S&P 500 ETFs: 7 Ways to Play the Index
Trillions of dollars are benchmarked to the ubiquitous S&P 500. These S&P 500 ETFs let you play the index ... either directly, or with a twist.
The universe of exchange-traded funds (ETFs) includes more than 7,000 products worldwide, ranging from sophisticated and tactical funds to rather vanilla index ETFs tied to tried-and-true benchmarks. And among the latter, few are more popular than S&P 500 ETFs.
The Standard & Poor's 500 index is one of the stock market's most widely followed benchmarks because it is comprehensive, diversified and fairly easy to understand. The S&P 500 tracks the shares of 500 large, predominantly U.S-domiciled companies that trade on the major American exchanges. That's it.
Of course, it's next to impossible for average investors to perfectly replicate the S&P 500's exposure by purchasing stock in each of the index's 500 firms. Enter ETFs – simple, cost-effective vehicles that allow investors to "buy the index" with the push of a button. Even Berkshire Hathaway (BRK.B) CEO Warren Buffett believes most investors should just buy and hold an S&P 500 fund. He bought two such funds for the Berkshire Hathaway equity portfolio in 2019, and he even brought the topic up at his company's annual shareholder meeting earlier this year, saying "I recommend the S&P 500 index fund, and have for a long, long time."
When a world-class stock picker tells even well-heeled investors in his own company to stop picking stocks and simply buy and hold the S&P, small investors should take notice and follow this advice.
If you're interested in doing so, here are a few S&P 500 ETFs to consider. While some of these funds provide direct exposure to the major market index, others provide interesting twists that make them mainstays of more active tactical investors and even traders.
Data is as of Aug. 8. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
SPDR S&P 500 ETF Trust
- Assets under management: $383.4 billion
- Expenses: 0.095%, or $9.50 annually on every $10,000 invested.
- Dividend yield: 1.3%
The SPDR S&P 500 ETF Trust (SPY, $442.49) is not just the largest ETF benchmarked to the popular S&P 500 index – it's the largest exchange-traded fund period. It's also the first U.S.-listed ETF, launched at the beginning of 1993.
This ETF has roughly more than $380 billion in assets under management (AUM) at present, and has long been the most liquid and popular vehicle to play the U.S. stock market.
But while SPY is quite popular, it is certainly not the cheapest S&P 500 tracker on the market, with a gross expense ratio of 0.095%. That's three times the expenses of some of the S&P 500 ETFs on this list.
So, why do some investors choose to pay more?
Well, for starters, 0.095% adds up to a mere $9.50 a year on every $10,000 invested, so that's not exactly breaking the bank. Furthermore, SPY continues to be the go-to vehicle for large institutional traders who are looking to put on big positions. And in these circles, the liquidity risk that comes with trading a product that doesn't have as much volume is a much bigger concern than a small difference in annual fees.
Of course, if you're not a Wall Street titan, then you have different priorities. In other words, SPY might not be the perfect solution for buy-and-hold investors.
SPDR Portfolio S&P 500 ETF
- Assets under management: $11.8 billion
- Expenses: 0.03%
- Dividend yield: 1.3%
In 2019, State Street Global Advisors recognized the difference between institutional traders and smaller "retail" investors – and recognized some investors' preference for SPY's lower-cost competitors – by offering a look-alike S&P 500 fund. It converted an existing large-cap ETF into the SPDR Portfolio S&P 500 ETF (SPLG, $52.03).
The big difference – aside from the fact that assets under management total "just" $11.7 billion – is that the fee is less than a third of SPY's, at 0.03% annually, or a measly $3 per year on every $10,000 invested.
The holdings are exactly the same and in exactly the same proportion – 505 stocks representing 500 of the largest U.S.-listed companies, which collectively represent about 80% of domestic market capitalization. Leading positions are just the same, too, which at the moment includes Apple (AAPL, 6.1% of assets), Microsoft (MSFT, 5.8%) and Amazon.com (AMZN, 3.8%).
The modest savings in fees may add up over years or decades if you're planning on holding this S&P 500 ETF for the very long-term. That could make SPLG more attractive to traditional investors than its larger sister fund.
iShares Core S&P 500 ETF
- Assets under management: $297.8 billion
- Expenses: 0.03%
- Dividend yield: 1.3%
The iShares Core S&P 500 ETF (IVV, $444.42) – launched in 2005 by the iShares family of funds run by asset management giant BlackRock (BLK) – is a happy medium between the prior SPDR pairing of S&P 500 ETFs. It is large and liquid like SPY, with nearly $300 billion in assets under management to make it one of the top ETFs of any flavor. But it also boasts a bargain-basement 0.03% expense ratio.
Indeed, this Kip ETF 20 selection was one of two low-cost S&P 500 ETFs whose rampant growth likely helped convince SPDR to offer up SPLG.
As with its peers, holdings and overall performance is the same. That performance has been stellar since the March 2020 lows, by the way. On a total return basis (price plus dividends), IVV has more than doubled since March 23, 2020, up 103%, and it has gained 34% over the past 12 months.
For comparison's sake, the tighter 30-stock portfolio of the Dow Jones Industrial Average has produced a 95% return since the bear-market bottom and is up 31% in the past year.
Vanguard S&P 500 ETF
- Assets under management: $246.3 billion
- Expenses: 0.03%
- Dividend yield: 1.3%
Rounding out the list of "vanilla" S&P 500 ETFs is the Vanguard S&P 500 ETF (VOO, $406.86). It's smaller than IVV or SPY at roughly $250 billion in assets, but if you roll in the look-alike mutual funds that Vanguard offers as well, you get closer to $750 billion in AUM in this specific S&P 500 strategy.
