It’s the fund that started a revolution, way back in 1993. Highly liquid and heavily traded, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is so familiar on Wall Street that some folks call SPY stock by its nickname, the “Spyder.”
The purpose of this exchange-traded fund is to track the S&P 500 index. Impressively, the fund represents 500 large-cap and mega-cap stocks spanning approximately 24 industry groups.
However, not everyone is a fan of SPY stock now. There are concerns that the fund and its underlying index may be overvalued (i.e., too pricey), and that it might be better just to park one’s capital in “risk-free” assets.
History, however, shows that what might seem “risk-free” can actually be quite risky. Indeed, riding out the tough times with the SPDR S&P 500 ETF Trust can result in surprisingly de-risked returns over time.
The Worst-Case Scenario for SPY Stock
Take the onset of the Covid-19 pandemic as an example. When the pandemic threw the U.S. into crisis mode in March 2020, it almost felt like the world was ending.
If ever there was a worst-case scenario coming to pass, this was it. There hadn’t been a global pandemic in recent memory, and both Wall Street and Main Street understandably went into panic mode.
Practically every asset class got dumped: stocks, gold and silver, cryptocurrencies, you name it. Investors sold off these assets and loaded up on cash for safety.
Even amid this crisis, the SPDR S&P 500 ETF Trust did its job of tracking the S&P 500. The fund and its underlying index both declined roughly 34% from top to bottom.
Rising from the Depths
In order to survive and prosper amid the worst market crisis since 2008-2009, all that investors had to do was hold SPY stock.
Truly, this was a test of the “set it and forget it” strategy. The SPDR S&P 500 ETF Trust passed the test with flying colors, ending 2020 up 16% and then adding another 27% in 2021.
Along the way, the fund only charged a gross annual expense ratio of 0.0945%. When it comes to ETF fees, that’s definitely on the low end of the spectrum.
How did the S&P 500 and SPY stock recover so quickly? The recovery was enabled through the strength of the fund’s gigantic, tech-friendly component businesses.
These include world-famous names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
With exposure to massive companies like those, you can rest easy even when the markets get shaky.
Too Expensive to Buy?
Even with its rock-bottom expense ratio, some people might doubt that SPY stock is a bargain.
Consider, though, that the S&P 500’s trailing 12-month price-earnings (P/E) ratio was 25.96 on Jan. 28, according to The Wall Street Journal.
We’re not dealing with an outlandish P/E ratio here. The S&P 500’s P/E ratio was actually much higher a year earlier, at 40.93.
Meanwhile, the so-called “risk-free” assets present a steep opportunity cost, compared to SPY stock. For example, the U.S. dollar is deteriorating in value quickly due to 7% annualized inflation.
U.S. government bonds are also unappealing. The 10-year Treasury bill, for example, only pays out 1.77% per year.
In most years, returns on SPY stock have at least kept up with the rate of inflation. Evidently, it’s a more high-probability holding than U.S. government bonds or just staying all in cash.
The Bottom Line
Even during times of crisis, it’s hard to go wrong with the SPDR S&P 500 ETF Trust. It’s great for riding out recessions and profiting from the recoveries.
Sometimes, you might hear people claim that SPY stock is too pricey or too risky to own. Yet, the fund’s long-term holders have fared quite well.
Therefore, you don’t have to listen to the critics and the fear-mongers. Instead, you can simply buy and hold the SPDR S&P 500 ETF Trust, and enjoy the diversified exposure to businesses that are built to last.
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.
