The Vanguard S&P 500 UCITS ETF (LSE: VUSA) is quite a popular investment in the UK. With this tracker fund, investors can get one-click access to a broad range of US stocks. I think it’s smart to have plenty of exposure to the US stock market as, historically, it has outperformed the UK market. But should I buy VUSA stock for my portfolio? Let’s take a look.

What is VUSA?

VUSA is an exchange-traded fund (ETF) that tracks the S&P 500 index. This index consists of 500 large companies listed on stock exchanges in the US.

At present, the top 10 holdings in the S&P 500 are:

Advantages of the fund

There are a number of things I like about VUSA. Firstly, it provides access to many world-class companies. With this ETF, I can get exposure to the likes of Apple, Amazon, and Alphabet (Google). These are some of the most dominant companies in the world. On the London Stock Exchange, we don’t have huge companies like this.

It also provides great exposure to the technology sector. At the end of October, tech represented about 26% of the S&P 500 index (versus 0.9% for the FTSE 100). As a long-term investor, this is a sector I want to have plenty of exposure to, as the world is only going to become more digital.

Additionally, it provides diversified exposure to the US market at a low cost. As an ETF, VUSA trades just like a regular stock. So the only fees I’ll pay to buy and own it are my standard brokerage fees (trading fees and custody fees). This means it will most likely be more cost effective than owning a non-ETF index fund or an actively-managed fund.

Finally, I also like the fact that as an ETF, its price changes during market hours (versus actively-managed funds which typically are only priced once a day). This feature could allow me to be nimble when it comes to buying and selling my units. For example, the S&P 500 recently fell to near-3,500 before ripping back up above 3,650 that same day. If I’d been on my toes, I could have got in near the 3,500 mark with VUSA. I couldn’t have done that with an actively-managed fund.

Disadvantages

Of course, VUSA has its disadvantages too. Buying a broad ETF like this doesn’t give me any control over the stocks I’m buying. I’m forced to own all the stocks within the S&P 500. So for example, if I want to avoid oil stocks like Chevron, I can’t. I like picking individual stocks myself as it gives me more flexibility.

Secondly, the S&P 500’s heavy allocation to technology means this ETF could be quite volatile. We’ve seen this in 2022. This year, VUSA has had some wild swings.

Should I buy VUSA stock?

So would I buy VUSA stock today? Well, the thing is I already own shares of Apple, Amazon, Microsoft, Alphabet, and a number of other US-listed companies. So if I invested in VUSA, there would be a fair bit of overlap.

So, for now, I won’t be buying it. However, if starting an investment portfolio from scratch today, I would definitely consider it. I think it could be a good core holding.

The post Should I buy VUSA stock for my portfolio? appeared first on The Twelfth Magpie.

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Ed Sheldon has positions in Alphabet (C shares), Amazon, Apple, and Microsoft. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Microsoft, and Tesla. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. 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.

In fact, it’s more precious than you might realise. For example, it dawned on well-known, super-successful investor Warren Buffett early in his life that every dollar he owned was actually worth all of the future dollars he would go on to compound the money into.

So, if he lost a dollar, he was really losing tens and hundreds of dollars in the future. And if you lose your £1,000, you are really losing what could become a vast chunk of your future retirement savings, perhaps.

Minimising the downside risks

Therefore, if I only had £1,000 to invest right now, I’d invest it with particular care and by focusing first on downside risks. To me, that means out the window with individual shares altogether. I reckon there’s too much single-company risk attached to owning individual stock market names, even big ones. Check out the history of well-known shares such as Lloyds Banking Group, Persimmon and Thomas Cook for evidence of the risks involved.

I think it’s better to diversify across several shares so that any one company’s bad performance can’t drag your total overall investment down too far. But you can’t really do that with £1,000 because the execution costs, such as trading fees and tax, will eat up too large a part of your investment.

To overcome the diversification problem, you could invest in a fund run by a manager who chooses the underlying investments. But the ongoing fees can be high, which will eat into your returns. And as a group, there’s plenty of evidence that fund managers often fail to beat the general performance of the stock market. So you could end up paying high fees to actually underperform the market with your investment.

Keeping up with the market, compounding gains

I used to think that choosing your fund manager carefully could lead to market-beating returns, but that idea was blown out of the water for me with the recent Neil Woodford debacle. He was a well-respected and successful fund manager with a knack for outperforming the market, which he did for many years. But since setting up his own investment management firm a little while back, his luck appears to have run out and his funds have lagged well behind the market.

So I’d chuck the idea of investing in managed funds out the window too. Instead, I’d put my £1,000 into a passive, low-cost tracker fund that aims to replicate the performance of the general market. There are many you can choose from, but I reckon a good place to begin is with a tracker fund that follows the fortunes of the FTSE 100 index of the UK’s largest public limited companies.

