Some things age without getting old.
In the consumer world, just look at Coca-Cola (NYSE:KO), McDonald’s (NYSE:MCD) and Walt Disney (NYSE:DIS), which have only grown their brands as the years have rolled on. (And whose fortunes have been mirrored in the investment world.)
Of course, the exchange-traded fund world can boast its own ageless classic: The SPDR S&P 500 ETF (NYSE:SPY).
The SPY, which hit markets in the early 1990s, was the first exchange-traded fund, providing investors with a theoretically simple but still important tool: the ability to essentially “buy” or “sell” the S&P 500.
The SPDR S&P 500 ETF’s launch sparked a wildfire of innovation, and now there’s an ETF for just about anything.
There’s simple sector funds like the Select Sector Utilities SPDR (NYSE:XLU) or Select Sector Health Care SPDR (NYSE:XLV). Care to get more specific? Invest in biotechs with the SPDR S&P Biotech (NYSE:XBI) fund or gaming stocks with the Market Vectors Gaming ETF (NYSE:BJK). Want to trade food? The PowerShares DB Agriculture Fund (NYSE:DBA) gets you into things like cattle and corn futures. Or maybe Treasuries, through the iShares Barclays 20+ Year Treasury Bond ETF (NYSE:TLT).
These funds only scratch the surface. But when it comes to strong long-term performance, the simple SPY still is an excellent choice.
The S&P 500 Index is a hand-picked group that is weighted by market capitalization, which means that much of the returns come from the world’s top companies. SPY’s top five holdings are Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM), Microsoft (NASDAQ:MSFT), International Business Machines (NYSE:IBM) and Chevron (NYSE:CVX). And because of the index’s glut of larger, more mature companies, the fund also offers a decent dividend of almost 2% — not eye-popping, but better than you can get from a 10-year T-note.
Of course, the S&P 500 is not just a proxy for the U.S. market. For the most part, an investor will benefit from the trends in overseas markets, as the core holdings of the S&P 500 are multinational corporations with enormous scale — though investors should note that doesn’t mean you’re getting access to foreign-based companies.
Another notable advantage of the SPY is its liquidity. On a typical day, the ETF’s trading volume is 135 million. This is important because smaller ETFs can be subject to higher bid-ask spreads, which means higher costs for investors.
Best of all, the SPY — which essentially is powered by a highly automated software system and doesn’t have to pay an active portfolio manager — has a rock-bottom expense ratio of just 0.09%, which means very little gets cut out of your returns.
Of course, low expense ratios hardly matter if the fund is no good, but the SPY actually tends to outperform the “smart money.” A recent report from Goldman Sachs (NYSE:GS) showed that the average return for 699 hedge funds (aggregating $1.2 trillion in assets) was 4.6% year-to-date, and only 11% beat the S&P 500.
It’s difficult to beat the S&P 500, at least in the long term — that’s part of the “efficient market hypothesis” — and this has been confirmed through extensive academic research. So unless you have a rare gift for investing (and the generous deals that come with being able to invest large piles of money at a time), like Berkshire Hathaway’s (NYSE:BRK.A, BRK.B) Warren Buffett, the odds are pretty much against you.
Buying the SPY might sound boring, as doing so means you’re only out to “match the market.” But it remains a great, low-cost way to get exposure to equities without worrying about missing out on a broader bull run.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.