Looking to invest in a fund that tracks an index? Two popular index options among Australian investors are the ASX 200 and the S&P 500.

Both can be suitable for long-term portfolios but reflect distinct markets with unique characteristics – local stability versus global reach, familiar names versus international conglomerates. Understanding how these funds stack up can help you make a choice that fits your long-term goals.

In this article, we’ll explore the major differences between ASX 200 and S&P 500 funds to help you figure out the right fit for your portfolio.

What is the ASX 200?

The Australian Securities Exchange 200 ( ASX 200 ) represents the largest 200 companies listed on the Australian Securities Exchange . These companies span various industries, giving you broad exposure to the Australian economy.

As a long-term investor, you might appreciate how the ASX 200 reflects local market performance. The index includes well-known Australian companies, particularly in the financial and resource sectors. For investors focused on dividends , it’s worth noting that Australian companies often offer higher yields compared to international counterparts.

Some of the companies included in the ASX 200 are:

1. Commonwealth Bank of Australia (CBA) : One of Australia's largest banks, providing a wide range of financial services, including banking, insurance, and wealth management.
2. BHP Group (BHP) : A global mining company known for its production of iron ore, copper, and petroleum. BHP plays a significant role in the resources sector.
3. Woolworths Group (WOW) : A major Australian retailer operating supermarkets, liquor stores, and hotels – a key player in the consumer staples sector.
4. CSL Limited (CSL) : A global biotechnology company specialising in blood products and vaccines, contributing to Australia's healthcare sector.
5. Westpac Banking Corporation (WBC) : Another of Australia's Big 4 banks, offering a broad range of banking and financial services across the country.
6. R io Tinto (RIO) : A leading global mining company focusing on the extraction of minerals, including iron ore and aluminium, with operations worldwide.
7. Telstra Corporation (TLS) : Australia's largest telecommunications company, providing mobile, internet, and other communication services to consumers and businesses.

The ASX 200 is widely tracked by funds, offering a convenient way to invest in Australia's top companies without picking individual stocks . If you're aiming for local market exposure, an ASX 200 fund can potentially be a suitable option.

What is the S&P 500?

The Standard and Poor’s 500 (S&P 500) includes 500 of the largest companies listed in the United States. It’s a widely recognised index that reflects U.S. market performance.

For long-term investors, the S&P 500 offers exposure to global brands and industries, especially in technology, healthcare, and consumer sectors. Many Australians invest in S&P 500 funds to diversify beyond local markets, gaining access to international growth opportunities.

Here are some well-known examples of companies included in the S&P 500:

1. Apple (AAPL) : A global leader in technology known for its innovative products like the iPhone, iPad, and Mac computers.
2. Microsoft (MSFT) : One of the largest software companies in the world, Microsoft is behind Windows, Office, and cloud computing services like Azure.
3. Amazon (AMZN) : A major player in e-commerce and cloud services, known for its global online marketplace and AWS (Amazon Web Services).
4. Alphabet (GOOGL) : Alphabet is the parent company of Google, the world's most popular search engine, and other ventures like YouTube and Google Cloud.
5. Tesla (TSLA) : A leader in electric vehicles and clean energy solutions, gaining significant attention for its growth and market innovation.
6. Johnson & Johnson (JNJ) : A key player in the healthcare industry producing a wide range of consumer healthcare products, pharmaceuticals, and medical devices.
7. Meta Platforms (META) : Meta Platforms, formerly Facebook, is a social media giant which also includes Instagram, that's expanding into virtual and augmented reality technologies.

Investing in U.S. companies can provide exposure to companies driving global innovation. If you're looking for international diversification, S&P 500 funds are worth exploring.

Why Australian investors look to these indices

Australian investors often consider investing in the ASX 200 and S&P 500 for different reasons. Each index offers unique benefits depending on your investment goals.

The ASX 200 often appeals to those looking for local market stability. It provides exposure to Australia’s top companies, particularly in the financial and resource sectors. If you're focused on dividends, the ASX 200 has historically often delivered higher yields compared to other global markets. It also includes franking credits , which can be attractive for Australian investors seeking tax advantages.

On the other hand, the S&P 500 is favoured by those seeking global diversification. By investing in the S&P 500, you gain access to some of the world’s largest companies. This can help balance the risks of being too focused on one economy, as you’ll benefit from the growth of global markets.

From domestic stability to international exposure, both indices offer solid options for long-term investors.

How do the ASX 200 and S&P 500 compare?

When comparing the ASX 200 and S&P 500, it’s important to understand how these indices differ across various aspects. The table below highlights their key differences:

Aspect	ASX 200	S&P 500
Market focus	Represents the top 200 Australian companies.	Represents the largest 500 U.S. companies.
Sector composition	Heavy in financials and resources, reflecting Australia's economic strengths.	Broader sector diversity, with a strong focus on technology, healthcare, and consumer sectors.
Dividend yields	Typically offers higher dividend yields due to Australian companies' payout policies.	Lower yields but more reinvestment into business growth, especially in tech sectors.
Tax advantages	Franking credits benefit Australian investors, reducing overall tax on dividends.	No franking credits; foreign withholding tax may apply to Australian investors.
Currency risk	Minimal currency risk for Australian investors.	Exposed to U.S. dollar fluctuations, which may affect returns.
Growth potential	Offers historically stable growth tied to the Australian economy.	Generally higher growth potential driven by global companies and innovation in key sectors.
Global exposure	Limited to Australian companies with some international operations.	Provides access to U.S. companies with significant global market presence.
Diversification	Less diversified, heavily weighted toward a few sectors.	Comparatively more diversified across multiple sectors and industries.
Risk level	Lower volatility, but sector concentration increases risks in downturns for financials and resources.	Higher volatility but generally spreads risk across multiple sectors and regions.

