Why an S&P 500 ETF is the first pick for my 2022 Stocks & Shares ISA!

I’m searching for the best investments for my 2022 Stocks and Shares ISA. Here’s why I’m choosing an S&P 500 as my first pick.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Niki Jerath owns shares in Vanguard S&P 500 ETF. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon, Apple, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »