SPY ETF: Guide to the Exchange-Traded Fund SPDR S&P 500

If ‘spy’ brought you here, you’re probably investigating the SPDR S&P 500 ETF, or SPY. SPY tracks the performance of the United States’ largest 500 companies, offering investors a representative slice of the U.S. stock market. This guide digs into what SPY is, how it functions, and its importance to diversified investment portfolios. On this blog, we have backtested many SPY trading strategies.

The SPDR S&P 500 ETF, commonly known as SPY and the pioneer exchange-traded fund listed on American exchanges, has attracted attention from both individual and institutional investors, not to mention traders and investors. Demonstrating its attraction since it was first launched, it currently manages assets worth roughly $406.6 billion.

This ETF is more than just a typical investment vehicle. It tracks the performance of 500 major large-capitalization stocks in the U.S., thus reflecting the broader United States economy.

Table of contents:

Key Takeaways

SPY is the ticker for the SP D R S&P 500 ETF, the first ETF in the US, designed to track the S&P 500 index performance, offering exposure to 500 large-cap U.S. stocks for diversified market participation.
Investors can gain from SPY through capital appreciation and dividends, reflecting the average annual return of the S&P 500; the fund has returned an average annual return of just under 10% with dividends reinvested and a relatively low expense ratio of 0.0945% as of September 20, 2023.
While SPY offers benefits like high liquidity and low management costs, it also comes with market, country, currency, economic, and interest rate risks, which investors must consider before investing.

What is the ETF SPY?

SPY is the ticker code for the ETF that tracks the S&P 500, which offers investors a means to track the S&P 500 Index’s performance. Notable aspects of SPY include:

Its establishment as an investment tool in January 1993 marked it as America’s first-ever listed ETF and the oldest one still trading.
The objective is to mimic the index by directing nearly all its assets toward stocks within that collective with the exact weighting as the index.

SPY has stocks from each of the eleven sectors outlined by GICS (Global Industry Classification Standard).

How does SPY work?

SPY works by mirroring the S&P 500 Index by maintaining a portfolio composed of all constituent stocks in their specified proportions and also the respective market weightings. It allocates its entire pool of resources into the common shares that constitute the index. The share price of SPY is intentionally set to be one-tenth of the current S&P 500 Index value, thereby faithfully tracking the index’s performance.

SPY presents investors with an uncomplicated approach to acquire exposure to every company within the S&P 500 through just one security transaction.

What are some SPY trading strategies?

For your convenience we have put together a list of SPY trading strategies.

How do SPYs make money?

Investors make money from SPY by the increase in value of its constituent stocks and through dividends distributed by these same stocks.

Historically, since starting out, SPY has delivered an annual average return close to 10%, mirroring the S&P 500 index’s yield performance alongside price movements effectively. However, as the chart below demonstrates, the returns are erratic and the whole decade form year 2000 until 2010 returned nothing to its shareholders! That is a long wait to make money.

SPY pays a quarterly dividend, and the dividend yield as of writing is 1.3%.

If you invested 100,000 in SPY in 1993, you would have over 2 million today, exactly 10% per year. However, the you suffered many nasty drawdowns along the way, the worst being a 55% loss in 2008 from the peak in 2007. That one is very hard to stomach.

The chart below shows the growth of the investment with all dicidends reinvested:

Guide to the exchange-traded fund SPDR SP500

ByBuying SPY, you get exposure to most of the market capitalization of US stocks with just one click.

What does SPY stand for?

SPY stands for the SPDR S&P 500 ETF, and it’s abbreviated SPY. The ETF is commonly only referred to by its ticker symbol “SPY,” also known as spy spdr, hence “spyder”.

The acronym “SPDR” stands for Standard & Poor’s Depositary Receipts and denotes this particular financial instrument offered by State Street Global Advisors. It tracks the performance of the S&P 500 Index and falls under the category of an exchange-traded fund (ETF).

What is the history of the ETF SPY?

The history of SPY starts in 1993 and is continuing today. The investment landscape underwent a significant transformation in 1993 when SPY was introduced, starting and influx of other ETFs. This was an innovative financial product at the time, overseen by State Street Global Advisors, and the idea was to grant investors an efficient and economical means to access extensive exposure to the S&P 500 Index’s returns. We argue it was a brilliant idea.

Since its launch, it has become both the most liquid and most frequently traded ETF globally. It offers investors wide-ranging exposure to some of America’s most well-known corporate entities.

What does SPY track?

SPY aims to replicate the performance of the S&P 500 index by holding a portfolio of stocks that closely mirrors the index composition. It provides investors with a convenient way to gain exposure to a diversified basket of large-cap U.S. stocks.

What holding does the SPY have?

Some of the holdings in the SPY ETF include giants such as:

Apple Inc. (AAPL)
Microsoft Corporation (MSFT)
Amazon.com Inc. (AMZN)
Meta Platforms, Inc. (formerly Facebook, Inc.) (META)
Alphabet Inc. Class C (GOOG)
Alphabet Inc. Class A (GOOGL)
Tesla, Inc. (TSLA)
Berkshire Hathaway Inc. Class B (BRK.B)
Johnson & Johnson (JNJ)
NVIDIA Corporation (NVDA)

What is the purpose of the ETF SPY?

The purpose of the ETF SPY is to mirror the S&P 500 Index’s returns, offering a straightforward method for investors to gain entry into a well-diversified portfolio. Consequently, this allows investors comprehensive access to the U.S. stock market with exposure to multiple industries.

By spreading investments over various sectors of the U.S. economy, it provides an average risk profile and serves as an appropriate option for those interested in engaging in passive index investing.

How is SPY calculated?

SPY is calculated by the market, but SPY tracks the S&P 500 index, which is a collection of 500 significant large-cap stocks from the U.S, so the performance mimicks the index with very small deviations.

The weight given to each stock in this index is based on its market capitalization, calculated by multiplying the available shares for each company by its current share price. To determine the overall market cap of these incorporated companies – serving as the numerator in calculating the index – an exclusive divisor is applied to ensure that it remains within a practical range.

A single SPY share aims to reflect one-tenth of what’s represented by the S&P 500 Index’s value.

What is the market capitalization of SPY?

The market capitalization for SPY, an exchange-traded fund, varies from day to day, but as of writing it is 500 billion USD.

Currently, the structure of SPY includes 981.78 million shares outstanding based on the most recent information available.

What are the benefits of trading SPY?

The benefits of trading SPY is that it offers high liquidity, attributable to its substantial asset size and hefty average daily trading volume. This characteristic renders it a favorite among both active traders and those looking for long-term investment opportunities.

Another benefit is the very low expense ratio of 0.09%. Compare this to an active mutuel fund that charges 1% annually, and you realize that thi is a bargain.

The fund’s extensive market reach coupled with its issuance of dividends positions it favorably for individuals interested in passive index investing while maintaining a moderate risk profile.

What are the downsides of trading SPY?

The downsides of trading SPY involves several types of risk, including:

Risk associated with the overall market (systematic risk)
Risk related to a specific country’s economy and political stability (USA)
The potential for loss due to fluctuations in currency exchange rates (If you are foreign, but also from currency exposure in the included companies)
Risks stemming from broader economic uncertainties
Sensitivity to changes in interest rates

All investments carry risk! Similar to stock trading, transactions involving SPY may result in commissions and other expenses that accumulate and can negatively impact the performance of your investment if you trade often.

There might be discrepancies between SPY’s market price and its intrinsic value. This could lead investors either to overpay when purchasing or receive less than the fundamental value upon selling.

What is the average spread in SPY?

The average spread in SPY is very low. For example, a research paper looked at the spread between bid and ask over a period of four years, and the spread was on average 1.5 cents (wecan’t remember the name of the paper, only the results).

Today, when SPY trades at 500 dollars, it might be slightly higher, but in percentage terms it’s very low.

How many shares does SPY have outstanding?

The shares outstanding in SPY currently amounts to approximately 979.78 million outstanding shares. This quantity symbolizes the aggregate of stock available and owned by investors.

Is SPY the same as the index S&P500?

No, SPY is not the same as the index S&P 500. SPY tracks the index, but it’s not the same.

Despite being crafted to reflect the S&P 500, SPY differs in several ways.

SPY is a tradable security known as an ETF, specifically designed to follow the S&P 500 Index’s returns.
Conversely, the S&P 500 Index serves as a notional benchmark and you can’t buy it.
Actual company stocks within the S&P 500 back SPY.
The S&P 500 Index represents an abstract measure of how well these top publicly traded companies across various industries perform.

Is it good to trade the SPY?

It’s good to trade SPY if you want to gain market exposure. Investing in SPY offers individuals the opportunity to gain broad exposure to the U.S. equity market along with the advantage of being able to trade it similarly as they would a stock, due to its exceptional liquidity which allows for buying and selling without causing substantial impact on its price.

This makes it an attractive option for those seeking long-term investment as well, consistent dividend earnings, and efficiency in taxes.

Similar to any form of investment activity, trading SPY comes with various risks that should be carefully considered by investors. These include:

Exposure risk related to market fluctuations
Risks associated with political or economic instability within a country
Fluctuations arising from currency exchange rates
Changes affecting the broader economy
Variations in interest rates

Anyone considering adding SPY to their portfolio must evaluate their goals regarding investments, level of comfortability with potential risks involved and also take into account all expenses related to transacting SPY shares before deciding on this specific type of investment since these elements can have significant implications on their financial outcomes.

What are the main sectors in SPY?

The main sector is, as of writing, Information Technology, carrying a weight of 29.54%. However, the SPY ETF offers a balanced investment opportunity due to its diversified exposure across all economic sectors. The allocation also extends to other key areas such as financials, health care, consumer discretionary, and communication services.

How can one trade SPY?

You can trade SPY just like you trade any other stock. First, an investor must establish and deposit funds into a brokerage account, followed by utilizing the broker’s trading interface to execute a purchase of SPY shares. Investors have the choice to place a market order that will be filled at the prevailing price within the marketplace or set up limit orders that define their preferred price ceiling or floor for buying or selling this ETF.

There is an option to engage in trading SPY through Contracts for Difference (CFDs). This method carries substantial risk due largely to leveraged positions it allows traders to take, and you are also forced to pay commission sindirectly via large spreads between bid and ask. Consequently, individuals should thoroughly evaluate both their personal financial standing and level of experience before starting CFD trading.

Does SPY pay dividends?

The SPDR S&P 500 ETF Trust indeed pay dividends, and the following information regarding these dividends includes:

A dividend yield of 1.3% based on the last ex-dividend date
The most recent distribution per share was $1.91
You are eligible for dividend payment if you own SPY on the ex.dividend date
SPY pays a dividend quarterly

Are there any alternative ETF that compete with SPY?

There are alternative ETFs that compete with SPY. These funds distinguish themselves through varying expense ratios, investment methodologies, or specific characteristics that might render them a better or worse fit for particular investor profiles.

What are the slang word of the ETF SPY?

The slang word for the ETF SPY are mainly “Spider”, but there are others. These include terminologies such as:

“Spy” or “The Spy” – Common shorthand for SPY.
“Spider” – Another nickname derived from the ETF’s ticker symbol SPY.
“S&P Spy” – Combining the ETF’s name with its underlying index, the S&P 500.
“The Index” – Referring to SPY as it tracks the S&P 500 index.
“Market Tracker” – Highlighting its function as a tool for monitoring the broader stock market.
“Big Brother” – Playfully referencing its tracking of the S&P 500, which comprises many significant companies.
“The Benchmark” – Emphasizing its role as a benchmark for the overall market performance.
“The 500” – Short for the S&P 500 index, which SPY aims to mirror.
“Blue Chip Basket” – Reflecting the S&P 500’s composition of large-cap, established companies.
“The Standard” – Referring to the S&P 500 as the standard benchmark for U.S. equity performance.

