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What is SPY ETF and How it Works?

Last Updated : 12 Jan, 2024
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SPDR S&P 500 ETF Trust, or SPY, tracks the S&P 500 index. The S&P 500 is a market-capitalization-weighted index that tracks 500 of the largest US public corporations. These firms operate in healthcare, technology, finance, and more. SPY is one of the most popular exchange-traded funds worldwide. It tracks the S&P 500 index by offering exposure to a broad selection of U.S. equities. State Street Global Advisors runs the ETF. Many investors use the SPY ETF to add diversity to their portfolios and obtain exposure to the U.S. stock market. It represents the market and is a yardstick for U.S. large-cap equities because it reflects the S&P 500. The SPY ETF is liquid and accessible because investors and traders can buy and sell shares on stock exchanges during the day.

Geeky Takeaways:

  • The SPY ETF reflects the S&P 500 index, giving investors quick access to a diversified portfolio of U.S. large-cap equities.
  • State Street Global Advisors manages the SPY ETF, one of the most commonly traded ETFs worldwide, providing investors with a liquid and accessible way to track the U.S. stock market.
  • SPY, a market-capitalization-weighted fund, tracks 500 of the largest publicly listed US firms from various industries.
  • The SPY ETF is a trustworthy benchmark for U.S. large-cap equities and the equity market, so investors use it to diversify their portfolios.
  • The SPY ETF’s real-time stock exchange trading gives traders and investors versatility and flexibility in their investment methods.

How SPY ETF Works?

The SPY ETF tries to match the results of the S&P 500 index, just like other S&P 500 ETFs. To do this, SPY holds all 500 stocks in the S&P in an amount equal to their weight in the index. The SPY portfolio gives more weight to the top stocks because the S&P 500 is a cap-weighted index. In this case, if Apple Inc. (AAPL) makes up 6% of the S&P 500 index, SPY would have 7% of its assets in AAPL shares. Because the SPY ETF is managed passively, the fund’s operational expenditures are especially minimal. ETF fees are calculated as an expense ratio, which is a percentage of a fund’s assets used to cover operating expenses. The SPY ETF has an expense ratio of 0.09%, or $9 for every $10,000 invested.

SPY ETF Portfolio Structure and Costs

The ETF is set up as a unit investment trust (UIT) because it is fairly new. In other words, it’s an established portfolio made up of units that may be issued and exchanged with the issuer. The SPY fully reflects the S&P 500 Index because of its structure, which keeps all of its members at their goal weights. There are index ETFs like SPY that let buyers own the whole index by buying a single security at a low cost. As of September 20, 2023, SPY has a cost ratio of 0.0945%. This number is low, but it’s not the lowest of all the ETFs that follow the S&P 500 Index. It costs more than three times as much for SPY as it does for the Vanguard S&P 500 ETF (VOO), which costs only 0.03%. Remember that these fees do not cover any profits or broker fees.

SPY ETF Top Holdings

The SPY is a well-balanced group of assets that invests in a lot of different types of stocks. As of September 21, 2023, these are the top five,

Information Technology






Consumer Discretionary


Communication Services


The SPDR S&P 500 ETF Trust puts most of its money into common stocks, which are part of the S&P 500 Index. The following companies make up its top 10 assets right now:

Holding Company

% SPY Portfolio Weight

Apple (AAPL) 7.05%
Microsoft (MSFT) 6.54%
Amazon (AMZN) 3.24%
Alphabet—Class A (GOOGL) 2.13%
Tesla (TSLA) 1.95%
Alphabet—Class C (GOOG)  1.83%
Berkshire Hathaway—Class B (BRK.B) 1.83%
Meta Platforms—Class A (META) 1.81%
UnitedHealth (UNH) 1.28%

SPY ETF Performance

SPY has a four-star grade from Morningstar, and its returns have been very similar to those of the S&P 500. Over the past ten years, this index has done better than the average return of other funds. As of August 31, 2023, the SPDR S&P 500 ETF Trust (SPY) had earned an average of 15.79% over the past three years. Based on figures from the last 10 years, the fund earned an average of 12.66 percent each year. Since its start, the SPDR S&P 500 ETF Trust has had an average annual gain of 9.92%.

With a beta of almost 1, this, of course, follows the success of the S&P 500. There is a very small mistake in the SPY ETF’s tracking, since it exactly copies the index. As of August 31, 2023, it was only -0.03%.

Why Invest in SPY ETF?

Many investors use SPY to add variety to their portfolios and acquire exposure to the US stock market without purchasing individual stocks. Because ETFs like SPY have low expenses, investors can track the S&P 500 index more closely than index funds with higher expenses. Some investors use an S&P 500 ETF like SPY as a core investment when constructing an ETF portfolio.

Advantages of Investing in SPY ETF

1. Costs are low: The SPY ETF’s costs are only 0.09%, a lot less than the costs of the average mutual fund, which are usually 0.50% or more.

