Amundi IS S&P 500 ETF C USD USD (LSE:500U) - ETF price


ETF Report

Amundi Index Solutions - Amundi S&P 500 UCITS ETF C USD (USD) 500U

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PortfolioConstruction

The S&P 500 is a float-adjusted, market-cap-weighted portfolio of 500 large US-domiciled stocks. For a constituent to be included, it must meet the following eligibility criteria: an unadjusted market cap of USD 6.1 billion or greater, a free-float rate of at least 50% of its shares outstanding, and a positive sum of the most recent as-reported earnings for four consecutive quarters, as well as for the most recent quarter. The US Index Committee maintains the S&P 500 and meets on a monthly basis. It aims to minimise index membership turnover. If a constituent no longer meets the entrance requirements, the committee will not remove the member immediately if it deems the change temporary. The index rebalances quarterly in March, June, September, and December. The index is well-diversified by sector and security. The most significant sector exposure is to information technology (20%-25%), followed by financials, healthcare, consumer discretionary, and communication services (each at 10%-15%). The top 10 holdings constitute approximately 20% of the total index value and include world-leading companies like Apple (3%-4%) and Microsoft, Amazon, and Berkshire Hathaway (2%-3% each).

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Fees

The Amundi S&P 500 UCITS ETF has an ongoing charge of 0.15%, which is the middle of the range compared with other S&P 500-tracking funds domiciled in Europe. The tracking difference (fund return less index return) was 0.37% for the three-year period ended February 2019, indicating that the ETF has outperformed its benchmark. Most, if not all, ETFs tracking the S&P 500 outperform the index thanks to favourable withholding-tax differences or tax-optimisation strategies. Additional costs to investors associated with trading the ETF include bid-ask spreads and brokerage fees.

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FundConstruction

The fund uses synthetic replication to capture the performance of the S&P 500 Net Return Index. Instead of holding the securities in the index, the ETF enters into a total return swap agreement with BNP Paribas. In this transaction, the ETF uses investors' cash to buy a substitute basket of securities and exchanges their performance for the return of the S&P 500. Amundi has a policy of systematically resetting the swap at the end of each business day, bringing counterparty risk exposure temporarily to zero. Eligible securities for the substitute basket, which can vary from day to day, include European blue-chip equities. The fund does not engage in securities-lending activity.

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Suitability

We have a strong conviction that Amundi S&P 500 ETF will outperform its Morningstar Category peers over the long term, supporting its Morningstar Analyst Rating of Gold.

A large body of research shows that it is difficult for active managers to consistently outperform U.S. large-cap benchmarks. As such, a passive strategy for this equity market exposure is a sensible investment approach.

This synthetically replicated exchange-traded fund offers a broad and diversified exposure to U.S. large-cap stocks by tracking the S&P 500, the most renowned proxy for the U.S. equity market. Since its inception in 2010, the fund's risk-adjusted returns have ranked in the top quartile of its category, which includes both active and passive funds.

At 0.15%, this fund's ongoing charge lands in the mid-range of ETFs and index funds tracking S&P 500. However, the slightly higher price tag has not meaningfully affected the fund's returns. In fact, during the past three years, this fund has been one of the best performing passive strategies along with other synthetically replicated ETFs. In terms of tracking performance (fund return minus index return), similar to most funds tracking the S&P 500 Net Return Index, this ETF has outperformed its benchmark--in this case, thanks to swap enhancements.

The merits of an index-tracking approach to the US equity market are very compelling. While this fund is not one of the cheapest passive offerings tracking the S&P 500, it nonetheless stands as a superior investment proposition in the broad context of its US large-cap blend equity category. 

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Fundamental View

The S&P 500 was created in 1957. It was the very first market-cap-weighted index of U.S. stocks. Its well-known predecessor, the Dow Jones Industrial Average Index (which was first calculated in 1896), is a price-weighted index. In 1896, weighting stocks based on their share price made sense in that it wasn't very computationally intensive (electricity was still a recent invention back then). Sixty years later, computing power had advanced significantly, making it easier to build and calculate an index that better reflects the overall performance of U.S. large-cap stocks, one that selects and weights its constituents based on their market capitalisation.

Over its history, the S&P 500 has proved a difficult hurdle for many U.S. large-cap equity fund managers to clear. Many attribute active managers' collective struggles to beat index funds to the overall level of market efficiency for U.S. large-cap stocks. Efficiency in this case is meant to indicate the speed and precision with which market participants incorporate new information (economic news, earnings data, and so on) into stock prices (by selling on bad news, buying on good news). Furthermore, given advances in information technology and growth in the portion of investable assets that is managed by an increasingly skilled set of professional investment managers, it can be argued that the market has become ever more efficient over time. However, market efficiency alone does not explain the long-term success of broadly diversified market-cap-weighted index funds.

The second leg of the investment thesis for index funds is their cost advantage. Index funds are inherently less expensive to manage than actively managed alternatives. Their sponsors don't have to pay teams of well-educated and highly credentialed portfolio managers and investment analysts to identify under- or overvalued stocks to be added to or sold from their portfolios. Also, market-cap-weighted index funds have lower turnover relative to actively managed funds. Turnover entails costs such as commissions, bid-ask spreads, and market impact costs that add to the headwinds for active strategies. These operating expenses are the largest and most persistent drag on the performance of actively managed strategies.

That said, market-cap-weighted indexes like the S&P 500 have some noteworthy drawbacks. By owning "the market," investors are relying on other market participants to price stocks on their behalf. Although over long stretches of time market participants have done a good job of valuing stocks, these long horizons have also been marked by episodes of mania and panic. Market-cap indexes are prone to bubbles, as they naturally overweight stocks that have gone up in price and underweight those that have been beaten down. For instance, during the dot-com boom of the late 1990s, the S&P 500 was largely exposed to technology, media, and telecom stocks, which ultimately cratered. When the bubble finally burst, the flagship index fell by more than 40% and took four years to return to its precrash value.

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Alternatives

Various ETF providers offer products that track the S&P 500, including (but not limited to) iShares, Vanguard, SPDR, HSBC, and Xtrackers.

As a direct alternative, investors can look to physically replicated iShares Core S&P 500 ETF (ongoing charge 0.07%). Given its low fee, good tracking performance, and superior on-exchange liquidity, it is one of the best accumulating funds available.

Investors seeking income may look to Vanguard S&P 500. With an ongoing charge of 0.07%, it is one of the cheapest and best-performing ETFs available among peers. The synthetically replicated Lyxor S&P 500 UCITS and Xtrackers S&P 500 ETFs (both at 0.15%) are also worth considering. During the past three years, they have outperformed their ETF peers, topping the category.

Providers are also offering currency-hedged S&P 500 ETFs for an additional cost. IShares offers pound-, euro-, and Swiss-franc-hedged ETFs (ongoing charge: 0.20% each), while UBS offers a suite of currency-hedged MSCI USA ETFs (ongoing charge: 0.22% each). 

For broader exposure to the U.S. stock market, there are funds and ETFs tracking the MSCI USA Index or the S&P Total Market Index. The physically replicated UBS MSCI USA ETF levies an ongoing charge of 0.14%, while Vanguard US Equity Index charges 0.10%.

Investors can also choose from an expanding menu of strategic-beta funds that offer an alternative to standard market-cap-weighted exposure to U.S. equities. However, it is important to understand that all these strategies can experience long periods of underperformance relative to the broad market. 

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