Imagine buying the whole market with a single stock purchase. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) was built on this exact premise. The fund invests in diversified, publicly listed equities in the U.S. across all 11 sectors. SPY replicates the S&P 500 index (SPX) and aims to generate returns that corresponds to the performance of the companies in the SPX. And SPY stock has achieved remarkable success since it launched almost 30 years ago, in January 1993.
What’s an index? An index is a basket of securities bundled together for the purpose of tracking a snapshot of a specific segment of the economy. For example, the S&P 500 Index is composed of 500 leading publicly traded corporations in the U.S., and it is weighted using market capitalization methodology. That means the bigger a company’s market cap, the more of the index it makes up.
Investors often use SPX and other indices as a tool to measure economic health.
Unfortunately, an index is not a tradable instrument. However exchange-traded funds (ETFs) that track indices can be traded in the financial markets.
SPY Stock Overview and Performance
The SPDR S&P 500 ETF is the first ETF to ever be created, and it’s the largest one by assets under management (AUM) — currently AUM exceeds $400 billion. Volume levels are around 84 million. The fund sits at an impressive 10.6% annualized return since its inception and boasts a 1.2% 12-month yield and 0.0945% gross expense ratio (GER). Meanwhile its Net Asset Value (NAV) currently trades around $430.
If someone had invested $10,000 into the SPY 10 years ago, today that person would have hold approximately $42,000. If someone had invested $10,000 around inception in 1993, the investor would now hold circa $170,500 (assuming dividend reinvestment). That’s the power of compound interest, a long-term view and low-cost funds.
It’s important to also remember that during the past 30 years, there have been three major global recessions: the early 2000’s dotcom bubble, the 2008 global financial crisis and the 2020 Covid-19 pandemic crisis. Nevertheless, history shows that the fund still managed to generate solid returns despite global financial turbulence.
The chart below shows the SPY performance compared to other mainstream ETFs, including the Invesco NASDAQ 100 ETF (NASDAQ:QQQM), the Invesco QQQ Trust (NASADQ:QQQ), the iShares JPX-Nikkei 400 ETF (NYSEARCA:JPXN) and the Global X DAX Germany ETF (NASDAQ:DAX):
With these numbers, one could argue that SPY surpasses the long-term performance of numerous Wall Street hedge fund giants. Hedge funds boast excessive financial performance in return for higher fees. Fees are often as high as 2% for management and 20% from profits.
Between January 2021 and November 2021, hedge funds averaged 8.7% returns, yet the S&P 500 index returned 24% during the same period. In fact, a recent report shows that HF haven’t beaten the market since at least 2015.
The Benefits of SPY stock
The fund is listed on multiple trading venues, thus international investors have access at almost any time. The ETF trades with the same straightforwardness as a stock, making the transaction process simple and safe.
Investing in the ETF provides instant diversification and exposure to prime large-cap corporations in the U.S. The fund is fully transparent and regulated. Its massive trade volumes feed investors with ample liquidity.
The only tool an investor is required to have for buying the ETF is a brokerage account. Once you’re set there, you can buy or sell SPY within seconds. The fund trades under the SPY ticker and can be traded via mobile apps, neobrokers and robo-advisors as well as established legacy brokers.
Investors can follow a simple yet effective investing strategies such as dollar cost average (DCA). DCA is the process of consistently investing in an asset across a time period. The philosophy of DCA implies that by investing regularly over time, investors can spread out volatility and avoid the risk of buying all at once at a market peak.
Despite SPY’s minimalism, there are a number of prolific investors who are advocates of the index fund. Warren Buffett has famously stated that “… that the best thing to do is buy 90% in S&P 500 index fund.”
Holdings and Risk Return
As of January 2022, the IT sector makes up 27.9% of the SPY, followed by Healthcare at 13.3% and consumer discretionary at 11.8%. Highest-weight companies include FAANGs like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN). All three are currently over a $1 trillion valuation with exceptional fundamentals and product innovations. SPY is classified by Morningstar as having average risk and above-average returns when compared to the large-blend investment category.
Bottom Line on SPY Stock
SPY stock is a low-cost alternative to actively managed ETFs, hedge funds, private equity, alternative investments and individual stock-picking strategies. It requires little to no ongoing upkeep, hence its popularity amongst retail and institutional investors. And it has proven to be a bulletproof vanilla investment vehicle over the long term. For those reasons, I recommend SPY stock to anyone with a long investment horizon.
On the date of publication, Jonathan Tang 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.
Jonathan Tang has gained extensive experience in the financial services industry in London. He has completed valuable projects for companies such as Bloomberg, London Stock Exchange Group and FactSet. He holds a master’s degree in Investment & Risk Finance and has completed an MBA course at the London School of Economics. Jonathan has a passion for fintechs that democratize investing, stock market and public equities, ETFs, start-ups and real estate.