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Index funds deep dive

As mentioned in

Investing basics⁠

, I suggest loading up your personal investing portfolio with S&P500 ETFs (you might not get to choose what you invest in through your pension/retirement investment account).

There are, confusingly at first, a few different financial companies that offer their own S&P500 ETF, each one of them consisting of the same 500 companies.

Some are domiciled (and traded) in the United States, others in Mexico, others in Ireland, and others elsewhere (mostly for tax reasons). Some trade in USD, some in GBP, some in MXN, and some in ZAR. Index funds are one of the cheapest ways to build a diversified portfolio, but the financial companies and banks that set them up charge different fees for them.

There are codes that are used for all currencies (like USD), stocks (like AAPL), and ETFs (like VOO). You can search for these codes on Google Finance or Yahoo Finance (it often helps to precede the code with a $ sign like “$AAPL stock”, which will show you stock and financial information related to Apple. For index funds, it will show you the TER (total expense ratio, i.e. the cost; lower is better).

The price of a single share in a company (or a single unit of an ETF) could be thousands of dollars. The shares and ETFs traded in some places only allow full share trading and ownership. Meaning, if you want to invest into, say, Amazon, and $AMZN shares cost $1,000, that you will need at least $1,000 USD to buy one share. Some allow for fractional share trading and ownership, meaning you can spend $200 for 0.2 $AMZN shares. You can enable fractional shares on Interactive Brokers, as

per this article⁠

Consider just buying a single ETF to begin with.

If you are from the US, consider $VOO (Google: “$VOO ETF”). This is the biggest S&P500 ETF with the lowest fee of 0.03% (”total expense ratio”), by Vanguard. Since you can buy fractions of this ETF, you can set the dollar amount you want to spend.

(If you are from elsewhere and you can’t buy $VOO, consider $VUSD, or $JSE:SYG500 in South Africa, or the lowest fee S&P500 index fund you can find)

Below is an order I placed:

⁠

Note:

It is a BUY order (since I’m buying)

for VOO (the Vanguard S&P500 ETF)

the “price” of the ETF was 355.08 USD

the “price” of things are displayed as the middle between the highest BID of 355.05 USD (the maximum someone will pay to buy something right now) and the lowest ASK 355.11 USD (the minimum someone is will accept to sell something)

the price of anything is how much you can buy or sell it for

you could sell 200 units of $VOO at the bid price at the time of this transaction, and you could buy 100 units at the ask price

instead of setting a quantity of shares that I wanted to buy, I selected the amount of money I wanted to spend (608 USD) and the platform gave me a rough estimate of how many shares that would be (~1.71 shares)

I selected a MARKET order, meaning I immediately paid the lowest ask (355.11 per share, for the first 100 shares) and got my shares.

I could have entered a LIMIT order, which would be the price I’m willing to pay for a share, like 355.10, for instance. The trade would only happen if someone sold it to me at that price. I could theoretically place a bid to buy 1 share of $VOO for 1 USD, but unless the stock market goes virtually to zero, nobody will sell me a share for that low price. The same way you can place a bid of $1 USD on a car (or anything).

The order was placed to expire at the end of the DAY (this is only relevant to limit orders, as market orders execute immediately). You can also set limit orders to exire on a certain date (or never: “good till canceled”).

🤓 Some more nerdy notes on S&P500 ETFs

When you die, the assets in your estate (basically, everything you own) will be taxed based on where you are a tax resident, where you are a citizen, and based on what those assets are.

If you are not a US citizen and have assets that are domiciled in the United States when you die, the US Internal Revenue Service (IRS) will levy

an estate tax⁠

on those assets at 40% (the first $60,000 won’t be taxed). Assets that are domiciled in the US could be things like the property you own there, but also stocks and ETFs that are domiciled there (you can look up a stock or ETFs domicile online).

So then, there are US-domiciled and non-US-domiciled S&P500 ETFs. They all invest in the same 500 companies, but they are traded on different exchanges, in different currencies, and they have different expense ratios (which roughly means ”fees” that will reduce your profit).

