Is the SPDR S&P 500 ETF Trust the Smartest Investment You Can Make Today?
KEY POINTS
With the three major indexes slipping over the past few weeks, now may not seem like the best time to invest in stocks. It’s always more tempting to buy when we see a particular stock or asset rising, as we can easily imagine our returns if the momentum keeps going. The idea is to hop on the bandwagon and immediately see your investment take off.
But as strange as this may sound initially, to truly score an investing win, one of the best things to do is consider buying during these periods of uncertainty. Why? Because quality stocks and other assets may be trading at bargain prices, meaning you can snap them up for a song and go on to benefit once they recover and advance over the long term.
It’s important to remember that, generally, elements troubling the market — from a government policy decision to rising inflation or a recession — won’t last forever. Today, investors are concerned about President Donald Trump’s tariffs on imports from China, Canada, and Mexico and the impact that will have on the economy and corporate earnings.
This may, indeed, represent a headwind, but quality companies will be able to manage these times and come out ahead. Considering this, is the SPDR S&P 500 ETF Trust (SPY -1.47%) — a bet on the S&P 500 — the smartest investment you can make today? Let’s find out.
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First, let’s talk a little bit about this sort of investment. It’s an exchange-traded fund (ETF), an instrument that includes many different stocks based on a particular theme, such as retail or biotech, or according to the player’s presence in a particular index, the latter being the case with the fund we’re talking about today.
Like stocks, ETFs trade daily on the market. So, if you’re familiar with buying stocks, you can go about purchasing an ETF in exactly the same way. The one thing to be aware of is that ETFs do come with a management fee, expressed as an expense ratio. To preserve your winnings over time, go for an ETF with an expense ratio of less than 1%. With a ratio of 0.09%, the SPDR S&P 500 ETF largely fits the bill.
Now, we’ll consider this ETF specifically and whether it’s a smart buy for you. The SPDR S&P 500 ETF tracks the S&P 500’s performance, so it truly is a bet on the overall stock market. It’s important to remember that this index includes the top companies driving today’s economy and makes adjustments regularly to ensure this is always the case. So, by investing here, you’ll always be exposed to the leaders of the moment.
When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 821% — a market-crushing outperformance compared to 167% for the S&P 500.
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Of course, during market downturns, you’ll likely see this ETF fall — as is the case today. Moving in lockstep with the S&P 500, it’s slid more than 6% over the past two and a half weeks. During times like these, certain individual stocks in your portfolio may be more likely to outperform. For example, as the overall market declined, stocks, including beverage giant Coca-Cola and pharma powerhouse AbbVie, advanced over the past month. This is why it’s a great idea to diversify across companies and industries — and across stocks and ETFs.
SPY DATA BY YCHARTS.
But if you can make only one investment right now, the smartest move may be to pick up a few shares of the SPDR S&P 500 ETF, and here’s why. The price, considering recent declines, has come down. But more importantly, this purchase offers you exposure to an index that has demonstrated resilience 100% of the time throughout its history.
After every period of decline, the index has gone on to recover and soar over time. In fact, the S&P 500 has delivered an annualized average return of more than 10% since its launch as a 500-company index in the late 1950s.
It’s impossible to time the market and pick up a stock or an ETF at its very lowest point, but here’s some good news: The S&P 500’s track record offers us reason to be optimistic about returns over time if we invest in it at any point. And that’s why the SPDR S&P 500 ETF Trust makes a fantastic buy right now — even if the S&P 500 falls further in the short term.
Before you buy shares in the SPDR S&P 500 ETF Trust, consider this:
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie. The Motley Fool has a disclosure policy.
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SPDR S&P 500 ETF Trust
SPDR S&P 500 ETF Trust (NYSEMKT: SPY) will always have a special place in the history of Wall Street. That’s because the exchange-traded fund (ETF) was the first of its kind. But the ETF market has changed dramatically over the years and, today, investors can easily do better than SPDR pioneering ETF.
