The SPDR S&P 500 ETF Trust (SPY) was launched in January 1993, making it the first U.S.-listed exchange-traded fund. It is also the largest ETF on the market today, with assets under management recently exceeding $600 billion.

Learn more about the SPY ETF, including how it works and the pros and cons of investing.

What is the SPY ETF?

The SPY ETF is an exchange-traded fund designed to track the performance of the S&P 500 index, which is a basket of the largest publicly traded companies in the United States. SPY is the oldest ETF listed on a US exchange and one of the oldest most popular ETFs in the world.

How does the SPY ETF work?

The SPY ETF works like other S&P 500 ETFs by attempting to replicate the returns of the S&P 500 Index. To this end, SPY holds all stocks in the S&P 500 in equal proportion to their weighting in the index. Because the S&P 500 is a capitalization-weighted index, the top holdings in the SPY portfolio receive a higher allocation weight.

For example, if Apple Inc (AAPL) Since SPY makes up 7% of the S&P 500 index, it would hold 7% of the fund's assets in AAPL shares.

Because the SPY ETF is passively managed, the operational costs of managing the fund are extremely low. ETF fees are expressed as an expense ratio, which is a percentage representing a fund's assets used to pay its operating expenses. The SPY ETF's expense ratio is 0.095%, which is $9.50 for every $10,000 invested.

Why invest in the SPY ETF?

Many investors use SPY to diversify a portfolio and gain exposure to the US stock market without having to purchase individual stocks. The low costs associated with ETFs like SPY allow investors to more closely track the S&P 500 index compared to higher-cost index funds. When building an ETF portfolio, some investors use an S&P 500 ETF like SPY as their core holding.

Advantages and disadvantages of investing in the SPY ETF

Investing in the SPY ETF offers investors several advantages, such as low costs and diversification. However, there are risks and other disadvantages that investors should be aware of before investing in SPY.

Advantages of investing in the SPY ETF

• Low costs: The SPY ETF has a low expense ratio of 0.095%. This is much lower than the average mutual fund cost, which is often 0.50% or more.
• Diversification: By investing in the SPY ETF, investors gain access to 500 of the largest publicly traded companies in the US across 11 different sectors. This broad exposure to a wide range of companies and industries can reduce market risk.
• Comfort: Investing in a diversified ETF allows an investor to easily access the stock market without having to research and analyze stocks or actively maintain a portfolio.
• Tax efficiency: Because ETFs have low turnover and are traded like stocks on a stock exchange, they pass on very low taxes to shareholders.

Disadvantages of investing in the SPY ETF

• Limited Returns: Because SPY is passively managed, it can only generate the returns of the S&P 500 Index, less fees and expenses. However, an actively managed fund or portfolio can potentially outperform the market.
• Not fully diversified: The SPY ETF invests primarily in US-based large-cap funds, meaning shareholders are not invested in other types of securities such as small-cap stocks, international stocks or bonds.

How to buy the SPY ETF

Investing in the SPY ETF can be relatively easy. Many investors purchase shares of the SPY ETF through an online broker or through a mutual fund company that offers access to ETFs. You can also purchase shares of the SPY ETF through a retirement account, such as an IRA. Once you purchase shares of the SPY ETF, you can hold them for as long as you like and you can sell them when you are ready.

Conclusion on the SPDR S&P 500 ETF

The SPY ETF can be a convenient way to gain low-cost exposure to the S&P 500 Index, a diversified basket of large-cap U.S. stocks. Although SPY offers numerous benefits, investors should be aware of certain risks before purchasing stocks, such as: B. the lack of commitment to other market areas.

Check out our SPY vs. VOO fund comparison.

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