SPY Is a Great Choice for Most, but I Like VOO ETF Better.
Investing in the S&P 500 is banking on the growth of the U.S. economy over time.
The Vanguard S&P 500 ETF has an expense ratio that is three times lower than that of the SPDR S&P 500 ETF Trust.
Using a strategy like dollar-cost averaging can help reduce the temptation of trying to time the market.
10 stocks we like better than Vanguard S&P 500 ETF ›
When exchange-traded funds (ETFs) were created, it was a game-changer for investing because it allowed people to create diversified portfolios with one to a few investments. This simplified investing and removed some of the barriers that could have turned off potential investors in the past.
The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) holds a special place in U.S. stock market history because it was the first ETF ever listed in the U.S. Today, it's the second-largest ETF in the world, with over $610 billion in assets under management as of June 19.
There aren't many ETFs that can serve as the foundation of a stock portfolio, but an S&P 500 ETF like SPY is one of those. It has a winning trio: diversification, access to blue chip companies, and proven results.
The S&P 500 (SNPINDEX: ^GSPC) tracks 500 of the largest American companies on the stock market. It's often seen as a broad gauge of the U.S. economy due to the significant contributions these companies make to the economy and the wide range of sectors they span. When you invest in SPY, you're essentially banking on the growth of the U.S. economy.
With large tech stocks skyrocketing in valuation over the past few years, the information technology (tech) sector has a large representation in SPY, but you still get access to leaders from all major sectors. Here's how SPY is broken down:
Sector
Percentage of the ETF
Information technology
32.40%
Financials
13.93%
Consumer discretionary
10.43%
Communication services
9.80%
Health care
9.53%
Industrials
8.60%
Consumer staples
5.63%
Energy
3.23%
Utilities
2.41%
Real estate
2.11%
Materials
1.93%
Data source: State Street Global Advisors. Percentages as of June 17.
The tilt toward tech makes sense when you consider that nine of SPY's top 10 holdings are tech companies, and they all have a market cap of over $1 trillion (as of June 19). The only non-tech company in the top 10 is Berkshire Hathaway.
The S&P 500 rebalances quarterly, so these percentages will naturally change as SPY adjusts its holdings to better reflect the index. However, it's worth keeping an eye on as you invest in other stocks and may want to complement this ETF to help ensure your portfolio remains well diversified and in line with your risk tolerance.
Despite all the great things about SPY, my personal preference is the Vanguard S&P 500 ETF (NYSEMKT: VOO) -- and it comes down to its expense ratio compared to SPY. VOO's expense ratio is 0.03%; SPY's is 0.0945%.
Expense ratios are fees charged annually as a percentage of your total investment value, and although many differences seem ignorable on paper, they add up quickly as your money grows.
To see just how much a slight 0.0645% difference can make in real-world dollars, let's assume you invest $500 monthly and average 10% annual returns. Below are the differences in fees paid with VOO versus SPY.
Years Invested
Fees Paid With 0.03% Expense Ratio
Fees Paid With 0.0945% Expense Ratio
10
$137
$431
15
$452
$1,422
20
$1,168
$3,666
25
$2,655
$8,321
30
$5,588
$17,488
Calculations by author. Fees are rounded to the nearest dollar.
Even though you're investing in the same index (though the percentages of each holding slightly vary), the difference in fees between the ETFs can be hundreds to thousands of dollars over time.
Neither SPY nor VOO are get-rich-quick investments (those don't exist) or ETFs that you should expect to experience hypergrowth. However, they are solid investments that have historically had solid returns, making many people millionaires along the way.
The best thing investors can do is focus on making consistent investments, regardless of market conditions. This is when a strategy like dollar-cost averaging comes in handy. By dollar-cost averaging, you remove the urge to try to time the market because you're on a set investing schedule.
Sometimes, you'll invest when prices are falling; sometimes, you'll invest when they're rising. Ideally, you'll trust that it evens out over time, and the long-term growth is there. Past performance doesn't guarantee future performance, but that's historically been the case with the S&P 500.
Before you buy stock in Vanguard S&P 500 ETF, consider this:
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Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $664,089!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $881,731!*
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Stefon Walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
SPY Is a Great Choice for Most, but I Like VOO ETF Better. was originally published by The Motley Fool
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