SPDR S&P 500 ETF: Analysis and How to Invest

Many of the most famous international investors (Buffett and Bogle above all) have always expressed themselves in favor of investing in index funds. These are a type of very efficient financial instruments, which allow investors to replicate a widely diversified basket while benefiting from low costs. The SPDR S&P 500 ETF, which replicates the S&P 500 Index, is the largest index fund in the world. Let’s discover in detail what the SPDR S&P 500 ETF is, how it is composed and what advantages it offers to investors. 

What is the SPDR S&P 500 ETF and How it works

The SPDR S&P 500 ETF is an exchange traded fund and is currently the largest ETF that replicates the S&P 500 Index.

The fund is issued by SPDR Services LLC and its objective is to follow the performance of the main index of the US stock market, capable of incorporating within it the 500 American companies with the largest capitalization.

Thanks to such a wide basket, it is therefore able to provide a sufficiently exhaustive X-ray of the US stock market. The companies included in the basket embrace numerous sectors: the IT sector is the main one, covering almost 25% of the basket, followed by health services, financial services, communication services and industrials.

Composition of the Index

As we previously mentioned, the S&P 500 Index includes the 500 companies with the highest market capitalization listed on the New York Stock Exchange. The stocks that exert the greatest weight are some of the world’s leading technology giants: Apple Incorporated (AAPL), Microsoft Corporation (MSFT), Amazon.com Inc (AMZN), Facebook Inc (FB), Alphabet Inc A (GOOGL), Tesla Inc. (TSLA), Berkshire Hathaway Inc, Johnson & Johnson (JNJ) and JPMorgan Chase & Co (JPM). Although the list is in strict order of weight within the portfolio, it is worth remembering that the S&P 500 index is rebalanced on a periodic basis and, consequently, so is the SPDR S&P 500 ETF. 

Therefore, in addition to the well-known names in the technology sector, the Top Ten also includes the parent company chaired by Warren Buffett (Berkshire Hathaway), the pharmaceutical giant Johnson & Johnson and the historic New York investment bank J.P. Morgan Chase.

Listing, Costs and Returns

The listing of the SPDR S&P 500 ETF can be monitored during the opening hours of the U.S. stock exchange, between 3:30 p.m. and 10 p.m. Italian time. The SPDR S&P 500 ETF (SPY) suffered, like all major stock indices, from the restrictions caused by the first wave of the pandemic: suffice it to say that in March 2020 the instrument reached a low of 207.85. With the subsequent reopenings and the progressively improving macroeconomic environment, the SPDR S&P 500 ETF was able to achieve exceptional performance, benefiting from a bullish trend that lasted until December 2021, the month in which it reached its all-time high of 423.59. 

In December 2020, the fund recorded a 3-year average return of 13.25%, while the 10-year average annual return stood at 13.55%. Overall, over its entire existence, the SPDR S&P 500 ETF has achieved an average annual performance of approximately 10%. 

As far as costs are concerned, the (gross) expense ratio of the fund stands at 0.095%. This ratio is certainly contained, but it is not among the lowest compared to other funds indexed to the S&P 500. For example, the Vanguard S&P 500 ETF has a fee of 0.03%, three times lower.

How to Invest in ETFs

The solutions preferred by investors to invest in ETFs with online trading are mainly two: through CFDs, an acronym that stands for Contract for Difference, or through direct investment in the underlying ETF.

CFDs are derivative instruments that aim to replicate the performance of an underlying asset: if this is an ETF, the investor is exposed indirectly benefiting from reduced commissions and the effect of leverage, capable of multiplying profits exponentially in case of correct positioning.

In the case of deciding, instead, to invest directly in the ETF, the objective is to reason in a long term perspective, without paying commissions for the overnight maintenance of the CFD contract.

Before you start investing, it is very important to know how to choose a reliable trader to trade with. One of the most well-known platforms on the market is eToro, a regulated broker for online trading that allows you to buy the SPDR S&P 500 ETF both as an underlying and as a CFD. Among the many advantages of the eToro platform it is necessary to mention, besides the presence of an easy and intuitive interface, the possibility to operate through advanced and exclusive features. One of these is called CopyTrading and offers users the opportunity to copy (literally) the strategies and investments of the platform’s veterans. Furthermore, it is possible to monitor the price of all instruments in real-time, check statistics and exchange opinions with other traders.

Advantages and Risks of Investing: Is it worth it?

As we have analyzed, investing in an index fund offers a series of advantages to investors, such as the possibility of diversifying the portfolio in an optimal way. In the case of the SPDR S&P 500 ETF, the basket includes a highly representative number of the American stock market (the 500 companies with the highest market capitalization).

This is a convenient investment strategy designed for those who intend to have US stocks in their portfolio while reducing its volatility. Moreover, it is an investment that presents very low costs compared to an actively managed fund, whose objective of beating the performance of the benchmark often requires a significant cost. In the event of issuer bankruptcy, it is good to remember that this is unrelated to the fund, so there are no such risks for the investor.

Of course, like any financial investment in general, the SPDR S&P 500 ETF also has potential risks. The fact that the portfolio is entirely concentrated on a single country, even if it is the most influential in the world, risks losing the advantage of diversification. Finally, another aspect to be considered concerns the trend of currencies: it is advisable to monitor the fluctuations of the American dollar and the risks associated with it.

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