Why S&P 500 Etfs Are Worth Your Investment

The S&P 500 is an index composed of 500 large US companies, and it powers some popular index funds. You can't directly invest in the S&P 500 index itself, but you can buy individual stocks of companies in the S&P 500, or buy an S&P 500 index fund or ETF. Index funds typically carry less risk than individual stocks.

ETFs are easy to buy through the best brokers and trading platforms. They are a cost-effective way to get exposure to a number of stocks. The S&P 500 Index is considered a fairly accurate snapshot of the US economy since it measures the market capitalization of the nation's 500 largest corporations.

There are many S&P 500 ETFs to choose from, including the SPDR S&P 500 ETF Trust, the iShares Core S&P 500 ETF, the Vanguard S&P 500 ETF, and the SPDR Portfolio S&P 500 ETF. When choosing an S&P 500 ETF, it is important to consider factors such as expense ratios, liquidity, and performance history.

S&P 500 ETFs are a good choice for investors who want a diverse portfolio but can't or won't directly buy the stocks of every one of the 500 biggest large-cap US companies. They offer instant diversification and moderate risk.

What are S&P 500 ETFs?

S&P 500 ETFs are exchange-traded funds (ETFs) that track the performance of the S&P 500 Index, a stock market index composed of 500 large US companies. ETFs are a type of security that pools investors' money to buy a number of individual stocks or other assets, and they are traded on an exchange like a stock.

The S&P 500 ETF is a passively managed fund that is benchmarked to the S&P 500 Index. The fund manager buys stock in every company listed in the index, using the same weighting, so the investor's money will rise or fall with the S&P 500. This involves buying or selling individual stocks to keep up with changes in the index, as companies get bought out or fail to meet its criteria.

The S&P 500 ETF is considered a diverse investment because the index covers a wide range of industries and the biggest companies in each. It is a good choice for investors who want a diverse portfolio but can't or won't buy stocks in every one of the 500 large-cap US companies individually.

Some of the most popular S&P 500 ETFs are offered by State Street (SPDR), Vanguard (VOO), and iShares (IVV). These funds tend to have lower expense ratios compared to the industry average.

How do they differ from index funds?

Exchange-Traded Funds (ETFs) and index funds are similar in many ways. They are both simple ways to invest, pooling many investors' money to create large, professionally managed portfolios. They can help to simplify investing, keep expense ratios relatively low, and reduce risk through diversification. However, there are some key differences between the two.

Trading Mechanism

ETFs can be bought and sold throughout the trading day, like stocks, whereas index funds can only be bought and sold at the end of each trading day, based on the fund's net asset value (NAV). This makes ETFs more liquid and accessible to ordinary investors.

Minimum Investment

ETFs generally do not require a minimum initial investment, whereas index funds often have a minimum investment requirement, which can range from $1 to $3,000.

Taxation

ETFs are considered more tax-efficient than index funds. Index mutual funds may incur an extra tax when the fund manager sells portfolio investments to meet redemptions, potentially leading to a tax liability for investors even if they haven't sold their shares.

Fees

Index funds and ETFs both charge shareholders an annual fee called an expense ratio. In 2023, the average expense ratio for index equity ETFs was 0.15%, while the average for index mutual funds was 0.05%. However, there are multiple S&P 500 ETFs that charge as low as 0.03%.

Trading Flexibility

ETFs offer more trading flexibility than index funds due to their ability to be traded throughout the day.

Liquidity

Index funds are bought and sold at the end of the trading day, while ETFs can be traded throughout the day, potentially offering more liquidity.

In summary, while both ETFs and index funds provide investors with broad, diversified exposure to the stock market, ETFs may be more accessible and offer greater flexibility due to their ability to be traded like stocks on exchanges. They also tend to have lower fees and are more tax-efficient.

What are the best S&P 500 ETFs to invest in?

The S&P 500 is an index composed of 500 large US companies, and it is considered a fairly accurate snapshot of the US economy. You can't invest directly in the index, but you can invest in an index fund or exchange-traded fund (ETF) that tracks it.

SPDR S&P 500 ETF Trust (SPY)

SPY is the largest and original S&P 500 ETF, with over $400 billion in assets under management as of August 2023. It has a high expense ratio of 0.0945% but offers dependability and outstanding liquidity, with an average daily trading volume of around 81 million shares. This makes it a good choice for active traders who need to be able to buy and sell positions quickly.

IShares Core S&P 500 ETF (IVV)

IVV is the second-largest S&P 500 ETF and has a very low expense ratio of 0.03%. While it offers a fraction of the liquidity of SPY, it is still suitable for buy-and-hold investors who want to save on costs.

Vanguard S&P 500 ETF (VOO)

VOO is the third-largest S&P 500 ETF and has the same expense ratio as IVV. It is known for closely replicating the S&P 500 index, using a full replication method to hold all index securities in exact weights.

