When investors want to see how the stock market is doing, they look at the S&P 500. This stock index tracks 500 major American companies from different sectors and averages them together. If the resulting number increases, then the stock market is up, and vice versa. If we didn’t have this number, we would have to look up each stock individually, and no one has time for that!
Investors buy individual stocks listed on the S&P 500 all the time. If you have an IRA, 401K, or are part of mutual fund, you probably own shares of S&P-listed stocks. The companies behind these stocks are often industry leaders, selling billions worth of product worldwide and raking in profits, much to the delight of their investors.
But what if you wanted to buy stock in every company on the S&P 500? If you were to purchase a single share of stock in all 500 companies on the index, you would end up spending millions. Such an investment would diversify your holdings, but there are much better ways to do this.
Instead of buying whole shares of multiple companies, you could buy a single fund that follows the entire S&P index. This might sound costly or complicated, but it’s surprisingly simple and cost effective. It’s also one of the best ways to kickstart your portfolio.
Buying individual stocks listed on the S&P 500 index can get expensive.
Berkshire Hathaway ($BRK.A) currently trades at $251,310 a share. Other stocks like Alphabet (Google, or $GOOG) trade at over $950 for a single share of stock. Buying these stocks could pay off in the long run, but the point of entry is rather high.
Luckily, SPY, an exchange-traded fund, makes buying stocks the S&P cost efficient.
$SPY is an exchange-traded fund (or ETF) managed by State Street Global Advisors. By purchasing one share of SPY (currently valued at over $241), you own small, allocated percentages of every stock on the S&P 500. This means a really tiny fraction of a share of Apple, Alphabet, Berkshire Hathaway, and 497 other stocks for one share price.
SPY mimics the movements of the S&P 500.
If the S&P 500 goes up, SPY goes up. If the S&P goes down, SPY goes down. If a stock is added or removed from the index, State Street sells all shares of that stock and replaces it with whatever stock was added on the index in its place.
Like many stock indexes, the S&P 500 (and SPY) historically increase over time.
The stock market has its share of pitfalls (recessions, depressions), but the market historically increases as time goes on. Since market indexes gradually increase over time, the value of $SPY will increase along with it.
You can buy SPY like a stock.
Any brokerage will let you buy shares of SPY in the same way you buy regular stock. You could open up Robinhood and purchase one or more shares of SPY right now, if you were so inclined. Since the price of SPY goes up and down throughout the day (like the S&P 500), the price you buy it at now could be higher or lower later in the day.
Unlike mutual funds, fees are minimal and automatically deducted from the stock.
You will never have to pay State Street or the brokerage where you keep your share(s) of SPY to maintain ownership of the ETF. Fees are calculated and subtracted automatically.
SPY isn’t the only ETF that follows the S&P 500.
There are several other ETFs that follow the S&P 500 index. VOO ($VOO) is an S&P 500 ETF managed by Vanguard, an investment firm. SPYX ($SPYX), also managed by State Street, does the same exact thing as SPY, but doesn’t contain any stocks related to fossil fuel (oil and coal) companies. SPYX has different gains and losses from SPY, as it doesn’t contain every stock on the S&P 500.
Should you invest in SPY?
Many investors buy $SPY in addition to their individual stocks, bonds, and other securities. With its low fee ratio and historical growth over time, SPY and related funds provide opportunity for making gains with less risk and more diversity. If this sounds good to you, then SPY might be right for you.