If you go for the ‘accumulation’ version of the tracker fund you choose instead of the ‘income’ version, it will automatically reinvest the dividends for you, which would set you on the road to compounding your money.

The post How I’d invest if I only had £1,000 right now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Furthermore, a tracker fund helps to spread risk across a large number of stocks. This can reduce company-specific risk and lead to a more favourable risk/reward ratio for an investor.

Of course, buying individual stocks also has its merits, with the prospect of beating the index potentially making it worthwhile over the long run.

Convenience

Buying units in a FTSE 100 tracker fund is a very simple and straightforward process. An investor needs to decide whether to purchase income or accumulation units, with dividends being paid in the former and being added to the value of the fund in the latter.

As such, there is no requirement to conduct research into the financial strength, growth prospects and valuations of specific stocks. This could lead to time savings that makes a FTSE 100 tracker fund more appealing to time-poor investors.

Costs

While the cost of buying shares has fallen significantly in recent years due to the emergence of online sharedealing, building a portfolio of stocks can prove to be expensive – especially for smaller investors.

For example, buying 25 different stocks at a cost of £12 per trade means a total cost of £300. Certainly, regular investing can significantly reduce the cost of buying individual shares, but the cost to sell can be prohibitively high for many investors.

By contrast, a FTSE 100 tracker fund usually charges less than 0.2% per year in management fees. This could make it a more cost-effective option for many investors – especially those who do not have vast amounts of capital at the start of their investing journey.

Risk

While it is not possible to diversify away market risk, which is the potential for stock markets to fall, company-specific risk can be reduced through owning multiple stocks.

A FTSE 100 tracker fund equates to exposure to 100 different companies, which means that company-specific risk is significantly reduced. As such, it may offer less risk than a portfolio that contains individual shares, which could make it more appealing to risk-averse investors.

Buying individual stocks

While FTSE 100 tracker funds have appeal, so too do individual shares. The potential for an investor to beat the performance of the wider market could mean that it is possible to generate relatively high returns in the long run. This could mean that you are able to build a larger nest egg and even retire early.

Therefore, for investors with time and capital, individual stocks may prove to be a worthwhile consideration. FTSE 100 tracker funds, though, may present a sound first step in the investing world due to their convenience, low costs and relatively low risks. 

The post Have £1,000 to invest? Here are 3 reasons why I’d buy a FTSE 100 tracker in an ISA today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

However, the rise of exchange-traded funds (ETFs), or index/tracker funds, in recent years has completely changed investing. Through an ETF, you can get exposure to a whole market or index with just one security at a very low cost.

Is investing through an ETF a better idea than picking stocks though? Let’s take a look at each strategy.

Index investing

ETFs offer investors a number of benefits. For a start, they make investing a very simple process. Through just one security, you can get exposure to a whole index, whether that’s the FTSE 100, the S&P 500, or the China Shanghai Composite index. Given that it’s very hard to consistently beat the market, buying the market itself through an index fund makes a lot of sense.

The other main advantage of tracker funds is their cost structure – fees are generally very low. For example, through online broker Hargreaves Lansdown, you can invest in the Legal & General UK Index fund – which tracks the FTSE All-Share index – for just 0.04% per year. Keeping your fees low is important when investing in the stock market, so tracker funds have considerable appeal from a cost perspective.

On the downside, however, index funds provide you with very little flexibility as you’re forced to own every stock in the index you’re tracking. Not a fan of companies that manufacture weapons? If you own a FTSE 100 or S&P 500 tracker, you’ll have exposure to them.

The other drawback of index funds is that, by definition, you will never ever beat the market. That may not be an issue when the market is rising, but what about if the market is falling, or trades sideways for a decade?

Picking stocks

Stock picking also has its pros and cons. One of the big advantages of picking your own stocks is that it gives you flexibility. If you want to construct a portfolio that has a higher yield than the index, you can. If you want to avoid tobacco stocks for ethical reasons, that’s easily done. When you’re picking your own stocks you have far more control over your portfolio.

Picking your own stocks also provides the potential to generate life-changing returns. For example, had you invested $5,000 in Amazon a decade ago, that investment would now be worth around $114,000. Of course, not every stock performs this well, but the point is you’re not going to get those kinds of returns from index investing.

On the downside, stock picking does require time and effort. It takes time to thoroughly research companies, and you need to have a basic understanding of investing as well.

Ultimately, both strategies have their advantages and disadvantages. If you don’t have much of an interest in investing and you’re simply looking for exposure to the market at a low cost, an index fund could be a great choice. On the other hand, if stocks do interest you, and you think you could potentially beat the market, stock picking could be a good option.

The post Picking stocks vs index funds. What’s the best investment strategy? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Hargreaves Lansdown. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Hargreaves Lansdown. 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.