If you’re looking for just one stock to own, it’s tough to beat SPY stock, or the SPDR S&P 500 Trust (SPY). Just one trade instantly exposes you to the entire market and S&P 500 at a very low cost. But should you sell it with the market falling?
Want to own Microsoft stock (MSFT)? And Apple stock (AAPL)? Also Alphabet (GOOGL)? All the top tech stocks are in there. And what about top consumer brands like Disney (DIS), Walmart (WMT) and now Tesla (TSLA)? Yes, those are in the SPY, too. In fact, if you buy SPY stock you instantly own all the hottest stocks in the Standard & Poor’s 500. Just like that. No matter who wins, you win.
What is this one stock that owns all?
What Is SPY Stock?
SPY is an exchange-traded fund that owns all the stocks in the Standard & Poor’s 500 index. The S&P 500 is arguably the most important market measure used by investors and traders around the world — as it’s the benchmark for trillions in dollars of investment.
The S&P 500, created in 1926, tracks the rise and fall of the largest 500 stocks trading on U.S. exchanges. And the S&P 500 is widely seen as the definitive measure of the U.S. stock market among most investors due to its superiority to rivals.
What Are The Top 10 Holdings In SPY?
Since SPY stock owns all the stocks in the S&P 500, its holdings are an open book. And SPY gives greater weight to stocks with bigger market values, so you can know what its top holdings are at any time.
It’s important to note that SPY weights stocks based on the value of stock available to trade. This mean it’s dominated by the very largest companies. Just the 15 most-valuable stocks in SPY stock account for roughly a third of its value. And now two companies claim more than than 5% of SPY stock.
|Company||Symbol||Market value ($ billions)||Weighting in SPY|
|Johnson & Johnson||(JNJ)||$439||1.2%|
Source: State Street as of August 26, 2022
Why Is The S&P 500 Better Than The Dow Jones?
The Dow Jones Industrial Average is often cited in market chatter. But the S&P 500 is seen as the true and accurate benchmark of U.S. stocks. Quirks in how the Dow Jones is calculated limit its appeal as a true gauge of stocks. And the S&P 500 is a better measure of the market, for instance, because it:
- Is broader: The S&P 500 holds 500 stocks to the Dow Jones’ 30 holdings.
- Is more fully representative of “the market.” The S&P 500 gives greater weight to companies with the most value trading in the market. This is arguably a superior method to the Dow’s. The Dow weights stocks based on their per-share prices. This makes no logical sense, as UnitedHealth (UNH) shouldn’t be given multiple-times more influence than Walmart (WMT), simply because it trades for more than $495 a share and Walmart just $125. The S&P 500 weights them about the same, as they’re both valued at around $400 billion.
- Is more rules-based. The S&P 500 relies less heavily on human intervention. Changes are made to both the Dow and S&P 500 as stocks are put in and taken out. And humans are involved in the selection process with the S&P 500 and the Dow. But since the S&P 500 owns nearly all large U.S. stocks, there is less judgment in what goes in and what comes out.
What Is An ETF?
SPY is the most popular of nearly 2,000 ETFs holding more than $3 trillion in investor assets, says The Investment Company Institute. More than $379 billion is invested in SPY alone.
And ETFs, created more than 25 years ago, are now among the fastest-growing investment vehicles in the world. Like mutual funds, ETFs are investments that own a bucketful of other investments.
And ETFs can own everything from individual stocks, like SPY stock does, to bonds, commodities and currencies. Nearly all ETFs own the investments dictated by an index. SPY stock owns the stocks in the S&P 500, which is the most popular index. But other ETFs own stocks in other indexes such as small stocks and mid-sized stocks. You can also buy ETFs that only own growth stocks or beat-up stocks called value stocks. Some ETFs only buy stocks held in specific sector indexes, such as information technology or utilities.
And there also also more exotic ETFs. Some “inverse ETFs” rise in value when the market falls. And some own commodities like gold or silver.
What Are The Top Sectors In SPY?
Another advantage of SPY stock is that it spreads your investment dollars across all 11 sectors. In just a single trade, you own tech stocks, consumer stocks, utilities and all the rest. Again, SPY stock gives a greater weight to sectors containing the most valuable stocks.
And not surprisingly, technology dominates SPY stock as mega technology stocks occupy most of the top spots. Tech stocks account for more than a quarter of SPY stock, followed by health care at just 13%.
Some might worry SPY stock is loading up with winning sectors. But remember the sector weightings will shift if another sector starts to outperform.
|Sector||SPY % Weighting|
Source: State Street as of August 26, 2022
Can You Buy Just One Sector Of SPY Stock?
