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How to invest in S&P/ASX 200 index funds in 2023
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10/1077% of retail CFD accounts lose money.
It only takes a few minutes to invest in the S&P/ASX 200 index. One of the simplest and most popular ways to invest is to buy shares in a Vanguard S&P/ASX 200 ETF through an online trading platform.
Where can I invest in the S&P/ASX 200 index?
Copy link to sectionAccording to our expert research, eToro is the best ETF broker to invest in S&P/ASX 200 index funds.
Both S&P/ASX 200 ETFs and S&P/ASX 200 CFDs are available to invest in through eToro .
Here are three more places to buy the S&P/ASX 200, ranked according to their cost, security, and features.
77% of retail CFD accounts lose money.
Buy or sell stock CFDs with Plus500. 82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
How do I invest in the XJO index?
Copy link to sectionThe easiest way is to sign up to a stock broker, open an investment account, and buy shares in an S&P/ASX 200 ETF or CFD. This guide explains how to do it:
Step 1. Sign up to eToro
Copy link to sectionWe recommend using eToro to invest in S&P/ASX 200. Sign up for a brokerage account and deposit some money. You may need to supply a form of photo ID to verify the account.
77% of retail CFD accounts lose money.
Step 2. Decide how to buy S&P/ASX 200
Copy link to sectionThis boils down to choosing between an S&P/ASX 200 ETF or CFD. ETFs are generally better suited to investors who want to passively track the S&P/ASX 200’s performance. CFDs offer a greater range of trading options: you can use leverage, short the index, or buy and sell it outside of trading hours.
Step 3. Invest in the S&P/ASX 200
Copy link to sectionSign into your trading account and search for the S&P/ASX 200. Hit the ‘buy’ button and enter the details of your purchase, such as how much you want to spend. Hit ‘buy’ again to execute the trade.
Step 4. Monitor your investment
Copy link to sectionWhen you buy a CFD, the trade goes through more or less instantly, and you’ll be able to see your new open position in your trading account. ETF purchases can take longer, and if you buy outside of traditional trading hours it won’t go through until the next morning.
Your trading account will show the price change in the S&P/ASX 200 since you bought it, so you can see your profit/loss at a glance. Use that information, along with your own research, to decide when to sell the S&P/ASX 200 and close your position, ideally at a profit!
The different ways to invest in the XJO
Copy link to sectionAs we mentioned above, there are numerous ways to put your money into the S&P/ASX 200. ETFs and CFDs are the simplest options for beginners, but there are alternatives. Here’s a brief overview of each option and who it’s best suited for.
S&P/ASX 200 ETFs
Copy link to sectionAn ETF (exchange-traded fund) is an investment fund traded on a stock exchange, much like a stock. Exchange traded funds can hold different assets, such as individual stocks, bonds, or commodities, or serve as a proxy for a stock market index.
An S&P/ASX 200 ETF is one way of investing in the S&P/ASX 200. It’s simply an investment fund that mirrors the performance of the S&P/ASX 200. When you buy shares in the fund, the value of your investment will rise or fall with the S&P/ASX 200 itself.
ETFs are ideal for new investors because they have a very low minimum investment. You can start with a few pounds and get exposure to some of the world’s largest companies. They’re also practical if you plan on trading the S&P/ASX 200 index, because you can buy or sell shares in the fund throughout the day.
Examples of popular XJO ETFs
- iShares S&P/ASX 200 ETF (IOZ)
- SPDR S&P/ASX 200 Fund (STW)
- BetaShares Australia 200 ETF (A200)
S&P/ASX 200 index funds
Copy link to sectionAn index or mutual fund is an investment fund that aims to track the performance of a stock market index, such as the S&P/ASX 200. It’s very similar to an ETF, in that there are low management fees and you can buy shares through your online broker.
However, there are a couple of differences. S&P/ASX 200 index funds are only priced at the end of each trading day, so you can buy or sell shares in the fund once per day. There may also be a higher barrier to entry, through a much larger minimum investment when you invest in S&P/ASX 200 index funds.
That means an S&P/ASX 200 mutual fund is better suited for long term investors with a higher initial budget, where the infrequent trading and barriers to entry are far less of an issue.
Examples of popular XJO index funds/mutual funds
- Vanguard Australian Shares Index Fund
- AMP Capital Core Equity Fund
- Fidelity Australian Equities Fund
S&P/ASX 200 CFDs
Copy link to sectionCFDs (contracts for difference) are a way to speculate on S&P/ASX 200 price changes with more flexibility than if you use an ETF or index fund. A CFD is a ‘derivative’, which means it gets its value from the underlying asset – in this case the S&P/ASX 200 – but it’s separate from it.
As a result, CFDs can be leveraged, where you borrow money to multiply the size of the trade, or they can be used to go ‘short’, where you place a trade on the index to fall in value. You can also buy and sell them outside of regular trading hours.
All of this means S&P/ASX 200 CFDs offer the potential to outperform a fund that passively tracks the S&P/ASX 200’s performance. Of course, you can also underperform it as well. Tools like leverage and shorting introduce a lot more risk, and are best left to experienced traders.
S&P/ASX 200 futures
Copy link to sectionFutures contracts are agreements to buy or sell the XJO at an agreed price on a set date in the future. S&P/ASX 200 futures are a means to predict how you think the index is going to perform over a set time frame, such as the next three or six months.
Most futures contracts involve leverage, so you only put up a small part of the total trade value (the margin) when you buy one. That makes futures more risky, and they require a bit more financial expertise to understand as well.
