Why The Spy Etf Is A Smart Investment Move

The SPDR S&P 500 ETF Trust, or SPY ETF, is an exchange-traded fund that tracks the performance of the S&P 500 index, which is a basket of the 500 largest publicly traded companies in the US. Launched in 1993, it was the first US-listed ETF and remains one of the most popular and actively traded ETFs in the world.

SPY is passively managed and has a low expense ratio of 0.0945% to 0.095%. This means that it can only produce the returns of the S&P 500 index, minus fees and expenses. However, its low expenses make it an attractive option for investors seeking to track the S&P 500 index.

SPY provides investors with a convenient, low-cost way to gain exposure to a diversified basket of large-cap US stocks. It offers advantages such as low expenses, diversification, convenience, and tax efficiency. However, there are also some disadvantages and risks to consider before investing.

SPY ETF's historical performance

The SPDR S&P 500 ETF Trust, also known as the SPY ETF, is the largest exchange-traded fund (ETF) in existence, with about $500 billion in assets under management (AUM) as of May 2024. It is also the first U.S.-listed ETF and the most-traded ETF in the world.

The SPY ETF has generated an average annual return of just over 10% since its inception in January 1993. As of September 2024, the ETF's total assets grew to $573.53 billion. The fund generated average annual returns of 12.84% over the past decade, based on trailing 10-year data.

The SPY ETF's performance over various holding periods as of March 31, 2024, is as follows:

• 9.60% YTD Daily Total Return
• 28.76% 1-Year Daily Total Return
• 9.68% 3-Year Daily Total Return

The SPY ETF's performance closely tracks the S&P 500 index, which has a strong record of building wealth over time. The fund's goal is to replicate the performance of the S&P 500 as closely as possible. For example, if the index rises by 20% in a given year, you can expect slightly less than 20% returns from the SPY ETF, accounting for minimal investment fees.

The SPY ETF's performance can be volatile in the short term, as with any stock market investment. For example, in 2022, the ETF dropped by almost 20% before recovering. Therefore, it is generally recommended for long-term investors.

How to buy the SPY ETF

The SPDR S&P 500 ETF Trust (SPY) is the largest exchange-traded fund (ETF) in existence, with about about $500 billion in assets under management as of May 2024. Launched in 1993, it was the first U.S.-listed ETF and remains the most-traded ETF in the world.

• Open a brokerage account: You can easily open a brokerage account online as long as you're at least 18 years old. You'll need to provide some identifying information, such as your address, Social Security number, date of birth, and possibly your employer's name. You'll also need to choose the type of account you want, such as a taxable brokerage account or an individual retirement account (IRA).
• Figure out your budget: Decide how much you can afford to invest. Since the SPY ETF is well-diversified, it's okay to put most of your investing budget into this ETF. However, consider using a strategy called dollar-cost averaging, where you invest on a set schedule to take advantage of market fluctuations.
• Do your homework: Familiarize yourself with the investment prospectus and learn how the fund works and what alternatives are available.
• Place your order: Enter the fund's ticker symbol, SPY, and indicate the number of shares you want to buy or the dollar amount you want to invest. You'll also need to decide whether to place a market order or a limit order. A market order executes the trade immediately, while a limit order instructs your broker to buy shares only at a specified price.
• Choose where to buy: ETFs are traded like stocks and can be bought and sold through brokerage accounts. If you don't already have a brokerage account, you'll need to open and fund one before purchasing the SPY ETF through the broker's trading platform or website.

Pros and cons of investing in the SPY ETF

Pros of Investing in the SPY ETF

The SPY ETF has a lot to offer investors, including:

• Low expenses: With an expense ratio of 0.0945% or 0.095% (depending on the source), the SPY ETF is much cheaper than the average mutual fund, which often charges fees of 0.50% or more.
• Diversification: The SPY ETF gives investors access to 500 of the largest publicly traded companies in the US across 11 different sectors, reducing market risk.
• Convenience: It's easy for investors to gain access to the stock market through the SPY ETF without having to research and analyse individual stocks.
• Tax efficiency: ETFs have low turnover and trade like stocks on an exchange, which means they pass very little tax on to shareholders.

Cons of Investing in the SPY ETF

There are also some disadvantages and risks to consider before investing in the SPY ETF:

• Limited returns: As a passively managed fund, the SPY ETF can only produce returns that match the S&P 500 index, minus fees and expenses. Actively managed funds or portfolios may be able to outperform the market.
• Not fully diversified: The SPY ETF primarily invests in large-cap US funds, so investors don't get exposure to other types of securities like small-cap stocks, international stocks, or bonds.

SPY ETF's suitability for your portfolio

SPY ETFs are a good choice for investors seeking to diversify their portfolios and gain exposure to the U.S. equity market. By investing in a SPY ETF, investors can access a basket of large-cap U.S. stocks, providing a level of diversification that reduces market risk. This is particularly beneficial for new investors who may not yet have a broad range of investments.

One of the main advantages of SPY ETFs is their low expense ratio, which is currently 0.0945% or 0.095%, depending on the source. This is significantly lower than the average mutual fund expense ratio of 0.50% or more. The low fees associated with SPY ETFs make them a cost-effective way to gain exposure to the S&P 500 index, which has historically delivered strong returns.

In addition to diversification and low costs, SPY ETFs offer convenience and tax efficiency. Investors can easily buy shares of the ETF through a brokerage account or retirement account, and the low turnover of ETFs means they pass minimal taxes on to shareholders.

However, there are some potential drawbacks to consider. SPY ETFs are passively managed, which means they can only produce returns that match the S&P 500 index, less fees and expenses. Actively managed funds may have the potential to outperform the market. Additionally, SPY ETFs are not fully diversified, as they primarily invest in large-cap U.S. stocks, and do not provide exposure to small-cap stocks, international stocks, or bonds.

Overall, SPY ETFs can be a suitable addition to an investment portfolio, particularly for those seeking a low-cost, diversified investment in the U.S. equity market. However, investors should carefully consider their financial situation, risk tolerance, and investment goals before deciding if SPY ETFs are right for them.

SPY ETF's expense ratio

The SPDR S&P 500 ETF Trust's expense ratio is 0.0945%, which is considered low compared to other funds. This equates to $9.45 in investment fees for every $10,000 invested. While this is a relatively low expense ratio, it is not the lowest among ETFs that track the S&P 500 Index. For example, the Vanguard S&P 500 ETF (VOO) has an expense ratio of 0.03%.

The expense ratio of an ETF is a percentage of an investor's assets that go towards fees. These fees cover the fund's operating costs, such as management and operational expenses.

It is important to consider the expense ratio when choosing an ETF to invest in, as fees can eat away at returns over time. For example, an investment of $10,000 with an expense ratio of 0.03% instead of 0.0945% would result in approximately $27,000 in additional returns over 30 years, assuming a 10% annualized rate of return.

The SPDR S&P 500 ETF Trust's low expense ratio, coupled with its broad diversification and convenience, makes it a popular choice for investors seeking low-cost exposure to the S&P 500 Index.

Frequently asked questions