I think using a Stocks and Shares ISA is a smart way to invest. With these investment accounts, any dividends I receive or capital gains made within them aren’t taxed.
For my own ISA I firmly believe in having a long-term outlook. I invest in stocks I expect to hold for 10 years or more and that ideally provide dividends I can reinvest to help build my wealth. If I’m lucky, hopefully the investment will grow to be worth a lot more and because of the tax-free wrapper, I should get to keep all of the gains.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
I could pick individual stocks, but I prefer to use exchange traded funds (ETFs) and for my 2022 Stocks and Shares ISA, my first pick is going to be an S&P 500 ETF.
Why the S&P 500?
At the end of 2020, the total value of the worldwide stock market was estimated to be almost $94trn. Out of that, the US accounted for over 55%. Therefore I feel that the US is a good starting point.
The S&P 500 is the key important index in the US. with 500 large companies selected by a committee. Firms must have a big market cap, at least 10% of shares outstanding and meet liquidity and profitability requirements.
It includes big-name companies such as Microsoft, Apple and Amazon and covers a wide a variety of sectors.
Not that it’s perfect. One issue is that the index only includes US companies. It’s true that many of them derive some earnings from outside of that country, but this percentage has been falling over time.
Another downside of buying the S&P 500 is that I limit my returns to those of the index. I could be wrong, but by picking individual stocks I might be able to outperform it.
However, this fund allows me to invest in 500 companies by holding a single share. It’s a low-cost way of diversifying across companies and sectors. I’m happy to give up the possibility of a higher return from investing in individual companies for the ease of this diversification.
Selecting a fund
As such an important index and essential barometer of US stock market health, it’s no surprise that there are lots of ETFs available.
The largest one listed here in the UK is iShares Core S&P 500 UCITS ETF. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.
For my own ISA, I’m again choosing Vanguard S&P 500 ETF (LSE: VUSA). It sits in the middle in terms of size ($47m) and costs (0.07%) and pays a dividends of 1.12% that I’m planning to reinvest into my ISA.
During 2021 its price rose around 30%. However, year-to-date, it’s down around 6%. That said, it’s been a turbulent start to 2022 and much of the stock market is down. However, for my ISA I’m more interested in the long term and over 10 years, it has seen a 320% increase.
The US index has averaged around 10% growth a year since 1957 and though nothing in investing is certain, I’m hopeful that can continue. I’m happy to make this S&P 500 ETF the first pick for my 2022 Stocks and Shares ISA.