By April Pochmara Spytomorrow.com
First, we should note that SPY is more correctly an Exchange Traded Fund (ETF). Although you can buy and sell it like a stock. It’s a basket of stocks and we will refer to it as a stock at times in this article.
Some folks like to pick out the good apples, while others would rather just buy the whole bunch. But, of course, these are both viable strategies for investors, and the SPDR S&P 500 ETF Trust (SPY) is an ideal tool for practically anyone seeking broad-market exposure. But what makes the SPY ETF so great?
Not only is SPY stock the world’s largest exchange-traded fund (ETF), but it’s historically significant as it was the U.S.’s first listed ETF back in 1993. The stated objective of SPY is to provide pre-expenses investment results that generally correspond to (i.e., “track”) the S&P 500.
As the second-largest U.S.-listed ETF by assets, SPY stock is also an excellent proxy for the general stock market. So the question then becomes: “Should you buy and hold SPY to capture gains in equities?” Let’s take a closer look at that question today by analyzing several of the most prominent arguments in favor of and against buying SPY permanently.
Is Spy safe investment?
Is the SPY ETF safe? Since the SPY ETF is a stock fund, it shares similar risk characteristics to any stock investment. For example, while long-term annualized returns have averaged greater than 10% for the SPY ETF, short-term declines can exceed 20%.
First, let’s look at the pros and cons:
Buying and holding SPY stock benefits from compounding because every share you purchase provides a fractional ownership in all future gains, including dividends or interest income. Sure, there are times when volatility might cause shares to dip or jump temporarily, but these fluctuations typically smooth out over time. Furthermore, SPY stock is one of the most cost-efficient ETFs to buy and hold since it charges just 0.09% in expenses on an annual basis. Most other U.S.-listed ETFs charge at least three times more than that.
That said, there are some scenarios where buying SPY stock might not be your best option.
First, you should only purchase shares if you’re comfortable with the idea of holding them indefinitely. Unless you have a perfect crystal ball (which we kinda do), there’s simply no way easy to predict how the U.S. stock market will perform over the short- to medium-term. In fact, shorting SPY stock is a risky proposition because the vast majority of stocks listed in this ETF have been around for decades and are unlikely to disappear anytime soon.
In addition, even if you hold shares for a matter of months or years, you’ll incur considerable trading costs by buying and selling SPY stock. Annual expense ratios for U.S.-listed ETFs typically range from 0.04% to 0.50%, making SPY stock one of the more affordable options (even with that initial commission). However, such fees add up quickly when buying and selling shares regularly.
Are ETFs good for beginners?
Exchange-traded funds (ETFs) are ideal for beginner investors due to their many benefits such as low expense ratios, abundant liquidity, range of investment choices, diversification, low investment threshold, and so on.
There are also some risks inherent to holding SPY stock.
First, SPY is actively managed, meaning its components are often changed in an attempt to keep it in line with the S&P 500 Index. Fortunately, this risk has been mitigated somewhat since about half of all assets under management are indexed to the same benchmark. Still, if you prefer your ETFs to be passively managed, SPY stock might not be for you.
Nevertheless, if your investment horizon is longer than five years and you want broad-market exposure without having to worry about individual issues, buying SPY shares makes a lot of sense. After all, it’s the largest U.S.-listed ETF with an extremely low expense ratio.
However, make sure you’re comfortable holding SPY for an extended period of time. If you want to reap the rewards of compounding over a 15-year or 20-year timeframe, then purchasing shares of this ETF makes sense. Otherwise, there are plenty of other ETFs that might interest you instead.
On the other hand, if you want to make a one-time purchase in the hopes of generating short-term gains, then something like SHY might be more suited to your needs.
Is Spy or VOO better?
As both funds track the same index, both have effectively identical strategies, holdings, and performance. On the other hand, VOO is slightly cheaper, with an expense ratio of 0.03% versus 0.09% for SPY. … In my opinion, VOO’s lower expense ratio and superior corporate structure make it the more robust fund.
Is SPY actively managed?
Very few actively managed funds can match that record. By the way, SPY, as well as it has performed, has several flaws that make it far from a great first choice of ETF for most portfolios. But despite its flaws, SPY remains by far the largest ETF on the market, with total assets of $90 billion.
Considering everything we’ve just discussed, which option is right for you? Of course, that depends on your time horizon and risk tolerance.
If you’re young and have a more aggressive investment strategy, then buying shares of SPY stock might make sense. With this approach, you can accumulate assets quickly and better weather any possible corrections or crashes since you aren’t incurring high trading costs.
On the other hand, if you’re older and/or more conservative, you might want to go with an alternative like VOO. While it’s true that this ETF doesn’t have as low of an expense ratio as SPY, its risk profile is much lower given the fact that it invests primarily in S&P 500 Index components.
It really boils down to your investment horizon and how much risk you’re willing to take on.
Nevertheless, don’t feel as though you have to choose just one option. You can always reach for a compromise by investing in other ETFs that offer broad-market exposure without being tied directly to the S&P 500 Index.