How does SPY track the performance of the S&P 500 Index?

SPY is designed to track the S&P 500 Index by maintaining all of its constituent stocks at their designated market weights. By accurately replicating the index, SPY achieves a performance that closely aligns with that of the index itself.

The pricing strategy for SPY shares intends them to be priced at one-tenth of the S&P 500 Index’s value, thereby reflecting fluctuations in the index’s valuation.

Investors can reap several advantages from using SPY ETF:

It ensures superior yield performance through precise tracking of the S&P 500 index.
Returns offered are highly representative of those from the broader U.S. stock market.
It obviates individual investors’ necessity to acquire each component stock separately within their portfolios.

What are the key features of SPY that make it attractive to traders?

The key features of SPY that make it attractive to traders are these:

It has enormous liquidity.
Transactions can be executed with minimal effect on its price.
Commissions are very low at most brokers.
With an expense ratio of only 0.09%, it presents a financially efficient choice for investors.

The ETF offers wide-ranging market coverage and issues dividends, adding to its appeal. Since launching, it has delivered an average yearly return just shy of 10%.

What are the expenses associated with investing in SPY?

The expenses associated with investing in SPY are mainly commissions, slippage, and the expense ratio of 0.09%.

When you invest in SPY, you are subject to certain costs. The overall yearly operating expenses before any fee waivers or expense reimbursements make up the Gross Expense Ratio for SPY, which stands at 0.0945%. Notably, the operational costs associated with SPY remain remarkably minimal because of its passive management strategy.

On top of that, investors should be aware they might face brokerage commissions when they purchase or dispose of shares in SPY via an online brokerage platform or a mutual fund company. However, commissions are low, and so is slippage.

What are the average trading volumes in SPY?

The average tradng volumes in SPY is very high, this is substantial quantities, reflecting its investor appeal.

As of writing, the 30-day average daily trading volume is 75 million shares! However, a look back at the historical data reveals that this figure has varied significantly over time – soaring to an all-time high of 256.71 million shares in april 2020 during the Covid mess.

Can investors reinvest dividends through SPY?

Investors can reinvest dividends through SPY, either manually or by DRIP (Dividend Reinvestment Plans). When you receive the dividends, you simply use the proceeds to buy more shares.

Numerous brokerage firms offer Dividend Reinvestment Plans (DRIPs) for ETFs that distribute dividends, such as SPY. But be aware that certain brokerages with automatic dividend reinvestment services may restrict purchases to whole shares only, resulting in leftover funds being placed into the investor’s account.

It is worth noting that when investors choose manual reinvestment of dividends, they gain enhanced control over both when and at what price they perform this reinvestment.

What are some potential risks associated with investing in SPY?

Some potential risks associated with investing in SPY are market risk, country risk (USA), and that you are exposed to large-caps.

A downturn in the overall market can diminish the fund’s value. There is country risk because SPY predominantly invests in U.S.-based large-cap stocks, leaving it susceptible to shifts within America’s economic and political environments.

Variations in the value of the U.S. dollar bring about currency risk that could influence SPY’s performance. Lastly, modifications to interest rates possess the ability to affect stock values included in SPY’s portfolio, presenting an interest rate risk.

How does SPY compare to other similar ETFs in terms of expense ratios?

SPY compares unfavorably to two other ETFs that track the S&P 500 – VOO and IVV.

The SPY ETF carries a ratio of 0.09%. This is comparatively more expensive than several other exchange-traded funds that also follow the S&P 500 Index. Specifically, VOO—the Vanguard S&P 500 ETF – has an expense ratio set at just 0.03%, while IVV—which is the iShares Core S&P 500 ETF – has an even lower fee structure with its ratio being only 0.04%.

