Wall Street has been on the edge since the start of the new year. Broader indices, the S&P 500, Dow Jones Industrial Average and Nasdaq 100, are down 5.9%, 3.4%, and 9.4% year-to-date (YTD). As we get ready to end a busy earnings season, investors wonder what to expect from most stocks in the near future. Today’s article discusses the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), an exchange-traded fund (ETF) that offers exposure to the S&P 500 index, the best single indicator of broad stock market performance.
Companies in the S&P 500 index account for roughly 80% of the overall U.S. stock market value. These names come from 11 industry sectors. Therefore, the index enables investors to watch the overall health of our economy.
Most InvestorPlace.com readers would know that SPY is the oldest and largest ETF listed stateside. The fund, which first started trading in January 1993, currently has $406 billion under management. It is also referred to by its nickname, “Spider.”
Given the composition of the S&P 500 index, larger companies account for a greater portion of SPY. With a market cap of over $2.8 trillion, Apple (NASDAQ:AAPL) leads the list with a 7% weighting. Next in line are other tech giants Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL, GOOG) and Tesla (NASDAQ:TSLA). The leading 10 stocks account for close to a third of the portfolio.
In other words, SPY has a simple but powerful value proposition. If allows you to participate in the growth of the largest names in the U.S. economy. As a result, the SPY fund deserves a place in most retail portfolios. The recent pullback in price offers an opportunity to buy the SPDR S&P 500 ETF Trust. Here’s why.
Why Invest in the SPDR S&P 500 ETF
Metrics show that the long-term average annual return of the S&P 500 index has been over 10%. There are also some exceptionally strong years, such as 2021, which saw returns around 28%. Understandably, we also witness declines, such as the drop of about 38% in 2008.
Now, let’s see what an average annual return of 10% can mean for buy-and-hold investors. If you are a 30 year-old investor with $5,000 in savings, you might plan to work for another 35 years.
Meanwhile, you decide to invest your capital in SPY. In the beginning of each year, you also add a lump sum amount of $3,600 (or about $10 a day) in annual contributions to your holdings.
At the end of 35 years, your nest egg will have over $1.2 million. Yet, current research highlights that in the U.S, “the median retirement savings for all workers is $97,000” and that “Women have smaller retirement savings overall, with an average $57,000 saved, compared to men’s $118,000.”
These powerful numbers show all of us the importance of investing in a low-cost fund such as SPY stock for our golden years. It gives diversified access to some of the best companies and helps investors in that long-term investment journey.
Should You Buy SPY Stock Now?
SPY has closely tracked the performance of the S&P 500 index during 2021. The ETF fell to a 52-week low of $371.88 in March. But since then, SPY, as well as the S&P 500, has steadily soared towards its record high of $479.98 in early January. Yet, at that level, Wall Street has expressed concern over high stretched valuations have become in many stocks.
We have seen a different story since that all-time high, as the fund is down more than 5% YTD, trading currently at $450 territory. Given the anticipated increase in interest rates, global political tensions, and even new potential Covid-19 variants, SPY may see further volatility and profit-taking in 2022. However, long-term investors may regard any dip in SPY stock as an opportunity to invest for the long term.
With a current annual expense ratio of less than 0.1%, it is one of the cheapest ETFs in the market. In addition, the current price supports a dividend yield of around 1.3%. Thus, SPY should be a vital component of any retail investment portfolio. Finally, investors who would like to have an equal-weighted exposure to names in the S&P 500 index could also research the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP).
On the date of publication, Tezcan Gecgil 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.
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.