Here’s why — and a look at a few of the more attractive alternatives.
Without getting into the details of why exchange-traded funds were such an innovative investment tool, you can pretty easily explain what this SPDR ETF does. It buys the stocks in the S&P 500 index (SNPINDEX: ^GSPC). An index fund isn’t a unique thing, and it wasn’t unique when the ETF was introduced to the world. What was different was the ability to trade SPDR S&P 500 ETF Trust all day long.
Unlike index-based mutual funds, which have existed for years, ETFs trade just like stocks. That materially increases the flexibility that investors have with their portfolios. And it also opens up all sorts of other investment tactics, such as shorting and options strategies, around the ETF. In this way, SPDR S&P 500 ETF Trust represented a revolutionary change for Wall Street.
But, at its core, SPDR S&P 500 ETF Trust is still just an index fund that tracks the S&P 500 index. On an absolute basis, it remains a fairly low-cost way to do that, too, with an expense ratio of just 0.09%. On a relative basis, however, that’s actually kind of expensive today.
The low costs offered by exchange-traded funds have attracted a huge number of investors. Because many ETFs are doing nothing more than tracking similar indexes, meanwhile, one of the best ways to differentiate an ETF is by offering lower costs. That has resulted in a race to the bottom expense ratio-wise concerning widely followed indexes. The S&P 500 index is, perhaps, the most widely followed index in the world, and there are many different choices for investors if they want to invest in it.
For example, Vanguard S&P 500 ETF (NYSEMKT: VOO) also tracks the S&P 500 index, but its expense ratio is 0.03%. That’s the same amount you’ll pay to own iShares Core S&P 500 ETF (NYSEMKT: IVV), another S&P 500 index tracker. And even Vanguard 500 Index Fund, a traditional mutual fund, has a lower expense ratio than SPDR S&P 500 ETF Trust, at 0.04%.
Given the plain vanilla approach taken by SPDR S&P 500 ETF Trust, the ETF’s expense ratio is extremely high relative to similar products. And that means there’s no particularly good reason to buy it. Unless you feel there’s some cache in saying you are overpaying to own the first ETF ever to be created, you should probably look elsewhere if you want a fund that tracks the S&P 500 index.
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In This Article:
What does SPDR S&P 500 ETF Trust do?
Times have changed for S&P 500 index-linked products
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SPY, VOO, or QQQ: Discover Which ETF Reigns Supreme for U.S. Investors
The SPDR S&P 500 ETF (SPY), Vanguard S&P 500 ETF (VOO), and Invesco QQQ Trust (QQQ) are three of the most popular ETFs in the stock market, boasting massive assets under management (AUM) ranging from $340 billion to $635 billion. Which one of these massive index ETFs is the most attractive today?
Exchange-traded funds (ETFs) have become a mainstay of today’s financial markets, offering easy and instant diversification, low costs, and reliable performance that reduces volatility while maximizing returns. Three of the largest and most popular are the SPDR S&P 500 ETF Trust SPY -1.47% ▼ , the Vanguard S&P 500 ETF VOO -1.47% ▼ , and the Invesco QQQ Trust QQQ -2.15% ▼ . Like stocks, ETFs trade on exchanges, providing investors direct access to portfolios of stocks rather than individual companies. Their low costs, sector-specificity, and ample liquidity make ETFs a popular choice for both beginner and pro investors alike.
Exchange-traded funds (ETFs) have become a mainstay of today’s financial markets, offering easy and instant diversification, low costs, and reliable performance that reduces volatility while maximizing returns. Three of the largest and most popular are the SPDR S&P 500 ETF Trust SPY -1.47% ▼ , the Vanguard S&P 500 ETF VOO -1.47% ▼ , and the Invesco QQQ Trust QQQ -2.15% ▼ . Like stocks, ETFs trade on exchanges, providing investors direct access to portfolios of stocks rather than individual companies. Their low costs, sector-specificity, and ample liquidity make ETFs a popular choice for both beginner and pro investors alike.