Some traders use futures as a hedge against the performance of stocks they own. For instance, if you own stocks that are part of the S&P/ASX 200 then you might want to short the S&P/ASX 200 so that you still make some money if the price falls.
S&P/ASX 200 stocks
Copy link to sectionAnother way to invest in the S&P/ASX 200 is to buy shares in the individual stocks that the index tracks. It isn’t practical to buy every share in the index, but you can invest directly into a few of the most heavily weighted stocks in the S&P/ASX 200 in order to get broad exposure to its performance.
The most heavily weighted stocks in the S&P/ASX 200 tend to be the largest companies by market capitalisation. If you invest directly in those largest stocks, you gain exposure to the index without taking on the risk of all the underlying companies.
One reason to do this is that these larger companies with the highest market cap dominate the index anyway, so that it can give you the impression of a diversified portfolio while actually being reliant on the performance of those particular stocks.
For the S&P/ASX 200 index, the largest stocks you might choose to invest in are:
| Company | Index weight |
|---|---|
| Commonwealth Bank of Australia (CBA) | 7.13% |
| CSL Limited (CSL) | 5.68% |
| BHP Group Limited (BHP) | 5.53% |
| Westpac Banking Corporation (WBC) | 4.96% |
| National Australia Bank Limited (NAB) | 4.91% |
| Australia and New Zealand Banking Group Limited (ANZ) | 4.80% |
| Rio Tinto Limited (RIO) | 3.91% |
| Wesfarmers Limited (WES) | 3.35% |
| Woolworths Group Limited (WOW) | 2.71% |
| Macquarie Group Limited (MQG) | 2.69% |
The flip side of investing directly like this is that you lose the diversification and stability that comes with buying into an entire index. It requires much more hands-on management to do your own stock picking, so it’s best suited to more experienced investors.
How much does it cost to invest in the S&P/ASX 200 index?
Copy link to sectionFrom $0 to $5, depending on how you invest. For each option, you must consider the cost of buying the actual asset, whether that’s an ETF, index fund, CFD, or share, plus the fees associated with it.
| Instrument | Trading fee | Management fee |
|---|---|---|
| Exchange traded funds | $0-$5.99 | 0-0.2% |
| Index fund / mutual fund | $0-$5.99 | 0.1-2% |
| Individual stock | $0-$3 | None |
| CFD | $0 | None |
*A fee comparison of 3 leading brokers for example purposes
ETFs and CFDs are generally the cheapest option overall, as they have low fees and a low minimum investment. Index funds and mutual funds have low fees but may have a high minimum investment. Buying individual stocks is the most expensive option in absolute terms, because the share price of a single large company is often more than $100.
All options are likely to include a trading fee, which you pay each time you make a transaction. Some trading platforms offer zero-fee trading, with others it may be a few dollars.
Then ETFs and index funds each have their own expense ratio. Expense ratios refer to an annual management fee, charged as a percentage of your total investment. Expense ratios are usually no more than 0.05%, so if you invest $1,000, you would pay $5 per year in management fees.
Should I invest in the S&P/ASX 200 index?
Copy link to sectionYes, S&P/ASX 200 investing is a great choice if you’re looking for a safer investment with more price stability compared to picking individual stocks. It gives you an instantly diverse portfolio with exposure to a broad area of the stock market.
The flip side is that you have less control over which companies you invest in. An index committee decides how the index works, and you can’t pick and choose the underlying companies you like the most. The S&P/ASX 200 is better suited to hands-off investors, compared to those who have the skills, experience, and desire to pick their own stocks.
What are the advantages of investing in the S&P/ASX 200 index?
Copy link to sectionAn index provides instant stock market diversification, where you spread your risk across a large number of underlying companies, rather than one or two. Here are some more reasons why you might want to invest in the S&P/ASX 200 index:
- The S&P200/ASX is diverse. It is an index of 200 stocks traded on the Australian Securities Exchange. It includes the 200 largest stocks listed on the exchange, which account for about 80% of the exchange’sexchange’s market capitalisation. The index tracks the stocks of companies from many different industries, including finance, industrials, technology, and healthcare.
- It offers growth potential. The index ticks several boxes, providing the benefit of diversification, an investment in many different blue-chip stocks, and a stake in a growing economy that’sthat’s one of the 15 largest in the world. Historically, the Australian stock market has experienced periods of growth.
- Invest in the best Australian blue-chip companies. The index includes many of the biggest and best-known blue chip companies, such as BHP Group, Commonwealth Bank of Australia, and Westpac Banking. These companies tend to offer more stability compared to lesser-known businesses.
- Several ETFs and Funds invest in the index. As the largest index in Australia, there are several ETFs and funds available that make investing in it easy and cost-effective.
What are the disadvantages of investing in the S&P/ASX 200 index?
Copy link to sectionThe main risk of investing in the S&P/ASX 200 is that all the underlying companies are related in some way, so a broader economic downturn that affected the entire country would likely affect many stocks in the index at the same time. Here are some more risks of S&P/ASX 200 investing.
- There is some concentration risk. Although the index is diverse, it is still heavily concentrated in a few sectors. These include financials and materials. If either of these two sectors suffers in the future, the index may likely fall.
- Commodity prices can impact performance. Australia is known for commodities and specifically mining. Both sectors feature in the index, meaning any downturn in the commodity market could impact the index’sindex’s price.
FAQs
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