If you're considering investing in the stock market, one of the best ways to do so is through an S&P 500 index fund, which holds the same 500 big American companies as the index itself and thereby tracks the performance of the index. One of the biggest S&P 500-based securities is the SPDR S&P 500 ETF (NYSEMKT:SPY), whose shares are also known as the "Spiders."
Here are some key reasons to consider becoming a shareholder.
Buy most of the market
Any sum invested in the SPDR S&P 500 ETF will instantly invest you in most of the U.S. stock market. Its 500 components, which include companies from AT&T and AbbVie to Xerox Corp. and Zimmer Holdings, make up about 80% of the U.S. stock market based on market capitalization. In the words of S&P Dow Jones Indices: "The S&P 500 is widely regarded as the best single gauge of large cap U.S. equities. There is over USD 5.14 trillion benchmarked to the index, with index assets comprising approximately USD 1.6 trillion of this total."
The S&P 500 offers a dividend, too, as many of its holdings are dividend-paying companies -- 423 of them, to be precise, according to the folks at indexarb.com. The SPDR S&P 500 ETF recently yielded about 1.8%.
Easy and cheap
A big benefit of investing in the SPDR S&P 500 ETF is that it's a simple solution that's easy to invest in it. Many S&P 500-based mutual funds, such as the granddaddy of them all, the Vanguard 500 Index, have minimum initial investments that can be hard for some to meet. (The Vanguard minimum is $3,000.) But the SPDR S&P 500 is an exchange-traded fund that's as stock-like as it is fund-like, letting you buy as little as a single share (recently trading for about $207 per stub) through your brokerage.
It's cheap, too, with an expense ratio (annual fee) of just 0.09% -- even less than the Vanguard mutual fund and far less than most other ETFs and mutual funds. For context, a $10,000 investment would cost you about $9 per year. By comparison, many alternatives would cost you $100, $150, or even more.
Investing in an index fund is also easy because it removes a lot of stress and decision-making from your investing life. Just hang on to your shares as long as you want to be invested in the stock market. When a company falls on hard times, you needn't keep up with it and decide whether to hang on or sell. Those who maintain the index will periodically remove companies and replace them with growing ones. And your index fund will adjust its holdings accordingly, with no work for you.
Beat the competition
Finally, investing in S&P 500 index funds makes sense because they tend to outperform most managed mutual funds. According to data from SPIVA, which monitors the performance of managed mutual funds against their index-fund benchmarks, as of mid-2014, 87% of all large-cap mutual funds underperformed the S&P 500 over the previous five years. This is not an aberration, either, as this underperformance is the norm. The average annual return for the managed large-cap funds was 17% versus 18.8% for the S&P 500.
Don't just take my word for it, either, when it comes to index investing. None other than superinvestor Warren Buffett is a big fan of them, especially for average individual investors. Regarding how he wants his wife's money invested after he's gone, he has said:
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.
So don't think you're simply settling if you opt for an easy, inexpensive index fund like the SPDR S&P 500 ETF. You're making a smart investing decision.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. Nor does The Motley Fool. 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 Motley Fool has a disclosure policy.