The SPY ETF: Everything You Need to Know

The SPDR S&P 500 ETF Trust (SPY) was launched in January 1993, making it the first ETF to trade on the U.S. market.

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 that seeks to track the performance of the S&P 500 index, which is a basket of the largest publicly traded companies in the U.S. SPY is the oldest ETF listed on a U.S. exchange and is one of the most popular ETFs in the world.

How Does the SPY ETF Work? 

The SPY ETF works like other S&P 500 ETFs, in that it attempts to replicate the returns of the S&P 500 index. To do this, SPY holds all the stocks in the S&P 500 in equal proportion to their weighting in the index. Since the S&P 500 is a cap-weighted index, the top holdings receive heavier allocation weights in the SPY portfolio. 

For example, if Apple Inc (AAPL) represents 6% of the S&P 500 index, SPY would hold 7% of the fund’s assets in AAPL shares. 

Since the SPY ETF is passively managed, the operational expenses to run 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 costs. The SPY ETF expense ratio is just 0.09%, which is $9 for every $10,000 invested.

Why Invest in the SPY ETF? 

Many investors use SPY to diversify a portfolio and to gain exposure to the U.S. stock market without having to buy individual stocks. The low expenses inherent with ETFs like SPY enable investors to track the S&P 500 index more closely compared to index funds with higher expenses. When building an ETF portfolio, some investors use an S&P 500 ETF like SPY as a core holding. 

Pros and Cons of Investing in the SPY ETF 

Investing in the SPY ETF offers investors several advantages, such as low expenses and diversification. However, there are risks and other disadvantages for investors to know before investing in SPY. 

Pros of Investing in the SPY ETF 

  • Low expenses: The SPY ETF has a low expense ratio of 0.09%, which is much lower than average mutual fund expenses, which are 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 U.S. across 11 different sectors. This broad exposure to a wide range of companies and industries can reduce market risk.
  • Convenience: Investing in a diversified ETF enables an investor to easily gain access to the stock market without having to research and analyze stocks or to actively maintain a portfolio. 
  • Tax efficiency: Since ETFs have low turnover and trade like stocks on an exchange, they pass very little taxes on to shareholders. 

Cons of Investing in the SPY ETF 

  • Limited returns: Since SPY is passively managed, it can only produce 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 large cap U.S. funds, which means shareholders are not exposed to 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 buy shares of the SPY ETF through an online broker or through a mutual fund company that provides access to ETFs. You can also buy shares of the SPY ETF through a retirement account, such as an IRA. Once you have purchased shares of the SPY ETF, you can hold them for as long as you want, and you can sell them when you are ready. 

Bottom Line 

The SPY ETF can be a convenient way to gain low-cost exposure to a diversified basket of large cap U.S. stocks. While SPY has multiple advantages, investors should remain aware of certain risks, such as lack of exposure to other areas of the market, before buying shares. 

 

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