As investors we like to find individual stocks. No matter what our investment philosophy or risk tolerance, it’s satisfying to find a stock to love. But in turbulent times like these, discretion can be the better part of valor. And that is a reason for you to consider the SPDR S&P 500 ETF (NYSEARCA:SPY). The SPY ETF is the world’s largest exchange-traded fund (ETF).
If you’re familiar with the benefits of ETFs, bear with me for a moment as I get the uninitiated up to speed. An ETF is similar to a mutual fund but shares of an ETF trade throughout a trading session just like shares of stock. And every ETF is tied to an index. Every ETF is an index fund but not every index fund is an ETF.
With that in mind, the appeal of the SPY ETF is that it follows the S&P 500 index. Every day you hear about the movement of the S&P 500 along with the Dow Jones Industrial Average and the Nasdaq composite.
The S&P 500 is a snapshot into the sentiment of individual investors. That gives the SPY ETF several important benefits.
A Cost-Effective Way to Run With the Popular Crowd
One of the simplest benefits to own shares in the SPY ETF is that you are buying shares of some of the best growth companies such as Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). But SPY actually trades approximately five times as frequently as Apple.
And because you’re buying shares of an ETF, you’re buying shares of these tech giants in small bites. One thing that I’ve always liked about ETFs and mutual funds is that they give you a chance to see what stocks are really moving before you commit yourself to a large position.
A Hedge Against Volatility
Right now, there is a feeling that the market is not being driven by smart money. In fact, I heard this morning on a popular business show that the market is being steered by investors who believe that the market can only go up.
That’s worrisome to hear. It reminds me of the way the market got during the dot-com bubble. Any company that had something to do with the internet were issuing initial public offerings and seeing its stock prices go through the roof.
For those of you that remember that time, you know how that ended.
I’m not saying we’re heading for another crash. The only thing that may be more reliable than death and taxes, are investors who have tried to time the market.
But there is a general sentiment that something is not quite right. And that’s a good reason to invest in the SPY ETF. If the S&P 500 goes up, you will benefit by owning a small piece of each of these companies.
And if the S&P 500 goes down, you get the benefit of spreading your risk across the entire index rather than being exposed to any one individual stock.
It’s an Inexpensive Fund
One caution with any mutual fund or ETF is the fees that you get charged. The SPY ETF charges just 0.09% per year. That means a $10,000 investment costs you just $9.45 per year. And that is far lower than typical mutual funds.
But what are you getting for your money? In the case of the SPY ETF, you’re getting a fund with a sterling track record. It has outperformed 80% of active mutual funds over the past five years, according to State Street.
The SPY ETF Is an Anchor, Not a Sail
Although the fund is actively managed, it is still a fund, and that means it can be more conservative than many investors want. That’s particularly true in times like this when stocks are trending upward on the slightest hint of good news.
And you can still use some of your portfolio to capture some of those gains, but in the meantime consider using the SPY ETF as a nice anchor to keep your portfolio firmly anchored and protected from market volatility.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
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