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I was recently asked if SPY was a good investment for someone who was just beginning to invest. SPY is the ticker used for the SPDR S&P 500 ETF Trust (SPY). The S&P 500 index is what most U.S. financial reporters are referring to when they talk about “the market.” So investing in an ETF that holds the same stocks as are found in the S&P 500 in the same proportions will give you so-called “Market return.”
The SPDR S&P 500 ETF trust was the very first ETF to trade in the US. It started trading in 1993 and currently has $410.14 Billion of assets under management. That makes it the largest ETF that tracks the S&P 500. It trades somewhere around 14 million shares a day, which also makes it by far the most heavily traded ETF that tracks the S&P 500 index.
Obviously, it is very popular. So beginning investors who have been influenced by Warren Buffett’s oft-quoted advice that most investors would be better off investing in an S&P 500 index fund might easily conclude that SPY was the fund to buy. But is it?
What are the Characteristics of SPY’s S&P 500 Index?
The S&P 500 index and, thus, SPY, currently holds the stocks of 505 U.S.Large Cap companies. They are chosen by a committee that is given a certain amount of discretion in what they select, though that committee must follow some simple guidelines. Those guidelines currently specify that a company must have a market capitalization larger than $13.1 billion. Recently that cutoff has been rising every year.
Beginner investors often don’t understand what the market capitalization of a stock is. It is strictly the product of multiplying the number of shares of a company’s stock available to trade by the current price of that stock. Thus a company can have a market cap in the billions with very low earnings. Which is why at one point in 2021 Tesla’s (TSLA) market cap was greater than that of the nine largest car manufacturers in the world, though its vehicle sales were far, far fewer than theirs.
Market caps fluctuate as stock prices fluctuate. When a stock’s price drops dramatically, as just happened to Meta (FB) when its price dropped by 33.64% over the last 30 days, the market cap of the company declines by the same percentage, even though the company still earns the same income, holds the same properties, and employs the same number of people.
SPY Is Market Cap Weighted
We are focusing on Market Cap because the S&P 500 and hence SPY is …….