You Don’t Need to Own SPY ETF, but You Gotta Pay Attention to It

Home to almost $281 billion in assets under management, the SPDR S&P 500 ETF (NYSEARCA:SPY) is still the world’s largest exchange-traded fund with an advantage of about $87 billion over its next closest rival.

You Don’t Need to Own SPY ETF, but You Gotta Pay Attention to It

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SPY ETF features numerous highlights, including robust liquidity, which lowers trading costs in the form of tight bid/ask spreads, a vibrant options market and its status as one of the premier ETFs for following the S&P 500, the world’s most important equity benchmark.

Indeed, the world of ETFs has boomed and matured by leaps and bounds since SPY debuted in January 1993. Sure, basic index investing via a fund like SPY has supporters ranging from Warren Buffett to the fictitious Jack Ryan.

Sure, there are hundreds of ways to get tactical and seek alpha in the world of ETFs, but for many investors, a fund like SPY does the trick.

SPY touches the most relevant corners of the U.S. equity markets, eliminates the burden of selecting individual stocks and does so for a fair price of 0.0945% per year, or $9.45 on a $10,000 investment.

SPY ETF Hidden Perks

SPY’s small fee and its heft among ETFs are nice benefits, but the story doesn’t end there, particularly for active traders looking to be tactical in either bullish or bearish fashion. Just look at last December’s market meltdown as a testament to some SPY’s often under-appreciated benefits.

“Taking a closer look at trading volumes during the December drawdown, we see more evidence of SPY’s healthy liquidity profile,” said State Street in a note published earlier this year. “SPY’s trading volume spiked during the month as investors rushed toward the product to express market views, both tactically long and short.”

Though it’s slightly more expensive than its major rivals – the iShares S&P 500 Core ETF (NYSEARCA:IVV) and the Vanguard S&P 500 ETF (NYSEARCA:VOO) – SPY has a track record of being the S&P 500 ETF to embrace when broader market volatility spikes.

“In other words, what we have seen historically is that when volatility spikes, SPY thrives,” according to State Street. “In fact, when the S&P 500 fell by nearly 3% on the shortened trading day of December 24th, SPY made up 12% of all US stock exchange volume—significantly greater than competing S&P 500 ETFs, including the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO).”

Adding to the case for passive funds like SPY is a slew of academic research suggesting a passive index fund is likely to generate better long-term returns than a pricier, actively managed mutual fund. Researchers at Rice University looked into the comparison.

Alan Crane and Kevin Crotty, professors at the Jones Graduate School of Business at Rice University, “found that outperformance in index-fund returns was greater than it would be by chance,” according to the study. “The discovery suggests that passive funds, although they require little skill to run, have almost as much upside as active funds. In fact, the professors found, the best index funds perform surprisingly closely to the best active funds, but at a lower cost to the investor. The worst active funds perform far worse than the worst index funds–even before management fees.”

Bottom Line: Not Sexy, But Efficient

SPY isn’t the most glamorous ETF on the market. No S&P 500 fund is and there is plenty of exotic fare out there for investors to augment core positions in SPY with. It may sound counter-intuitive, but another SPY is good for is NOT beating the market, something that’s incredibly difficult to do.

How hard is it? Last year marked the ninth consecutive year in which the majority of actively managed large-cap funds, 64.4% to be precise, failed to top the S&P 500, according to S&P Dow Jones Indices.

Stretching even further, for the 15 years ended 2018, nearly 92% of active large-cap managers couldn’t beat the S&P 500. In other words, SPY is just fine and practical for a broad swath of investors.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

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