When it comes to broad index funds that follow the Standard & Poor’s 500, many say the SPY ETF is hard to beat.
As a product of State Street Global Advisors, SPY is a uniquely attractive exchange traded fund for many investors with different strategies, diverse backgrounds and levels of capital. In fact if there was only one ETF to own forever, it would be SPY.
Why is the SPY ETF so popular?
Tracking the Index
First, the Standard & Poor’s 500 index is an excellent bellwether for American industry as a whole. It is tethered to the success of the largest companies in the United States, and is essentially a bet on the US economy growing over time.
What researchers have found, mostly, is that active traders pursuing narrower or more eclectic baskets of equities, or individual equities, often underperform those who invest in a broad index like the S&P 500. The umbrella that the S&P 500 creates is a good basis for index investing.
That’s part of what drives people to the SPY ETF, which is easy to buy and sell because of its liquidity as a market exchange traded fund.
Analysts also point out that SPY is the first fund of its kind to track the S&P 500, which means it has had more time than competitors to fine-tune its approach, and SPY is also the largest fund of its kind, with $224 billion in assets under management.
SPY and Performance
By nearly any measure, the performance of the SPY ETF has been astonishing, the SPY ETF has seen large double-digit increases in each of the last three years, and that’s on top of a phenomenal run since the lows in 2009 during the last Great Recession.
Some calculate its five-year return at over 100%, compounded. But no matter what accounting method you use, SPY returns are outperforming most hedge funds, and even superstars like Cathie Wood, who enjoyed an astonishingly good 2020 but struggled in 2021.
The returns give traders ample reason to trust the future will be bright, recessions aside.
SPY ETF and Big Tech
The SPY ETF also has significant exposure to top U.S. tech stocks that have led the market higher for years.
We’ve seen for a while now that these mega-tech companies make up a disproportionate part of the American market and capital gains in American industry.
That insight has birthed the acronym FAANG or “fang,” a collection of top-performing equities consisting of Facebook, Apple, Amazon, Netflix and Google.
The SPY ETF actually has all five of these in its basket, with a larger focus on Apple, Amazon and Microsoft, which, despite not being included in FAANG, has a unique market cap and track record. All in all, big tech makes up around one quarter of all fund holdings for SPY, and expert traders like that ratio in keeping with tracking the S&P 500 index.
Other Holdings and the SP500
In addition to the technology stocks, SPY holds other related equities, as well as more general industry equities.
It holds electric car company Tesla, and chip maker Nvidia. It holds Salesforce, widely seen as a leader in ERP. On the consumer front, it features both Home Depot and Procter & Gamble.
This diversity is part of the “quiet strength” of an index ETF that gets respect from the Oracle of Omaha, Warren Buffett.
Warren Buffett and SPY ETF
Indeed he’s stamped his approval on SPY.
The Oracle from Omaha has spoken, declaring that in his opinion, SPY ETF is a better buy than his own Berkshire Hathaway in the years to come. To be clear, SPY also holds Berkshire Hathaway, (a rather small weighted percentage of overall holdings) but it is very diversified as shown above.
In explaining why it’s good to go with so broad an index fund, Buffett has been outspoken about the misconception that the best trading is about big plays on individual equities, especially for investors who want stabler gains. Some point to a 1993 investor communication where Buffet said this:
“By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” Buffett has also been clear about this in many addresses since.
All of this contributes to the popularity of the SPY ETF, which many traders see as a resource for its time. ETFs are directly market-tradable – you can get into them and out of them within a market day. They are liquid in a way that some mutual funds are not. And index ETFs like SPY have that key diversification that investors want in order to be agile and look out for changes in the American market. SPY won’t be a life raft if the entire American economy goes south and the indexes themselves are tanking, but it will protect investors from red ink in narrower sectors.