I’ve long believed that the best way for long-term investors to get into the stock market is to buy index funds. This is how I introduced my youngest son to investing. And one of my favorites is the SPDR S&P 500 ETF Trust (NYSEARC:TO SPY).
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SPY does a great job tracking the S&P 500 Index, which includes 500 of the most well-known publicly traded companies in the United States.
The S&P 500 is one of the most followed and quoted indexes when considering the relative strength of the US stock market. So if you’re investing in SPY stocks, you’re pretty much following the market in general.
SPY is notable also because it was the first exchange-traded index fund – i.e. an ETF that fully tracks and replicates one of the market indices. And it does so at a target price of 10% of the S&P 500.
On top of that, SPY has an average annual return of over 10% since inception. And it has an exceptionally low expense ratio of 0.095%, or $9.50 per year on a $10,000 investment.
Holdings of the SPDR S&P 500 ETF Trust
One important thing to know about the SPDR S&P 500 ETF Trust is that it is not an equal weight fund. Equal weight funds have approximately the same portfolio weight for each stock represented in the fund.
For example, the Investco S&P 500 Equal Weight ETF (NYSEARC:RER) tracks 505 names. Each security represents approximately 0.2% of the fund. Currently, ActivisionBlizzard (NASDAQ:ATVI) is RSP’s largest holding at 0.28%.
You won’t find that kind of consistency in SPY stock. The SPDR S&P 500 ETF Trust is more heavily weighted to tech stocks, which make up 25% of the fund.
Financials make up just under 14% of SPY, followed by healthcare (13.3%) and cyclical consumer stocks (11.9%).
So it’s no surprise that the world’s largest and best-known tech stocks have an oversized weighting in SPY. The top outfit is Apple (NASDAQ:AAPL), which represents just over 7% of SPY. She is closely followed by Microsoft (NASDAQ:MSFT), with a portfolio weighting of 6%. That’s 13% of the entire SPY ETF just in two stocks!
The other major holdings in the SPDR S&P 500 ETF are the e-commerce giant Amazon (NASDAQ:AMZN), search engine and cloud powerhouse Alphabet (NASDAQ:GOOGNASDAQ:GOOGL), electric vehicle manufacturer You’re here (NASDAQ:TSLA) and the semiconductor chip company Nvidia (NASDAQ:NVDA).
Why SPY Stock is a Good Investment
It doesn’t break my heart that you want to believe more than my word. But maybe you’d rather believe the words of the Oracle of Omaha himself, Warren Buffett.
Buffett, the head of conglomerate Berkshire Hathaway (NYSE:BRK.ANYSE:BRK.B) has long been a proponent of index funds. So he used the Berkshire Hathaway 2021 Annual Meeting to once again defend the merits of investing in products like SPY.
To make his point, Buffett showed a slide showing that there were more than 2,000 companies that entered the automotive industry in the early 1900s. And by 2009, there were only three left. .
“That’s a great argument for index funds,” Buffett said. “If you just had a diversified group of stocks, US stocks, that would be my preference, but hold over a 30-year period.”
Buffett says that rather than picking individual stocks, investors should choose a low-cost index fund instead. “I recommend the S&P 500 index fund and have had it for a long, long time to people.”
In order to support his family, Buffett notoriously ordered the trustee in charge of his estate to invest 90% of his money in the S&P 500 after his death, and 10% in Treasuries.
The Basics of SPY Stocks
The last thing to keep in mind about the SPY ETF is news. The tech sector has been getting hammered in recent weeks as investors. Investors are shunning growth stocks and seeking refuge from rising interest rates and expected Fed action this year.
So if you’re considering investing in the SPDR S&P 500 ETF Trust right now, be aware that your short-term returns won’t be great. But it’s good.
SPY is for investors who can afford to be patient and build a portfolio over a long time horizon. You really can’t go wrong with that kind of thinking.
As of the date of publication, Patrick Sanders was a long-time TSLA. He had (neither directly nor indirectly) any other position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 he led the investment advice section at US News & World Report. Follow him on Twitter at@1patricksanders.
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