When it comes to the leading U.S. stock indexes, the S&P 500 index is widely regarded as the best single barometer of the overall stock market’s performance. The S&P 500 measures the stock performance of the largest publicly traded 500 companies in the U.S. and covers approximately 80% of available market capitalization.
For many investors, the gauge’s performance, therefore, mirrors how U.S. equities are performing in general. Today’s article discusses the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), an exchange-traded fund that provides exposure to the index.
Launched in January 1993, SPY was the first ETF listed in the U.S. It is also the largest one. The top 10 companies in the ETF’s portfolio comprise around 30% of net assets of almost $318 billion. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) lead the names in the fund.
SPY has closely tracked the performance of the S&P 500 index during 2020. February and March saw the novel coronavirus become a global pandemic. As the health crisis’ size and nature became apparent, SPY dropped to a 52-week low of $218.26. But since then, the story has changed and in early December SPY, as well as the S&P 500, hit record highs. So far in the year, both the S&P 500 index and SPY are up over 13%.
This year’s return so far, in fact mirrors, the long-term average annual gains of around 11% the S&P 500 index has achieved over decades. Although short-term volatility and profit-taking could well be around the corner for the ETF, long-term retail investors would benefit from investing in a fund like SPY. Here’s why.
SPY Stock Shows Power of Compounding
Many people wonder if their savings will support a comfortable lifestyle in retirement. I’d like to show you how investing in an ETF like SPY could help in saving for those golden years.
Let’s assume an investor is now 35 years old with $5,000 in savings and that person plans to retire at age 65.
That individual now decides to invest that $5,000 in SPY and make an additional $3,600 in contributions annually at the start of the year.
If this person has 30 years during which to invest and receives an average annual return of 11%, compounded once a year, at the end of 30 years, the total amount saved will be close to $909,749.
Investing $3,600 a year would mean putting aside $300 a month or about $10 a day. And if one could increase the amount contributed to $4,800 a year, the total savings over the same period stands at almost $1,174,844.
Put another way, regular investing over a long period can enable most people retire comfortably. And an index ETF, such as SPY, which aims to mirror the performance of its benchmark index, can help in that long-term investment journey. SPY provides instant diversification over 24 industry groups and takes the stock-picking guesswork out of equation for retail investors.
So Should You Buy SPY Stock Now?
The S&P 500 index is currently around 3,700, close to the all-time highs seen in recent days. Meanwhile, many market participants are impatiently waiting for Tesla (NASDAQ:TSLA) to join the S&P 500 on Dec. 21. Index funds need to buy close to $100 billion of Tesla shares. The rebalancing is likely to mean volatility in the index and ETFs like SPY.
As we get ready to wrap up 2020, a year that will be remembered for a long time, the bulls and the bears are likely to continue arguing over the next moves for broader markets.
However, for buy-and-hold investors, such short-term moves should not matter much. Any potential profit-taking in SPY would give a better entry point into the fund. With a current annual expense ratio of less than 0.01%, it is one of the cheapest ETFs around. The current price also supports a dividend yield of about 1.5%.
Those investor who plan to invest in the S&P 500 by buying a fund could also consider several other ETFs. Examples include the iShares Core S&P 500 ETF (NYSEARCA:IVV), the Vanguard S&P 500 ETF (NYSEARCA:VOO), or the SPDR Portfolio S&P 500 ETF (NYSEARCA:SPLG).
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation and publishes educational content on investing.