SPY stock is designed to expose you to all 11 sectors. But you might want to own just a few of the sectors. You might also want to boost your exposure to specific sectors, say tech. And there are S&P 500 ETFs that track just one sector.
Why Is SPY Stock Important?
SPY stock is the oldest and largest ETF, largely because it was the first to track the S&P 500. If you buy SPY stock, you own all the stocks in the S&P 500. This is a compelling offering. Investors hold more than $340billion in SPY stock, says the ETF’s sponsor, State Street. And nearly $18 billion in shares trade hands daily, a testimony to the massive demand for the shares.
What Other Options Are There? How Much Do They Cost?
SPY is the biggest ETF tracking the S&P 500 Index, but faces fierce competition. State Street Global Advisors sponsors SPY stock, but not the underlying S&P 500 Index. The S&P 500 is owned by S&P Dow Jones Indices, a company that licenses the right to use the index. And that means anyone else is open to offer competing S&P 500 ETFs, if they pay the fee. There are many firms offering S&P 500 ETFs.
So, pay attention to size and fees with S&P 500 ETFs. You don’t want to overpay for what should be one of your lowest cost and core holdings. SPY stock has a very low fee, just 0.095% annually. That means if you invest $25,000, you’ll pay just $23.75 a year. Compare that to the $137.50 you’d pay a year if you owned the typical stock mutual fund that charges 0.55% annually.
Paying Less To Own Stocks In SPY
But some S&P 500 ETFs charge even less. For instance, State State offers the SPDR Portfolio S&P 500 ETF (SPLG), which tracks the S&P 500 (it tracked the largest 1,000 U.S. stock previously). But it charges just 0.03%. It’s just one example of a “clone” ETF with a lower fee. These ETFs can save you money.
Then there’s the Vanguard S&P 500 ETF (VOO), which charges just 0.03%, making it 0.01% a year cheaper than the iShares Core S&P 500 ETF (IVV) at 0.04%. If you invest $25,000, that will save you $2.50 a year. Most large brokers will also let you buy any of these ETFs and pay no trading commission.
|ETF||Symbol||Assets ($ billions)||Expense Ratio|
|SPDR S&P 500 ETF Trust||SPY||$379||0.095%|
|iShares Core S&P 500 ETF||IVV||$309||0.04%|
|Vanguard S&P 500 ETF||VOO||$275||0.03%|
|Schwab U.S. Large-Cap ETF||SCHX||$30||0.03%|
|SPDR Portfolio S&P 500||SPLG||$14||0.03%|
Does SPY Pay Dividends?
Absolutely, SPY pays dividends. SPY stock collects the dividends issued by all the dividend-paying stocks in the S&P 500 — and pays them to you. And, currently, the dividend yield on the SPY is roughly 1.5%. That means if you invest $25,000 in SPY stock, you will receive $375 a year, paid quarterly, on your investment.
SPY Stock — Is It A Buy Now?
If you’re a long-term investor, any time is a good time to buy SPY stock. Given how diversified it is, SPY is the ultimate “set it and forget it” stock. Over the long term, the S&P 500 has returned 9.9% a year on average since 1928 including dividends, says IFA.com. You would be hard pressed to find many better, low-cost plays you can hold onto forever. Keep in mind, too, if you buy and hold SPY stock you will receive the quarterly dividend payment.
Even famed investor Warren Buffett often recommends investor buy and hold the S&P 500.
SPY Technical Analysis — Is It A Buy Now?
On the other hand, some investors use SPY stock more tactically. They dart in and out to catch market movements. If you’re this type of investor, you’ll need to pay closer attention to technical action in the broad market.
IBD’s Market Pulse will tell you if the S&P 500 is in a confirmed uptrend and if now is a good entry point. And Stock Market Today shows you breaking trends in the market that will tell you if you should be in SPY stock in the short term, or out.
And there’s one last point. It’s true, with the SPY you own all the largest big-cap winners. But since you own all S&P 500 stocks, you own all the dogs, too. That can be a problem when giant companies’ stocks with large weightings in the S&P 500 fall.
Likewise, since the SPY owns so many stocks, it’s common for giant gains to barely make a dent in the ETF’s overall performance. And if a stock is only 0.5% of the index, even if it soars, it won’t move the needle much.
Even so, given its issues, SPY stock is a core holding with a role in nearly every investor’s portfolio.
Follow Matt Krantz on Twitter @mattkrantz
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