Stocks are one of the most vital financial instruments in the world today. Here's a guide to provide a basic understanding of one ...
You can now gain more insight on the ETFs that track S&P 500, as well as, the important details pertaining to ETFs and S&P 500.
Standard and Poor (S&P) 500 consists of the top largest U.S. stocks based on market capitalization. This index accounts for around 80 percent of the U.S stock market. For this reason, the S&P 500 is used as a major indicator to ascertain the health of the U.S. stock market. And over the years, investors have come to rely on this indicator greatly.
Some of the top listed stocks on the S&P 500 are Microsoft Corporation (MSFT), Apple Inc. \(AAPL), and Amazon.com Inc. (AMZN). Companies have to meet certain criteria to be listed on the S&P 500. The requirements are numerous, however, there are basic ones such as:
ETF or exchange-traded fund is a fund that offers investors a direct entry into a large range of securities including stocks and bonds. These securities can be purchased and sold using a broker or stock exchange.
ETFs have a volatile price and the price is highly determined by demand and supply. The market value of ETFs may also differ from the actual price of the asset. The value of an ETF is determined by calculating the value of each security that is associated with the fund.
ETF investors are paid a certain percentage from the profit the fund makes. However, what an investor stands to get is dependent on how many shares they hold in the fund. Investors of ETFs also get paid dividend payments.
Compared to traditional shares, ETF shares attract lesser fees and are more liquid. These funds can also be likened to mutual funds that allow investors to buy the securities they choose. Once a purchase has been made, the financial instrument is then used to track the stock index. Accordingly, ETFs have the benefits of mutual funds while at the same time having stock-like features. In the case of the later, they can be traded easily, which is the same for stocks.
ETFs have a mode of operation where the owner of the underlying asset is the fund provider. The provider creates a fund to track the asset’s performance and also sells shares to investors. Shareholders only own a certain part of the ETF and as such, they are not owners of the fund’s underlying asset.
The SPDR S&P 500 ETF also referred to as the SPDR was launched in 1993, and so far, it has purchased and sold several components using the S&P 500 index. Accordingly, the SPDR trades several components yearly in a bid to reach its target. These trades are based on the most recent ranking of companies before there is a rebalance.
Other companies purchase some of the SPDR components. There are also cases where some components lose their position on the S&P 500 due to failure in meeting the platform’s criteria. In this case, the State Street offers the outgoing index component for sale or excludes it from the SPDR holdings. The aim is to ensure that the ETF closely monitors the S&P 500.
The idea behind the SPDR has aided in the launch of several S&P 500 funds. There’s the Vanguard S&P 500 ETF (VOO), and iShares’ Core S&P 500 ETF (IVV). The VOO’s net asset is around $543.1 billion while the IVV has $194.7 billion worth of net assets. These two and the SPDR dominate this market segment. They may not have the lowest risk, however, they operate alongside the stock market.
Here are some things to keep in mind if you’re investing in the S&P 500 ETF.
There are several S&P 500 ETFs you can buy, but it is important to consider the expense ratio. The aim is to get the lowest fees possible to ensure your return is higher. An instance is State Street whose expense ratio is around 0.0945 percent. The value is also thrice that of Vanguard’s which is 0.03 percent. There’s also iShares’ whose expense ratio is around 0.04 percent. You’ll be able to come to a decision if you have more knowledge of the expense ratio.
A 0.0945 percent expense ratio may still be low but there are mutual funds whose expense ratio is even overly higher than this value.
SPDR shares are more actively traded than S&P 500 ETF, and this level of activity can be tied to factors like size, uniqueness amongst others. SPDR shares are even more traded than Vanguard and other shares. The latter translates to high liquidity which allows investors to exchange their holdings to real money.
Despite this, there are S&P 500 ETF without much trading activity yet it still trades up to a million units each day. In this case, it may take more time to liquidate and that could translate into hours instead of minutes. Accordingly, this may not be reason enough to move from a less traded S&P 500 ETF to the SPDR.
There’s UIT and they can be closely tied to SPDR. It can be said that SPDR is a UIT, which sets it apart from the S&P 500 ETFs. SPDR has a legal structure binding it. It was also needful for State Street to have its purchases in house. There are shares that do not adopt the same setup, and one of these is iShares. These are allowed to lend the shares to companies in return for interest.
Accordingly, having up to a hundred stocks in a single portfolio would equate numerous dividend paid. Also, the dividends may not be delivered to investors all year, and if it was so, it would be cumbersome. Accordingly, SPDR offers dividends in cash and they are sent out during distribution. In contrast, the dividends are reinvested in the case of iShares, and this is useful in bull markets.
The best ETFs can be classified based on their inexpensive fees, high liquidity, and investment period. Accordingly, the best ETFs that track S&P 500 are:
BlackRock’s iShares Core S&P 500 ETF consists of IVV in its portfolio. IVV is the best out there due to a number of factors. There’s its expense ratio of 0.04 percent, to begin with. It also monitors the S&P 500 and there are sometimes minor deviations in the course of the year. Despite this, IVV is smaller compared to SPY. Nonetheless, this fund has a lot of liquidity and its holdings are revealed daily.
This fund is also recommendable for anyone looking to hold for the long term. It comes with the promise of allowing the investor to save in taxes thanks to the fund’s structure. On the other hand, the advisors of this fund claim that capital gains have not been paid in the past 10 years. Rather, there have have been a delivery of qualified dividends, which enabled high earners to pay less in taxes.
The Vanguard S&P 500 ETF (VOO) is one of the most inexpensive in terms of how much is charged as fees. Investors get to save more in fees with VOO, which is one of its selling points.
VOO is traded on major brokerage exchanges. And it may not have a significantly high volume notable with the SPY, but this fund has a trading volume of about 3 million shares daily. Asides from that VOO is attractive to investors who want more exposure to large stocks. It also has more diversification that a good number of ETFs.
More liquidity often results in lesser costs when trading. Although trading costs may not be a problem for investors who wish to hold the ETF for a long time, it is important to consider this cost for investors who wish to buy and sell more frequently.
Therefore, this brings about the need to find funds with high liquidity since their trading costs are lower. To that effect, SPY has high liquidity. It has also become a go-to for investors that are out to get a fund with active traders.
Leverage funds like PPLC are short term investments, hence, anyone investing needs to be wary of the risk that may occur. Nonetheless, the PortfolioPlus ETF seeks to offer higher returns compared to the regular S&P 500 return. The leverage is increased to 1.35 times and this gives investors a 135% exposure to the S&P 500. The result could be immense gains, especially in bull markets.
Furthermore, a rebalancing of the fund is carried out on a daily basis, so there are often disparities when the fund is compared with the underlying asset tracked. In line with that, the expense ratio of this fund is 0.67% and it is quite significant compared to some. Needless to say, it is still lower to some leveraged funds.
Whether you’re a new or old investor, good knowledge of what ETFs and S&P 500 entails enables you to make better decisions about your investment. You also get to know the best ETFs that track S&P 500 and as such, the ones with the most potential to choose. Therefore, keep these useful tips in mind to make informed decisions that will yield gains in the short and long run.