SPDR Portfolio S&P 500 ETF (SPLG)

SPLG is a cheaper alternative to IVV and VOO, with a slightly lower expense ratio. It has a much smaller pool of net assets compared to the other three funds mentioned.

Invesco S&P 500 Equal Weight ETF (RSP)

RSP offers an alternative to the market-cap-weighted S&P 500 index by using an equal-weight strategy. This means it aims to give each of the 500 components in the index a 0.2% weighting through regular rebalancing, resulting in a higher expense ratio.

SPDR Portfolio S&P 500 Growth ETF (SPYG)

SPYG is a tactical S&P 500 ETF that focuses on growth stocks in the index. It has a very low expense ratio of 0.04%.

Vanguard S&P 500 Value Index Fund ETF (VOOV)

VOOV is a value-focused S&P 500 ETF that screens out approximately 20% of the benchmark index's components, resulting in a portfolio of around 400 stocks with strong value potential. It has a slightly higher expense ratio of 0.10%.

ProShares Short S&P 500 ETF (SH)

SH is an inverse ETF that aims to deliver the opposite performance of the S&P 500 each day. It is intended for experienced investors and should only be held for very short periods, such as intraday. It has a high expense ratio of 0.89%.

What are the benefits of investing in S&P 500 ETFs?

S&P 500 ETFs are a great way to start a portfolio and invest for the long term. They offer a range of benefits, including:

Instant Diversification

Investing in an S&P 500 ETF provides instant diversification as it covers a wide range of industries and the biggest companies in each of them. The S&P 500 index includes 500 of the largest US companies and is considered a fairly accurate snapshot of the US economy. By investing in an S&P 500 ETF, you gain exposure to a diverse range of sectors and reduce the risk of putting all your eggs in one basket.

Low Fees

S&P 500 ETFs tend to have lower expense ratios compared to the industry average. The expense ratio represents the annual fee charged by the fund, expressed as a percentage of your investment. For example, the iShares Core S&P 500 ETF has an expense ratio of just 0.03%, which means you pay $3 for every $10,000 invested. This makes S&P 500 ETFs a cost-effective way to gain exposure to a large number of stocks.

Strong Track Record

The S&P 500 has a strong track record of performance over the past five years, with a net gain of more than 50% despite the pandemic recession and market downturns. While past performance is not a guarantee of future results, the S&P 500's resilience and long-term growth make it an attractive investment option.

Liquidity

S&P 500 ETFs offer high liquidity, making it easy for investors to buy and sell their holdings. The large trading volumes of these ETFs ensure that investors can promptly buy or sell shares without sacrificing returns. This liquidity is particularly advantageous for active traders who need to move in and out of positions quickly.

Benchmark Performance

The S&P 500 is widely used as a benchmark for stock market performance and is considered one of the best indicators of the overall health of the US stock market. By investing in an S&P 500 ETF, you can track the performance of this benchmark index with minimal fees. This allows you to align your portfolio with the broader market and benefit from its long-term growth prospects.

What are the risks?

Investing in an S&P 500 ETF can be risky due to the index's concentration in large-cap US companies, making it a high-risk and volatile strategy. The S&P 500 has experienced losses of at least 50% on two occasions in the last 25 years, and it took over five years for the index to recover in both cases. This highlights the potential for significant downside risk and the need for a long-term investment horizon.

The S&P 500 is dominated by large-cap companies, with its 10 biggest constituents accounting for almost one-third of the index. This means that the index has limited exposure to small-cap and mid-cap stocks, which may have higher growth potential. As a result, the S&P 500 may not be a good choice for investors seeking greater diversification across market capitalizations.

Additionally, the S&P 500 only includes US companies, so investors are not getting exposure to international markets. This lack of geographic diversification can increase portfolio risk, as it concentrates the investor's assets in a single country.

The S&P 500 also has inherent risks associated with equity investing, such as volatility and downside risk. Newer or less risk-tolerant investors may find it challenging to tolerate the volatility of the S&P 500.

Furthermore, the S&P 500 is not as diversified as it once was. There is a significant concentration in the Technology sector, which comprises 26% of the index. When technology stocks assigned to other sectors by S&P Global are included, the true technology sector weight rises to 40%. This level of concentration in a single sector increases the risk of the index.

Finally, valuation risk and inflation risk are also present in the S&P 500. The top five stocks in the index trade at higher valuation multiples than the median for the index, and these valuations are dependent on low-interest rates. If interest rates were to rise, there could be a harsh effect on these expensive and speculative technology stocks.

In summary, investing in an S&P 500 ETF carries various risks, including concentration risk, volatility, downside risk, lack of international diversification, and valuation and inflation risk. These risks should be carefully considered before investing, and investors should ensure they have an appropriate risk tolerance and a long-term investment horizon.

Frequently asked questions