Can you scalp SPYs?

Indeed, you can scalp SPY, but most likely you’l lose money. Scalping is very difficult!

Scalping is the technique of executing swift trades of security, frequently in mere minutes, aiming to capitalize on minor fluctuations in price.

Can you day-trade SPYs?

Certainly, SPY ETFs can be day traded similarly to individual stocks. Engaging in day-trading entails the purchase and sale of securities within the same day and trading session. However, just like scalping, day trading is very difficult and very few make any money.

Day-trading the SPY affords traders real-time trade execution which allows them to capitalize on fluctuations in price and variations in market volatility throughout the course of a day. This form of trading bears greater risks and demands both an effective strategy for trading and proficient skills in managing risks.

SPYs vs. Mutual Funds – What’s the Difference?

SPYs and mutual funds are both investment mechanisms that provide investors with access to a broad range of securities within one portfolio, yet they have distinct characteristics.

SPYs operate similarly to stocks in that they allow for trading throughout the day, while mutual funds transactions occur only after market close at the fund’s net asset value price. Unlike actively managed mutual funds overseen by professional managers making decisions on holdings, SPYs adhere to a passive management strategy aiming to replicate the performance of the S&P 500 Index.

When it comes to financial commitment levels required from investors, mutual funds typically mandate higher minimum investments compared with SPYs which offer entry points equivalent to the cost of a single share.

SPYs Vs. SP500 Futures?

Both SPY and SP500 futures track the index, but futures have a finite life and trades at margins and you can almost trade it around the clock.

SPYs provide a way to invest in the S&P 500 Index through ETFs which are available for trading during standard market hours. On the other hand, S&P 500 futures grant nearly round-the-clock access to investors around the globe due to their extended trading timeframe.

Structured as collective investment vehicles, SPYs allow shareholders an ownership interest relative to their share of a pool that holds a selection of stocks within it. Conversely, S&P 500 futures represent speculative financial agreements based on predictions concerning the future index price of the S&P 500.

Can you swing trade SPY?

Yes, you can swing trade SPY. Here are some key points to consider.

Swing trading involves holding a position in a security for several days to capture potential price moves.
It often involves technical analysis or quantified analysis to identify potential entry and exit points based on price patterns and market trends.
Swing trading can be profitable if done correctly, but it also carries risks and requires careful planning and risk management.

We have provided many trading ideas for swing trading strategies.

Is there a leverage ETF alternative for SPY?

Yes, there are leveraged ETF alternatives for SPY (SPDR S&P 500 ETF Trust). Leveraged ETFs seek to amplify the returns of an underlying index or asset class by using financial derivatives and debt to magnify the movement of the underlying index.

Some examples of leveraged ETFs that aim to track the performance of the S&P 500 index (similar to SPY) with leverage are:

ProShares Ultra S&P500 (SSO): This ETF aims to provide double the daily return of the S&P 500 Index.
Direxion Daily S&P 500 Bull 2X Shares (SPUU): This ETF seeks to achieve double the daily performance of the S&P 500 Index.

When did SPY start trading?

SPY started trading trading on January 22, 1993. The SPDR S&P 500 ETF Trust (SPY) represents a monumental landmark as it was the inaugural exchange-traded fund within the United States. This investment vehicle pioneered a new era in stock trading.

This transformative ETF sprang from State Street Global Advisors, an asset management firm based in Boston. Its initial listing took place on the American Stock Exchange, signaling its entrance into financial markets.

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Summary

In summary, the SPY exchange-traded fund is a widely recognized investment option that mirrors the S&P 500 Index’s performance. Introduced in 1993, it has emerged as a primary choice for investors aiming to participate in the U.S. equity market. The combination of its extensive liquidity, minimal expense ratio, and comprehensive market reach makes SPY an effective means of accessing the U.S. stock market cost-efficiently.