SPDR S&P 500 ETF Trust Has Momentum, But May Be Too Tech-Heavy

It’s known far and wide as the world’s largest exchange-traded fund, and made history as the U.S.’s first listed ETF back in 1993. Of course, I’m referring to the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Each and every day, legions of traders use SPY stock to get exposure to the S&P 500 index.

close-up of the phrase "exchange traded fund" on three colorful papers pinned to a wall by colorful pushpins
Source: shutterstock.com/bangoland

Instead of entrusting a professional money manager with their capital, some folks simply choose to park it in an index fund like this one. It’s not a terrible idea, as it represents 500 large-cap and mega-cap stocks spanning approximately 24 industry groups.

Sure, SPY stock could be considered a “set it and forget it” type of investment. However, informed investors should always follow the “know what you own” credo, even if they’re holding a time-tested index fund.

As we’ll see in a moment, the S&P 500 could be viewed as cheap or expensive, depending on one’s viewpoint. With that in mind, let’s delve into a mega-fund with huge trading volumes and a pedigree that few assets can match.

A Closer Look at SPY Stock

Over the long term, the SPDR S&P 500 ETF Trust has done an outstanding job of tracking the price trajectory of the underlying index.

Even on a day-to-day basis, as I check the percentage gains and losses on my computer screen, I can barely detect differences between SPY stock and the S&P 500.

And for cost-conscious investors, the fund has an ultra-low gross expense ratio of 0.0945%. In other words, the fund’s managers charge an annual fee, but it’s barely noticeable.

Just think about how much effort and time it would require to pick out 500 stocks on your own. For such a small fee, why not let the experts do the stock picking for you?

Besides, SPY stock has performed extremely well on a long-term time frame. In fact, the ETF’s price has sailed from $226 five years ago, to $437 at this writing.

Might Be Too Pricey, or Not

Given the SPDR S&P 500 ETF Trust’s astounding five-year performance (despite a global pandemic, mind you), some folks might claim that it’s too expensive to buy now.

On the other hand, SPY stock recently pulled back from its 52-week high of $479.98. That’s not a 10% correction, but at least it’s a dip.

And when it comes to the S&P 500, the trend is definitely your friend. Contrarians who try to wager against the index’s upward momentum are only asking for trouble.

Furthermore, as of Jan. 14, the S&P 500’s price-earnings ratio was 28.55, according to The Wall Street Journal. A year earlier, it was 40.98, so perhaps there’s actually a bargain to be had here.

A Tech-tonic Shift

I’m old enough to remember a time when the S&P 500 was dominated by old industrial giants. Nowadays, the index reflects society’s evolution into the digital age.

Before you consider buying SPY stock, I strongly encourage you to apply the “know what you own” principle. This would include visiting the web page for the SPDR S&P 500 ETF Trust and clicking on the “holdings” tab.

There’s you’ll get an idea of what’s actually in the fund. Immediately, you’ll be struck by the heavy weighting in the technology sector.

We’re talking about famous tech names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon  (NASDAQ:AMZN), Meta Platforms (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).

Clearly, if you’re going to hold SPY stock, you’d better believe that the tech sector of the economy will continue to grow. Otherwise, you could be overly exposed to a sector that you’re not confident about.

The Bottom Line on SPY Stock

With ultra-low fees and a track record of strong performance, it’s hard to beat SPY stock.

Just be sure to delve into the details of the fund before taking a position. After all, knowledge is power in the financial markets.

Plus, you’ll want to perform a gut check to determine if you’re a true believer in the technology sector. If so, then the SPDR S&P 500 ETF Trust could be one of your most reliable long-term holdings.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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