The SPDR S&P 500 ETF Trust (NYSEARCA: SPY) is a plain vanilla exchange traded fund. The performance should track and match that of the S&P 500 index. It won’t, not wholly and perfectly, because it’s necessary to pay SPDR for making it available to us. That expense ratio is also 0.09%, which makes it little more than a rounding error except on holdings over decades. That SPY is extremely popular means that the spread - the difference between the buy and sell price, also known as how much money we have to give the markets to be able to trade it - is very small. For small lots, individual stockholders sorts of amounts, it’s usually possible to trade flat in fact, To buy and sell at any one moment at the same price.
This small to no spread means that people do use SPY as a trading vehicle. Say we’ve a position in some large cap stock that we think is going to move relative to the market - there’s some special piece of news coming out that will affect that company and that alone. We might want to then hedge our position there, go opposite (so, if long our selection, then short SPY) on the ETF. Or, perhaps, we might just think that some macroeconomic news is going to shift the market and so trade for a short period in an index fund. That’s not, though, what SPY is built for.
Yes, trading stocks is fun and we all think we can beat the market. But for the long term - the decades to build a retirement fund for example - the real bet is on the ability of free market capitalism to keep making the entire society richer. So, betting upon, or investing in, the broad stock market as a whole has been a winning strategy for well over a century now. There are, roughly enough, some few thousand quoted companies (the Wilshire 5000 has fewer components than that as we don’t include OTC companies) and the Nasdaq 100 is really the top and big tech companies. If we want broad based exposure to the economy then the S&P 500 is the index for us. Size weighted, it’s a bit of this company, some of that, all adding up to, roughly enough, the top 500 quoted companies in the US markets.
SPDR S&P 500 ETF Trust stock price from Google Finance
That’s really what it is. A slice of the American economy. And the proper bet here is to simply put a piece of that away at the back of the 401 (k) and then get to spend that on Waffle House breakfasts in 30 years time. It’s very boring to think of it this way but that is what the construction is for. Sure, people use it to trade in and out of but that’s not the actual point. This is a buy and hold, hold for the decades.