What funds track the ASX 200?

Several funds track the ASX 200, making it easier for investors to access the top 200 Australian companies without selecting individual stocks.

Here are some examples of popular funds that track the ASX 200:

1. iShares Core S&P/ASX 200 ETF (IOZ) : This ETF offers broad exposure to the ASX 200, with a low management fee, making it a popular choice for cost-conscious investors.
2. Vanguard Australian Shares Index ETF (VAS) : A widely recognised ETF, VAS tracks the ASX 200 and is known for its low-cost structure and strong diversification across Australian sectors.
3. SPDR S&P/ASX 200 Fund (STW) : Another well-known ETF that tracks the ASX 200, offering investors access to Australia’s top 200 companies in one simple fund.
4. BetaShares Australia 200 ETF (A200) : This ETF is designed to closely match the performance of the ASX 200 and is known for its competitive fee structure.

These funds offer broad exposure to the Australian market with relatively low management fees. These features can potentially make them a convenient option for investors seeking local market exposure. However, since fees can vary, it's always worth researching a fund's current fees before investing.

Managed funds also track the ASX 200, offering a more hands-off approach for investors who prefer professional management. Some funds include ESG (environmental, social, and governance) factors, such as SPDR S&P/ASX 200 ESG Fund , allowing you to align your investments with your values.

What funds track the S&P 500?

Australian investors can access the S&P 500 through several ETFs and managed funds. These funds provide exposure to the largest U.S. companies.

Here are some examples of popular funds that track the S&P 500:

1. Vanguard S&P 500 ETF (VOO) : This is one of the most well-known and low-cost ETFs that tracks the S&P 500. It's popular for its low management fees and strong performance over time.
2. iShares S&P 500 ETF (IVV) : Another highly recognised fund, IVV also offers low fees and broad exposure to the 500 largest U.S. companies.
3. SPDR S&P 500 ETF Trust (SPY) : SPY is the original ETF that tracks the S&P 500. It's highly liquid and widely traded, appealing to both individual and institutional investors.
4. Vanguard US Total Market Shares Index ETF (VTS) : While not strictly an S&P 500 fund, VTS includes all S&P 500 companies plus smaller U.S. stocks, giving even broader market exposure.

These are just a few options, and each fund may have different costs, liquidity, and performance factors to consider based on your goals.

For a more actively managed approach, some managed funds also track the S&P 500. These funds offer professional management, which may appeal to investors who prefer a more hands-off investment style.

How can I compare funds that track each index?

When comparing funds that track the ASX 200 and S&P 500, looking at a few key characteristics can help guide your decision.

• Management fees : Lower fees can potentially boost long-term returns, especially for passive funds. Compare expense ratios to find cost-efficient options.
• Tracking error : Tracking error shows how closely a fund follows its index. Smaller tracking errors indicate the fund performs more in line with the index. However, past returns are not a reliable indicator of future outcomes.
• Dividend yield : Funds tracking the ASX 200 have often provided higher dividend yields than those tracking the S&P 500. Check yields based on your income needs. Keep in mind that a fund’s dividend payouts can change over time.
• Currency risk : Investing in S&P 500 funds exposes you to U.S. dollar fluctuations. This can affect returns, so consider whether you’re comfortable with currency risk.
• Fund size and liquidity : Larger funds tend to have higher liquidity, making them potentially easier to trade. Fund size can also indicate stability and investor confidence.
• ESG considerations : Some funds also focus on ESG factors. If this aligns with your values, explore these options when comparing funds.

Evaluating these aspects can help you understand how different funds fit within your investment strategy. Pearler’s Compare tool is useful for comparing ASX 200 and S&P 500 funds side-by-side.

How do I choose between ASX 200 and S&P 500 funds?

Beyond fees and performance, there are other important factors to weigh when choosing between ASX 200 and S&P 500 funds. Here are some additional factors:

• Investment goals : Ensure the fund aligns with your long-term goals, whether it's capital growth, income, or a mix of both.
• Risk tolerance : Understand how much risk you're willing to take. S&P 500 funds may potentially have more volatility due to international exposure, while ASX 200 funds may feel more stable but concentrated.
• Tax implications : Different tax treatments apply to Australian and U.S. dividends. Be mindful of franking credits with ASX 200 funds and withholding tax with S&P 500 funds.

Every investor has unique goals and preferences, so considering a few more details can help ensure you pick a fund that truly fits your needs.

Finding the fund that fits your goals

Whether you lean towards the ASX 200 or the S&P 500, the key is to find a fund that fits your investment strategy. You may choose the ASX 200 for local stability or the S&P 500 for global growth, but both indices can play a valuable role in your portfolio. Considering factors like fees, risk, and performance can help you select a fund that aligns with your needs and investment horizon. Stay focused on what matters most to you and make an informed choice that matches your priorities.