Ultra-cheap US exposure

The US economy looks set to continue to expand, driven by a strong private sector. What's more, this year American voters either re-elect a Democrat or newly elect a Republican. Historically, either outcome has generated above-average equity returns in election years.

Research from Fisher Investments shows that the third years of US presidential terms have more uniformly positive returns, but fourth years (ie election years) also feature lower return variability. Since 1926, only four fourth years have produced negative returns; the average gain has been 10.9 per cent.

The US market is a good area to use an ETF because most actively managed US funds fail to outperform the US stock market, given its size, maturity and efficiency.

The recently launched SPDR S&P 500 ETF has a good pedigree and very low costs.

Its parent ETF, the US-listed SPDR S&P 500 ETF from State Street Global Advisors, was the very first ETF to track the S&P 500 Index. Today it is the most actively traded ETF in the world and also the largest, with around $100bn in assets.

In March 2012, State Street released a London Stock Exchange version of this ETF with a very competitive total expense ratio (TER) of just 15 basis points per year. This is a significant saving over the ETF's main competitor, the iShares S&P 500 Index Fund, which charges 40 basis points per year and won the Best Exchange-Traded Product for US Exposure category at Investors Chronicle's inaugural fund awards last month.

Like the iShares fund, the SPDR ETF uses full physical replication (as opposed to synthetic replication via derivatives). This means that it buys all the underlying shares in the S&P 500 in the correct weightings to mirror the movement of the actual index. However, from time to time the fund may also have limited exposure to derivatives and mutual funds.

Dividends are paid quarterly and the fund currently yields just under 2 per cent.

Stockbroker Charles Stanley says that, although there are no plans at present to introduce stock lending on the fund's underlying holdings (which would introduce counterparty risk), probably due to the low value of assets under management currently, it expects this to change in time. However, any lending will at all times be fully mitigated with collateral, which in turn will be marked to market each day.

The fund comes in two share classes, one quoted in dollars (SPY5) and the other in sterling (SPX5). However, there is no currency hedging built into either share class - so if you are a sterling investor you will be subject to some currency risk whichever version you buy.

Both share classes can be traded within a self-invested personal pension (Sipp) or individual savings account (Isa), but investors who are planning to buy in a normal trading account (ie non-tax-efficient) should note that the funds do not yet have UK Reporting Fund status. State Street has applied for this, however, and it is unlikely that HMRC will not grant it. Once this happens (expected in July), status is granted retrospectively, meaning any gains made during the intervening period would be taxed as capital gains and not income.

As the UK fund is a new launch, you can't see how well it has tracked its benchmark. Nevertheless, if you are seeking cheap passive entry to US large-caps, it is one to switch to or combine with other holdings. Buy.

Price and performance as at 23 April 2012. *Source Morningstar.

TOP TEN HOLDINGS (as at 29 February 2012)

SECTOR BREAKDOWN (as at 29 February 2012)