an ETF tracking the S&P 500: Look for ETFs such as SPY and VOO, which offer competitive management fees and are listed on multiple exchanges in different currencies (This can help you circumvent potential broker-related Forex fees as you can buy in your account currency);
2. Find a suitable broker: Choosing a reliable broker is crucial for investing in the S&P 500. Consider factors such as the minimum deposit and fees;
3. Open an account and deposit money: After deciding which trading platform to use, you must go through the account opening process and deposit money;
4. Send a buy order to your broker for the picked ETF: Sending a buy order to your broker is a straightforward and intuitive process. Just fill in the required fields to execute the trade!

We hope this guide has addressed your concerns and provided valuable insights. Remember to conduct thorough research to determine the best investment strategy for your needs.

Happy investing!

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