The SPDR S&P 500 ETF Trust (SPY) is actually the oldest exchange-traded fund (colloquially referred to as “spider”), with the launch going back to 1993. No doubt, it ushered in a revolution in finance. And while the SPY is no longer the largest ETF, it is still massive, with assets under management totalling a whopping $185 billion.
So the question arises for investors: Should I buy the S&P 500 Index by investing in the SPY ETF?
Well, of course, there are no clear-cut answers. But to help provide some guidance, let’s first get a background on the SPY ETF. As the name implies, it closely tracks the movements in the S&P 500, which is composed of 500 of the largest companies — based on market cap — that are listed on the New York Stock Exchange and the Nasdaq.
Some of the top holdings include blue chips like Apple Inc. (AAPL), Microsoft Corporation (MSFT), Exxon Mobil Corporation (XOM), Johnson & Johnson (JNJ), General Electric Company (GE) and Facebook Inc (FB). Keep in mind that the average market cap is about $73.7 billion.
The S&P 500 is also fairly diversified, with exposure to industrials (10.9% of the portfolio), energy (7.1%), consumer defensive (10.2%), healthcare (15.2%), financials (14.7%) and technology (18%).
Oh and yes, the costs are dirt cheap. The expense ratio is a mere 0.09%.
OK Then, Should I Buy the S&P 500?
The broad market has certainly been volatile lately. During the first couple months of this year, the S&P index lost nearly 12% of its value. Then after this, the S&P added close to 15%.
It’s enough to make your head spin.
Unfortunately, the volatility may continue. Let’s face it, there are still many wildcards, such as the possibility of the UK exiting the European Union (called the Brexit), the upcoming presidential election and the potential of interest rate increases from the Federal Reserve.
What’s more, the S&P 500 is not cheap. After all, the price-to-earnings ratio is about 24. To put this into perspective, the multiple was under 15 back in 2012. Then again, the S&P 500 has been mostly in the bull phase since the financial crisis of 2009.
In light of all this, it does seem like buying the SPY ETF is a bad move, right? Perhaps. But timing the markets can be tricky as well. As seen in the 1990s, the markets demonstrated that they can be bullish for quite some time (the P/E multiple hit nearly 33 times in 1999).
Something else to keep in mind: The S&P is really a great vehicle to build a diversified portfolio, which should help provide for steady long-term growth. During the last 30 years, the S&P has returned an average annual return of 9.9% (including the reinvestment of dividends).
In fact, this is something that billionaire investor Warren Buffett believes in strongly. In his 2013 investor letter, Buffett noted that, for his will, he has instructions for the trustee to put 10% of the portfolio in short-term government bonds and the rest in a low-cost S&P 500 index fund!
Granted, this does not mean you should do the same. If anything, it’s a good idea to factor in your risk tolerance, goals and current financial situation. However, when structuring a portfolio, having some level of exposure to the S&P 500 is still hard to argue against.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
