Avoid the Stock-Picking Trap with the SPDR S&P 500 ETF Trust

Some folks like to pick out the good apples, while others would rather just buy the whole bunch. These are both viable strategies for investors, and the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is an ideal tool for practically anyone seeking broad-market exposure. But what makes SPY stock so great?

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Not only is SPY stock the world’s largest exchange-traded fund (ETF), but it’s historically significant as it was the U.S.’s first listed ETF back in 1993. The stated objective of SPY is to provide pre-expenses investment results that generally correspond to (i.e., “track”) the S&P 500.

We’re talking about 500 large-cap and mega-cap stocks represented in a fund spanning approximately 24 industry groups. That’s some serious diversification. If there ever were a “set it and forget it” type of investment, this would certainly qualify.

Yet, while investors of all stripes own SPY stock, many shareholders have never looked inside to see what’s in the fund. I always say, know what you own. Therefore, let’s peek behind the curtain and uncover the details of this classic trading vehicle.

A Closer Look at SPY Stock

If you’re like me, then you like to avoid high fees whenever possible. One great feature of SPY stock is its ultra-low annual expense ratio of 0.09%, or $9 annually on a $10,000 investment. I have to hand it to State Street, the fund manager, for choosing not to raise SPY’s expense ratio for so many years.

Just as individual companies might offer dividend payments, so does the SPY stock. Currently, SPY’s forward annual dividend yield is 1.57%. Granted, you probably won’t get rich overnight with the dividend payments. Still, it’s a nice added bonus for long-term investors.

And unsurprisingly, SPY stock has a five-year monthly beta of exactly 1. This means that SPY is highly successful in moving at the same speed as its underlying index, the S&P 500.

So, you won’t have to worry about SPY stock moving faster or slower than the S&P 500 itself. It’s a cost-effective way to take a stake in hundreds of carefully vetted, well-established companies in one fell swoop.

Strong Tech Exposure

Investors who attempt to pick stocks on their own often miss out on important market trends. For instance, technology stocks tended to do better than most other sectors in 2020.

Indeed, tech stocks have fared quite well over the past decade. Hence, it makes sense that SPY stock is heavily weighted towards famous tech-market names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).

Don’t get me wrong. There’s still plenty of diversification within SPY stock. Just be advised that for the foreseeable future, you’ll want to be bullish on technology if you’re planning to own SPY shares.

Look Out, Here Comes Tesla

Now, I feel that I must address an 800-pound elephant in the room. As InvestorPlace contributor Wayne Duggan reported, On Dec. 21, Tesla (NASDAQ:TSLA) stock will be added to the S&P 500 index.

SPY is market-capitalization-weighted, and Tesla has a huge market cap. Thus, it’s reasonable to expect that TSLA stock will have a considerable influence on SPY stock.

Some folks like Tesla as a company and Elon Musk as its CEO, while others don’t. Musk is a controversial figure, no doubt about it.

There’s no need to delve into a full debate over the pros and cons of Tesla stock here. If you’re looking for an excellent starting point to get the basic facts about Tesla and its inclusion in the S&P 500, I recommend checking out InvestorPlace contributor Sarah Smith’s article on that topic.

Suffice it to say that you’ll probably want to conduct at least some cursory research on Tesla, both the company and the stock, before taking a position in SPY stock. After all, their fates will soon be intertwined.

The Bottom Line

If you’re willing to let the fund managers do some stock selection on your behalf, then SPY stock may be a worthy addition to your portfolio.

Just be aware that in exchange for excellent diversification into a broad variety of established companies, you might have to deal with tech-heaviness and perhaps a bit of controversy as Tesla stock makes its grand entrance.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/avoid-the-stock-picking-trap-with-an-investment-in-spy-stock/.

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