The Basics of Tracking the S&P 500 with ETFs

Worldwide Invest Better Day 9/25/2012

The Motley Fool has helped ordinary people become better investors for nearly two decades. This month, we're reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.

Along those lines, I'm planning to take a look at many of the most popular exchange-traded funds in the market today. ETFs have skyrocketed in popularity, but it's important to understand exactly what you're getting when you buy an ETF. Today, I'd like to focus on the fund that started the ETF craze nearly 20 years ago, the SPDR S&P 500 ETF (NYSE: SPY  ) , also known colloquially as the Spiders.

Why buy the Spiders?
The SPDR S&P 500 was the first ETF to trade in the U.S., having opened its doors in early 1993. Since then, it has become a behemoth in the trillion-dollar industry, sporting assets of more than $100 billion.

The Spiders' mission is simple: It tracks the S&P 500 (INDEX: ^GSPC  ) , the commonly followed benchmark of 500 top U.S. large-cap stocks. The S&P 500 includes many of the best-known companies in the world, including all 30 stocks in the Dow Jones Industrial Average (INDEX: ^DJI  ) . Moreover, unlike the Dow, the S&P 500 includes some prestigious stocks that the Dow hasn't found room for, including Apple (Nasdaq: AAPL  ) and Philip Morris International (NYSE: PM  ) .

Inside the ETF, you'll find shares of the S&P 500's component stocks, weighted by their market capitalizations. As a result, Apple, with its explosive growth opportunities and market-leading market cap of more than $650 billion, dominates the ETF, representing roughly $5 billion of its assets. By contrast, some of the smallest stocks in the index have less than $10 million of the ETF's assets invested in them.

The Spiders come at a relatively low cost. You'll pay annual expenses of just $10 for every $10,000 you invest -- much less than the $100 or more that many actively managed mutual funds charge. But in addition to tracking the broader stock market, Spiders also provide a fairly good income with a dividend yield of about 1.9%, meaning you can expect to receive about $190 in dividends every year for every $10,000 you invest.

Learn more
The Spiders give you an easy way to own the entire S&P 500 in a single investment. To learn more about the Spiders, use this link to the ETF's main information page and be sure to follow the Fool's coverage on the S&P 500 using our My Watchlist feature.

Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

Fool contributor Dan Caplinger has never been afraid of spiders. He doesn't own shares of Spiders or the other companies mentioned in this article, although he does own certain component stocks in the Dow and S&P 500. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy likes giving you the basics.


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