The SPDR ETF: Buy the S&P 500 for a Bargain Price

This SPDR ETF can instantly have you invested in about 80% of the U.S. stock market. Photo: TaxCredits.net.

With more than 3,000 different stocks and roughly 8,000 mutual funds to invest in, it's not easy to decide where to put your money. To make matters worse, many people lack the time, interest, or expertise to pick individual stocks or actively managed mutual funds. Fortunately, there's an excellent alternative: buy the bulk of the American stock market all at once through an exchange-traded fund (ETF) that tracks the benchmark S&P 500 index.

I'm speaking of the SPDR S&P 500 ETF (SPY -0.21%), which is also sometimes referred to by its nickname, "Spider." ETFs trade like stocks throughout the day but are structured more like mutual funds, containing a variety of holdings. In the case of the SPDR ETF, its holdings are the 500 companies that make up the S&P 500, one of the key benchmarks for our entire stock market. Indeed, the S&P 500 companies together make up about 80% of the overall U.S. stock market's value.

An index fund can save you the trouble of studying stocks and choosing individual ones. Image: Flickr user Andreas Poike.

Nuts and bolts
ETFs have expense ratios (annual fees) just like mutual funds do -- only they tend to be much lower. For example, the respected Vanguard 500 Index Fund (VFINX -0.58%), a mutual fund that's also based on the S&P 500, sports a low expense ratio of 0.17%. Meanwhile, managed mutual funds often charge 1% or more -- and sometimes a lot more. But the SPDR S&P 500 ETF charges a truly tiny expense ratio of 0.0945% -- 44% less than the low-cost Vanguard mutual fund.

To put that in perspective, if you plunk $10,000 into the mutual fund, you'll pay about $17 per year in fees. With the SPDR ETF, though, you'd pay $9.45.

Meanwhile, because the S&P 500 seldom changes its roster, the Spider is not constantly jumping in and out of stocks and thereby racking up commission costs. It has a low turnover ratio of just 4% versus 23% for its category, per Morningstar.

Holdings and performance
So what are the index's biggest holdings? Well, the S&P 500 is market-capitalization-weighted, meaning that the companies with the largest market value will wield more influence in the index. Here are the top holdings, as of Oct. 6:

The table shows that a move in the value of Apple will have roughly three times the effect on the index as a similar-sized move by Facebook. Remember, too, that the index has about 500 companies, and since the top 10 companies alone make up about 17% of its value, hundreds of other companies clearly have rather small weightings.

The performance you'll get from this SPDR ETF will basically track the performance of the S&P 500, less a little to account for fees and trading costs. Here are some stats from Morningstar:

Buy this one security, and you'll have a stake in 500. Image: Got Credit.

SPDR ETF strategies
So what should you do with all this information? Should you invest in this SPDR ETF? Well, if you want to invest in an S&P 500-based index fund, then this is an excellent and extremely inexpensive way to do so. And it makes a lot of sense.

You might split your portfolio, investing a portion of your long-term assets in individual stocks and/or managed mutual funds and parking the remainder in this ETF. You might also decide that you don't have the wherewithal to choose individual securities and simply park all your long-term assets in the ETF. Even Warren Buffett has suggested that this is a fine idea for most of us. After all, index funds tend to outperform managed funds over long periods of time.

Alternatives
Finally, remember that this ETF isn't the only index-fund ETF around. Other solid choices include the Vanguard Total Stock Market ETF (VTI -0.21%) and the Vanguard Total World Stock ETF (VT -0.15%). Respectively, they distribute your assets across the entire U.S. market and nearly all of the world's stock markets.

Great wealth can be made by simply leaving money in inexpensive broad-market index funds for decades.