Comparison of S&P500 index funds

Comparison of S&P500 index funds

Name

Code

Domicile

Currency

Expense ratio

Vanguard 500 Index Fund ETf

VOO

USA

USD

0.03%

Vanguard 500 Index Fund (Mexico) ETF

VOO.MX

USA

MXN

0.03%

Vanguard S&P 500 UCITS ETF USD

VUSD

Ireland

USD

0.07%

Vanguard S&P 500 UCITS ETF GBP

VUSA

Ireland

GBP

0.07%

SPDR S&P 500 ETF

SPY

USA

USD

0.09%

Sygnia Itrix S&P 500 ETF

JSE:SYG500

South Africa

ZAR

0.2%

There are no rows in this table

⁠

I focus not on trying to find “perfect”, but “good enough”. For most people, $VOO is good enough (and close to perfect) since it has the lowest expense ratio. That said, since it is US-domiciled, if you have more than $60,000 in VOO (and other US-domiciled ETFs, stocks, or other assets), your heirs will give up a lot of that in inheritance tax.

Other people might prefer to buy and sell the same ETF immediately in MXN (instead of converting it to USD) and may choose to trade

VOO.MX⁠

⁠

For most people, SPY is a worse choice than VOO, since the expense ratio is 0.09, compared to 0.03 (66% cheaper). That said, your investing platform/app might not have VOO and only SPY, and then it could be the best option. Many mutual funds and other advisors charge expense ratios of up to 2% (2000% more expensive).

For many people who aren’t American, the best option (after your first $60,000 in USD-domiciled assets) is VUSD. The expense ratio is higher, but since these ETFs are domiciled in Ireland, your estate won’t need to pay a high estate duty. If you are British or prefer to do your accounting in GBP, VUSA is exactly the same, except it is traded in GBP.

Note that VUSA and VUSD are traded on the London Stock Exchange and VOO and SPY on the New York Stock Exchange. These exchanges have different hours of operation, but you can always place a limit order at your preferred price if you want to buy or sell if the specific market isn’t open.

The beauty of the Irish-domiciled ETFs is that they are a way for you to invest in US companies, but by clever means of accounting, the investment isn’t seen as US-domiciled (and therefore US-taxed upon death). If you bought the individual stocks of the companies on the S&P 500, they are all US-domiciled and liable to US estate duty upon death.

The return of all these ETFs should be roughly the same (but the ones with the lower expense ratio will make more money in the long run). Here is

a graph⁠

where you can compare them and see.

Lastly, some platforms will allow you to buy fractional shares (instead of buying a whole share of $AAPL or $VOO, you can buy a fraction like 0.1 shares), but only of certain ETFs and stocks, not all of them around the world. If you can only afford to invest $50 per month right now, and $VOO and $VUSD cost more than $50 a share (which they do), you may have to choose an ETF that you can buy in fractions.

🇿🇦 My suggested portfolio for South Africans would be to:

Maximise your TFSA allowance by buying the Sygnia Itrix S&P 500 ETF (JSE:SYG500) with your Easy Equities TFSA account. Even though it levies fees 566% more than $VOO (which means you’ll pay $268,641 more in fees over 40 years), your growth isn’t taxed and the asset is domiciled in South Africa (easy when it forms part of your estate upon death).

Then, invest in Vanguard 500 Index Fund ($VOO) with your Easy Equities USD or IBKR account until you get close to $60,000.

Then, invest in the Vanguard S&P 500 UCITS ETF USD ($VUSD) with your IBKR.

(Obviously, it depends on the domicile of the other assets in your portfolio.)

In closing

Get an investment account where you can invest in an S&P500 ETF

Pick one that is good enough for now (lowest expense ratio, US/non-US domiciled, fractional share, preferred currency)

That’s it: a single thing you can keep buying every month, that will give you exposure to companies making money around the world. Do a Google search for “The lazy portfolio”. Once your net worth is around $100,000, you can consider updating your portfolio to look like this:

Lazy portfolio of assets

Lazy portfolio of assets

Asset class

US-domiciled

Non-US

US ETF

80%

VOO

VUSD/SYG500

Non-US ETF

10%

VEA

VHVE

Emerging markets ETF

10%

VWO

EIMI

There are no rows in this table

⁠

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