If you invest, chances are you've heard of SPY. As one of the most popular investments out there, the SPY stock is often the benchmark people refer to when they say “the market”. If your own stock picks outperform SPY, you've “beaten the market”. But is the SPY ETF better than individual stocks? What's in it? And should you be buying it in today's day and age?
What is the SPY Stock
The SPY stock is just the ticker for something called the “SPDR S&P 500 ETF Trust”. And THAT is basically a basket full of 500 large companies in the United States. When you buy one share of SPY, you immediately own a little bit of each of those companies.
As of July 5, 2021 SPY stock's biggest holdings are:
- Apple (AAPL): 5.95%
- Microsoft (MSFT): 5.40%
- Amazon (AMZN): 4.05%
- Facebook (FB): 1.90%
- Alphabet (GOOGL): 1.87%
What this means is that if you buy $100 worth of SPY, you'll own about $6 worth of Apple stock, $5.4 of Microsoft stock, and so on. As you may have noticed, SPY's biggest sector is technology, but here is the exact percentage of its top 5 sectors:
- Technology: 27.61%
- Financials: 16.35%
- Consumer Services: 13.90%
- Industrials: 12.10%
- Health Care: 11.48%
ETFs vs Individual Stocks
At the end of the day, SPY is an ETF (basically a basket of stocks instead of an individual stock). And there are positives and negatives to ETF investing. Here are some of them:
ETF Pros:
- Extremely diversified (you have the ability to own a whole bunch of companies at once)
- Less volatility (usually)
- Almost always goes up over long periods of time
ETF Cons:
- Not a high chance for massive growth quickly (the downside of diversification)
- Lower dividend payout than some companies
Individual Stock Pros:
- Chance for massive growth very quickly (Gamestop is up 4,683% in the past year vs. SPY is up 37%)
- Could have higher dividend payout (a lot of banks have a dividend of 3%-5% whereas SPY is 1.5%)
- Easier to research one company than to research a whole bunch of them
Individual Stock Cons:
- Even the biggest companies can drop a lot or go bankrupt (Nortel, General Electric, Enron)
- Lots of potential volatility
- More exposure to news and world events (movie theatres when COVID hit)
For long-term growth, investing in baskets is the way to go. There have been 15 recessions in the past 100 years, and even though the stock market has dropped by more than 50% on some occasions, it has always recovered and gone up afterwards.
The Verdict
Warren Buffett, arguably the greatest investor of all time, has stated that the best thing for most investors to do is to buy ETFs and index funds that track the S&P 500 (SPY). In fact, the S&P 500 has actually beaten Warren Buffett’s portfolio over the last 10 years. Buffett has instructed that 90% of his money be invested in index funds after he dies.
This doesn’t mean don’t pick stocks. If there is a company that you really understand and have a lot of faith in, by all means, invest in it. But, to truly understand a company, you have to go beyond the financial statements and really analyze the fundamentals of the business and what they do. And the time and effort that that takes coupled with the chance that something completely out of your control (ahem-COVID) might happen and could kill the company, is far outweighed by the relative ease of purchasing and holding an ETF.
Dividends and Fees
Dividends are a great way to get some money back from your investment without liquidating shares. So the question is: does the SPY stock offer dividends? The answer is yes! but not much…
Currently, the dividend yield on SPY is around 1.5%. That means if you invest $1000, you'll get paid $15 a year. Compare that with AT&T's 7.2% dividend yield (or $72 a year with the same $1000 invested) and it doesn't seem like much… BUT the SPY stock is also far more diversified than any high dividend stock, so the potential growth arguably outweighs the “low” yield.
As for fees, SPY's expense ratio is 0.095%. This means that on $1000, around $1 a year goes to SPDR for managing your money. Compared to most mutual funds, that's VERY low. But then again there are some companies that offer a fund tracking the S&P 500 with even lower fees:
- Vanguard S&P 500 ETF (VOO): 0.03% expense ratio
- SPDR Portfolio S&P 500 (SPLG): 0.03% expense ratio
- iShares Core S&P 500 ETF (IVV): 0.04% expense ratio
It's important to do your research on multiple verticals before purchasing a stock. One of them is fees + dividends, but another is the stock's historical performance…
SPY Stock Historical Performance
Before diving in and buying any stock, it's important to understand how it's performed in the past. It doesn't make sense to buy a historically underperforming asset unless you have good reason to.
Luckily for SPY, it has a very strong track record:
Over the past 100 years, the SPY stock has returned around 10% on a yearly basis to its investors. If you shorten the time frame further, SPY has been even more impressive returning 14% annually in the last decade.
That being said, it IS at an all-time high right now. You can either take that piece of information and say “well good, it means that it has strong momentum… time to buy!” or you might say “ooh, mean reversion dictates that the stock will drop soon.” Either way, it's an important piece of information to note.
SPY Stock Final Review
At the end of the day, if you're looking for a relatively “safe” way to grow your wealth over time that requires minimal effort, investing in the S&P 500 (or SPY stock) is a pretty good way to go about it.
As Investopedia puts it: “The SPDR S&P 500 ETF Trust offers investors an efficient way to diversify their exposure to the U.S. equity market without having to invest in multiple stocks. Therefore, SPY is suitable for any investors who want to include U.S. equities in their portfolio while taking only a moderate level of risk.”
It contains the biggest companies in the US, has Buffett's backing, and has historically performed very well. (If you compound your wealth at 10% for 30 years, you'll multiply your money by 17x!)
So what are you waiting for? Get out there and start compounding your wealth today! Future you will thank you.
What do you invest in? Do you have any money in SPY? Do you think there's a correction coming? Let me know in the comments!
Thanks for reading through Stocks or ETFs and thank you for following along! If you’re a Canadian Student, check out the Ultimate Canadian Student’s Guide to Personal Finance! To learn more about me, head over to this link here. If you want to get exclusive updates and tips, drop your email in the “get updates” box (might have to scroll up a bit.) Let me know your thoughts and suggestions in the comments!
Some more ETFs to check out if you love SPY are:
- XLV (Healthcare Sector ETF)
- VGT (Technology Sector ETF)
- IJS (Small Cap ETF)
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.