The exchange-traded VOO is relatively young, launching in 2010 in what seems like a very late entrance onto the ETF scene. However, many investors know Vanguard and its iconic founder Jack Bogle as pioneers of "passive" investment strategies that use fixed indexes to power their funds. That's exactly what VOO is, and it builds on this tradition.
As is its fashion, Vanguard ensures to pass on the savings from this simple investment strategy via a low-cost structure for investors. VOO also provides a dirt-cheap 0.03% expense ratio. Thus, Vanguard account holders don't even have to look outside the family to gain easy, inexpensive access to this major market index.
Invesco S&P 500 Equal Weight ETF
- Assets under management: $28.7 billion
- Expenses: 0.20%
- Dividend yield: 1.3%
While a relatively simple and effective index of domestic stocks, the S&P 500 is not without its drawbacks. Perhaps the most obvious is that it is weighted by market capitalization – meaning the biggest stocks make up the biggest share of his index.
Specifically, right now, nearly 30% of the S&P 500's weight is concentrated in its top 10 holdings. And since those holdings are predominantly large U.S. tech stocks, you won't be surprised to find that the sector is over-represented: S&P 500 ETFs allocate 28% of their assets to tech stocks at present. Healthcare makes up another 13%. On the other hand, materials, energy, real estate and utilities each make up less than 3% of the index's weight.
Many investors may already have a significant stake in technology companies, either through owning individual stocks or other tech-heavy funds. Similarly, some investors might want more exposure to defensive sectors such as utilities or consumer staples.
Whatever your needs, if the S&P 500's lopsided constitution isn't for you, consider the Invesco S&P 500 Equal Weight ETF (RSP, $154.06) as an alternative.
The RSP equally weights every stock in the S&P 500, then rebalances every quarter to ensure a fairly equal distribution of weigh across all 500 companies it holds. That means at the start of any given quarter, $2.4 trillion Apple would have the same impact on the fund as $5.5 billion insurer Unum Group (UNM), which would round out the bottom of traditional S&P 500 ETFs.
This doesn't mean you'll get a perfect sector balance, however. While each stock is equally weighted, the S&P 500 holds different numbers of stocks from different sectors. At the moment, information technology is the largest sector sliver of RSP – but at just more than 15% of assets. Meanwhile, the smallest weightings go to communication services and energy stocks at about 4% each.
Invesco S&P 500 Equal Weight ETF is well established, at nearly $30 billion in assets. And the RSP has actually beaten the market out of 2020's lows, up 119% on a total-return basis. Just note that at 0.20% in annual expenses, it is pricier than the plain-vanilla S&P 500 ETFs.
ProShares Short S&P500
- Assets under management: $1.4 billion
- Expenses: 0.90%
- Dividend yield: 0.0%
Among the more interesting ways to play the popular stock index is to the downside, via a "short" fund.
The ProShares Short S&P500 (SH, $14.86) seeks to deliver the opposite return (minus fees) of the S&P 500 index. In other words, if the S&P 500 declines 1% in a day, the SH should actually gain 1%, and vice versa.
The stock market almost always trends higher in the long term. And given a still-positive environment for U.S. equities at present, you might think a bearish bet such as ProShares' ETF is quite foolish. On top of that, the losses you'd incur during a positive run for the S&P 500 index would be compounded by SH's significant costs of 0.90% annually.
So who in the world would buy this fund?
Well, speculators betting against a short-term decline might. Consider from March 1 to March 20 of last year, SH surged more than 21% in short order while the S&P 500 fell by roughly the same amount. It's also important to note that SH has big purposes for institutional or sophisticated traders looking to put on a hedge against declines. For these investors, this short S&P 500 ETF is more of an insurance policy than a profit vehicle.
These factors might not make ProShares Short S&P500 right for everyone. Indeed, most buy-and-hold investors are better off leaving inverse funds alone. But SH remains an important tool to tactical investors and traders, and boasts well more than $1 billion in AUM as a result.
Direxion Daily S&P 500 Bull 3x Shares ETF
- Assets under management: $2.8 billion
- Expenses: 1.01%
- Dividend yield: 0.1%
ETFs and other exchange-traded products (ETPs) are wildly popular among smaller investors in part because they provide for easy access to investments that used to be too complex or costly.
However, the universe of ETPs out there operates under the same principles as anything on Wall Street. Two of those ideas are particularly important to call out before we discuss our next S&P 500 ETF:
- You shouldn't chase the crowd and should only invest based on your personal means and goals.
- You should never invest in any product unless you fully understand what you are getting into.
Disclaimers out of the way, let's talk about the Direxion Daily S&P 500 Bull 3x Shares ETF (SPXL, $117.03).
As the "3x" in the name indicates, this is a "leveraged" fund that seeks to deliver three times the daily performance of the S&P 500 index (before its rather substantial fees, of course).
This strategy is attractive to some aggressive investors, and for good reason. SPXL has delivered a whopping 569% return since the March 23 bottom – well more than five times the broader index, because while Direxion's ETF aims to triple the index's daily movement, longer-term performance can vary greatly in either direction.
But it should go without saying that while SPXL can generate triple the profits when things go well, you can lose three times as much when the S&P 500 goes south. And at a hefty 1.01% in fees, or $101 annually on every $10,000 invested, costs can hold back performance over the very long term, too.
We can't stress enough that leveraged funds such as SPXL are not meant for most individual investors who are primarily investing with an eye toward retirement. They are meant for highly experienced tactical investors and day traders … and even then, they should be purchased in modest amounts.