2. Diversification: People who buy the SPY ETF can invest in 500 of the biggest publicly traded companies in the U.S. in 11 different industries. Market risk can be lowered by having a lot of exposure to many companies and businesses.

3. Convenient: Investing in a diversified ETF makes it simple for people to get into the stock market without having to actively manage a portfolio or study and analyze stocks.

4. Tax efficiency: Because ETFs have a low turnover and trade on an exchange like stocks, they transfer very little tax on to shareholders.

Disadvantages of Investing in SPY ETF

1. Limited Potential for Growth: The SPY ETF is designed to monitor the performance of the S&P 500 index. Because it is a market capitalization-weighted index, the most significant companies have the greatest influence. For shareholders seeking involvement in smaller, high-growth companies, this framework may limit potential returns.

2. Exposure to Market Volatility: The SPY ETF, like an index fund, is vulnerable to market volatility. If the stock market as a whole falls, the value of the ETF may fall as well. While diversity is innate, it may not completely protect investors during times of market instability.

3. Variation in Dividend Yield: The yield on dividends of the SPY ETF is determined by the dividend payments of the S&P 500 underlying companies. This yield is subject to fluctuation and may be lower than that of individual stocks with attractive dividend prospects.

4. Management Fees: Although ETFs often have lower expense ratios than actively managed funds, the SPY ETF includes management fees. These costs can reduce long-term profits, particularly for investors who use a buy-and-hold strategy.

5. No Active Management: The SPY ETF employs a passive investment approach, mimicking the S&P 500 without the use of active management. This means it fails to capitalize on chances created by market inefficiencies or make tactical modifications in response to changing economic conditions.

6. Overconcentration in Specific Industries: Because the S&P 500 is weighted by market capitalization, it can lead to overconcentration in certain industries, such as technology and finance, which have a greater influence on the index. Due to a lack of sector diversity, investors may be exposed to risks connected with certain specific businesses.

How Do I buy SPY ETF?

Investing in the SPY exchange-traded fund (ETF) can be a pretty simple process. A significant number of investors purchase shares of the SPY exchange-traded fund (ETF) by way of an internet broker or by way of a mutual fund firm that offers access to ETFs. Investing in the SPY ETF can also be done through a retirement account, such as an individual retirement account (IRA). If you already bought shares of the SPY ETF, you are free to keep them for as long as you like, and you are also free to sell them whenever you feel ready to do so.

Frequently Asked Questions (FAQs)

1. What does the SPY ETF stand for?


This is the SPDR S&P 500 ETF Trust, or SPY ETF. It is an exchange-traded fund that mirrors the success of the S&P 500 index, which is made up of 500 of the largest publicly traded businesses in the United States.

2. What does the SPY ETF perform?


To make money, the SPY ETF buys a group of stocks that are very similar to the stocks that make up the S&P 500 index. Investors can buy and sell SPY ETF shares on stock exchanges. This gives them a way to track the success of the S&P 500 as a whole.

3. What are the main benefits of investing in the SPY ETF?


Investing in the SPY ETF gives buyers access to a wide range of large-cap U.S. stocks and is an easy and inexpensive way to get a feel for the health of the U.S. stock market as a whole.

4. Can the SPY ETF earn me dividends?


Yes, the SPY ETF does give out profits. It gives the money it makes from the underlying stocks to investors as dividends. This lets investors get a piece of the dividends that the S&P 500 companies pay out.

5. What makes the SPY ETF distinct from investing in individual stocks?


Instead of buying in just one stock, the SPY ETF spreads your money across many companies, so if one stock does badly, it doesn’t have as much of an effect on your overall portfolio. This spread of assets can help lower risk.

6. What are the costs of investing in the SPY ETF?


The expense ratio for the SPY ETF shows what portion of the fund’s assets are used to pay for running costs. Even though it’s not very high, buyers who are thinking about the SPY ETF should be aware of this cost.

7. Can I trade the SPY ETF at any time during the trading day?


Yes, the SPY ETF trades on stock platforms like stocks. Investors can buy and sell shares at market prices at any time during the trading day.

8. Is the SPY ETF a good long-term investment?


Because it tracks a broad market measure, the SPY ETF is used by many investors for long-term plans. But each person’s financial goals and willingness to take risks should always be taken into account.

9. Does the SPY ETF give you access to stocks in other countries?


The SPY ETF invests mostly in U.S. stocks that are part of the S&P 500 index. If an investor wants to get exposure to the world, they might need to look at other ETFs or investment choices.

10. What are the possible consequences of buying in the SPY ETF?


The SPY ETF gives you a lot of different investments, but it is still vulnerable to changes in the market. When buying in any equity-based product, like the SPY ETF, shareholders should be aware of financial risks, changes in the economy, and the chance of losing money.

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