What Are S&P 500 ETFs And How Can You Invest In One Of Them?
With the advent of exchange-traded funds, or ETFs, in the late 1980s, it only seemed natural to create an ETF that comprised the proportionate ratios of the stocks that make up the S&P500 index. The oldest of all ETFs was created to track the behavior of the S &P 500 in the same way that this index measures the behavior of the 500 largest companies in the United States. While that ETF was quickly taken off the market, in 1993 the investment management company State Street Global Advisors developed an equivalent ETF, Standard & Poor’s Depositary Receipts (SPY).
Better known by its spidery acronym SPDR (reminiscent of Spider) the SPY is the largest and most traded ETF in the world, with net assets of at least $374 billion. SPDR has expanded into a whole family of ETFs known as SPDR funds, each of which focuses on a particular geographic region or market sector.
The SPDR Explained
Since its debut in 1993, the S&P 500 SPDR ETF, hereafter SPDR, has bought and sold the contingent and changing components that make up the underlying S&P 500 index. This means that SPDT has to change about a dozen or so components each year depending on the latest rankings of the companies that make up the index, to then be rebalanced accordingly. Some of these constituents are bought by other companies, and some lose their place in the S&P 500 by failing to meet the index’s stringent requirements. When this happens, State Street sells the outgoing index constituent (or at least removes it from its SPDR holdings) and then replaces them with the new constituents. The result of this is an ETF that tracks the S&
Other S&P 500 ETFs
As the definitive ETF for the S&P 500, SPDR has inspired a couple of imitators.
The following are the two most popular S&P 500 ETFs after the State Street SPDR:
Vanguard has its version of the S&P 500 fund, the S&P 500 Vanguard ETF (VOO), just as BlackRock has a similar ETF for the S&P 500 (the IVV). With net assets of more than $753 billion and $286 billion, respectively, they along with the SPDR dominate this market for funds that are not necessarily a low risk, but at least move in sync with the stock market as a whole.
Having said all this, an S&P ETF should be as good as all those that follow this same market. After all, why shouldn’t it be? As almost everyone who has built a fortune knows, you can build wealth by spending less than your income. This brings us to the expense ratios of the S&P 500 ETFs.
Paying Attention To Expense Ratios
State Street charges a 0.0945% administration or expense ratio, which is almost triple what Vanguard charges for its peer ETF (0.03). BlackRock with its IVV ETF has a comparable ratio of 0.03. This should make the answer obvious, if your question is “Which S&P 500 ETF should I buy?”
This would be so if our only criteria were costs. Controlling for originality or fund size, or a few other factors, SPDR stock is by far the most highly traded of any of the S&P 500 ETFs. shares of similar Vanguard or BlackRock ETFs, prospectively making it much easier for the holder of the shares to sell them and get their cashback. But then again, a lesser-traded S&P 500 ETF still trades close to a million shares a day. So it is possible that you only have to wait a few minutes or a few hours to have liquidity from the sale of your shares of the respective ETF.
Still, even an expense ratio of 0.09% (like SPDRs) is very low. It’s easy to find mutual funds whose expense ratios are twenty times that number. Granted though, unlike ETFs, mutual funds are a type of fund that requires a much higher degree of active management, whereas ETFs simply track the stocks that make up an index whose constituents are selected by a third party.
ITU Versus ETFs
Another important difference between the SPDR ETF and the other two S&P 500 ETFs is that the former is technically a unit investment trust. This is where being an original creator and early market entrant can be a disadvantage; SPDR is tied to an antiquated legal structure that had not provided for the creation of myriad ETFs. State Street must therefore keep all shares it purchases within this company. The Vanguard and BlackRock S&P 500 ETFs have been set up differently and they are allowed to lend and sell their shares to other firms and earn the associated interest.
Five hundred shares in a portfolio mean several hundred dividend payments as well. But instead of delivering these dividends to investors at the end of the year, which can be more than a little awkward, SPDR retains the cash dividend payments and distributes them on each distribution date. BlackRock, for its part, reinvests dividends, which can be beneficial in a bull market. Meanwhile, Vanguard invests its daily cash in its own extremely low-risk investment vehicles.
How To Invest In S&P 500 ETFs
Whether you want to invest in the S&P 500 through the State Street ETF (SPDR) or the BlackRock ETF (IVV) or the Vanguard ETF (VOO), you can access these financial products by investing through a regulated market exchange or broker.
Some brokers with which you can invest in these ETFs are eToro, a broker of Israeli origin and regulated by the ASIC in Australia, and the CySEC in Cyprus and Europe. Another recognized broker is RobinHood Markets, owned by the US market and regulated by the SEC. Likewise, another important and accessible broker for the Latin American market where you can buy shares of the ETFs that follow the S&P 500 is XTB. In this last exchange, you can buy the shares of the ETFs through CFDs. XTB is regulated by the FCA and the CMNV.
In short, you can invest in S&P 500 ETFs through any regulated broker that offers these products within its list of financial instruments.
For those who reject the concept of beating the market, or all the work that goes into it, investing in an S&P 500 ETF makes sense. Patient people who follow the market can have excellent results over time. Best of all, investment firms have already gone to the trouble of buying the respective amounts of each component of the S&P 500, compiling them all into a single unit, and making them available in small, divisible units so that anyone who wants can buy one of them or a part of them. Having the most modest expense ratios, and assuming there is no bear market, these ETFs offer an excellent investment opportunity at a low cost.
With information from Investopedia.