SPY ETF: What It Is and How to Buy It

Learn more about the first ETF listed in the U.S. and how its holdings compare with others.

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You may have caught a headline about the SPY ETF. But no, you didn't stumble across an espionage-related tip. SPY is an exchange-traded fund, or ETF, that tracks stocks (often referred to as "equities") in the S&P 500 index, which includes around 500 of the largest U.S. publicly traded companies.

» Learn more: What is the S&P 500?

What is SPY?

An ETF is a basket of stocks, bonds or other securities that allows you to invest in many securities all at once.

State Street Global Advisors introduced the SPY ETF in 1993, making it the first exchange-traded fund of its kind. If you get confused by the name: SPY initially debuted as the SPDR, an acronym for the Standard & Poor's Depositary Receipts (pronounced "spider"). SPDRs are now considered a category of ETFs that track the S&P 500. Nearly three decades later, the market has grown to over 2,500 ETFs on U.S. stock exchanges. Today, State Street Global Advisors is one of the largest asset management companies in the world.

SPY ETF price today

How to buy the SPY ETF

1. Consider how the SPY ETF will fit into your portfolio

Whether SPY is right for you is unique to your financial situation, risk tolerance, time horizon and preferences. Ask yourself: Do you currently own only individual stocks and need diversification? Do you already have an S&P 500 ETF in your portfolio? How long would you like to be invested (i.e., when do you need your money back)?

One advantage of exchange-traded funds like SPY is diversification in a single purchase.

An S&P 500 ETF like SPY spreads your investment over at least 500 of the largest U.S. companies. The diversification comes is handy when the stock market gets rocky, as it has been in 2022.

The largest sector in the S&P 500 is information technology, which makes up 27.1% of the index. On Sept. 13, companies in the tech sector tumbled after the Bureau of Labor Statistics reported that the Consumer Price Index, a common inflation metric, increased 8.3% in August from a year ago. That same day, the S&P 500 fell 4.3%.

The next largest sector is health care, which makes up 14.4% of the index, followed by the financial sector, which makes up 11.2%. The other eight sectors — consumer discretionary, communications, industrials, consumer staples, energy, utilities, materials and real estate — make up the rest of the index.

Since the goal of an S&P 500 ETF is to track the index, the top 10 stock holdings between S&P 500 ETFs don't vary greatly. Below are defined key terms and factors to consider when choosing an ETF like SPY.

Important ETF terms and factors

Assets under management, or AUM: The market value of the ETF, calculated by multiplying the total number of shares outstanding by the current price per share.

Expense ratio: What you pay per year to own a slice of the fund. You can also think of it as your annual management fee, expressed as a percentage of your investment.

Stock symbol: An abbreviation used to identify the ETF. In this case, SPY's namesake.

Time horizon: Even though you're diversified with an S&P 500 ETF, a stock ETF is often still more volatile than something like a bond ETF. The longer you're invested, the more time your investment has to grow and overcome any short-term stock market dips or corrections and approach the historical average stock market return of 10%.

A general guideline on stock investments: don't invest anything you may need in the next five years or so. Make sure your investment has time to recover from any dips and that you won't be forced to sell when the market is down if you do need that cash.

Total return: How much money you made or lost on an investment over time, including any regular cash payments from the investment, such as dividends.

2. Choose between the IVV, VOO or SPY ETF

The table below compares SPY with two comparable S&P 500 ETFs, VOO (Vanguard S&P 500 ETF) and IVV (iShares Core S&P 500). The data is current as of May 31, 2022.

ETF

SPDR S&P 500 ETF

Vanguard S&P 500 ETF

iShares CORE S&P 500

Assets under management

$356 billion.

$766.3 billion.

$280.9 billion.

Expense ratio

0.0945%.

0.03%.

0.03%.

Total market return since inception

9.97% (1993).

376.04% (2010).

369.12% (2000).

Stock symbol

SPY.

VOO.

IVV.

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3. Decide how you'll invest in the SPY ETF

So you're ready to buy SPY. Before you pass go, research your investments and check in with your feelings and priorities. Do you have emergency cash savings on hand? Have you paid off high-interest debt or other financial priorities? Are you willing to part with your money for five years? Can you afford to lose the money?

Your next step may be to decide how to invest in SPY. You can always begin by purchasing a single share or even a fraction of a share if you're starting. Fractional shares allow you to portion shares based on an amount you can afford instead of purchasing at the whole share price.

Another conservative approach would be to use dollar-cost averaging, a strategy for buying in small increments over time, helping to spread your money and risk. The advantage is that while you might buy SPY ETF when prices are high, you're also regularly buying when prices are low.

However, if you've got the funds and the risk tolerance, investing your money in a lump sum is another option. Some prefer to invest their money as early as possible to give the ETF more time to grow rather than purchase smaller SPY ETF parcels over time.

4. Decide where to buy the SPY ETF

ETFs are traded like stocks and bought and sold through brokerage accounts, a type of account that allows you to buy, sell and trade securities like stocks, bonds and mutual funds. If you don't already have a brokerage account, you'll need to open one to buy SPY.

Once you have the account open and funded, you can purchase SPY through the broker's trading platform or website. For detailed instructions, check out how to invest in ETFs, which takes you through how to place the trade and the possible order types.

Neither the author nor editor held positions in the aforementioned investments at the time of publication.
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