Is it possible to replicate the S&P 500 on Trading 212, and if so, what are the potential drawbacks of doing so? In this blog post, we will go into why you might want to do this and just how feasible it is.
It is not possible to replicate the S&P 500 using a single Pie as each Pie is limited to 50 securities. You could potentially use multiple Pies but this then increased the complexity of managing the process.
The main reason people would want to do this in the first place, would be to avail of a lower tax rate in tax jurisdictions which charge much higher rates for ETFs than stocks.
What is Trading 212’s Pie Feature?
The Trading 212 Pies feature has been around for a number of years now and is really handy way to try and simplify your investing strategy.
A pie is a collection of securities – stocks & ETFs. Each security is represented as a slice of the pie.
With Trading 212 Pies you can:
- Easily diversify you regular lump sum investments.
- Easily rebalance your portfolio at the click of a button, rather than having to manually execute numerous transactions.
- Change the allocation rate of your Pie very easily without having to perform calculations and making a large number of transactions.
- Each subsequent investment will be allocated at the same proportion as the settings you choose.
- You can follow Pies that have been created by other Trading 212 users.
- You can even fully automate your investing by combining the Autoinvest feature with Pies.
Why would you to use Trading 212’s Pies to replicate the S&P500?
In some tax jurisdictions (such as Ireland) the taxes made on profits from ETFs is far higher than that of investments in stocks.
You will pay an additional 8% (41% vs 33%) tax on your chargeable gains in Ireland if you opt to invest in ETFs that track indicies like the S&P 500.
As well as this, there are other unfavourable rules:
- you will not be allowed to offset losses made ETF investments against profit made on other separate investments.
- You will not receive any annual exemptions of €1,270 like you would get for investments in individual stocks.
This leads to a significant financial incentive for Irish investors to find an alternative way to invest in the S&P 500 that won’t attract the higher exit tax rate of 41%.
What Challenges are there?
The first big hurdle you are going to face is that the maximum number of securities that you are allowed to add to a Trading 212 Pie is 50, which means that you won’t be able to fully replicate the S&P 500 with a single Pie.
However, if you were to just take the top 50 companies on the market cap weighted S&P 500 index that would equate to roughly 54% of the overall market cap of the index.
Even if you were allowed to add 500 different securities to the Pie, that would be an administrational burden that would require a lot of upfront time investment from yourself.
Theoretically it is still possible to fully replicate the S&P 500 but you will need a couple of Pies to do so.
Another very important point to be aware of, is that each time you rebalance your Pie, or change the allocation rates this will trigger a taxable event, as stocks will need to be bought and sold to match your new strategy. Although Trading 212 do have transaction reports and tax statements, it is still a lot more complicated than just holding on to one single investment rather than 500.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.