OVERVIEW OF S&P 500 EXCHANGE TRADED FUNDS
Why the S&P 500? Why Exchange Traded Funds? Why Invest?
For most people in the FIRE community, their main investment vehicle is an index fund. An Index fund is basically a basket of stocks from different companies. The power of this is in the diversification and the ability to sleep relatively well at night knowing that if one company goes down, you do not lose your life savings. Investing in individual stocks and being a “stock picker” is extremely risky. That is why here at The Money Vikings
we only do this with 5-10% of assets and we do it more for learning and entertainment purposes. If we lost it all, we would still be fine because we invest in index funds. The majority of our assets are placed in large Index funds. The reason is simple. With a collection of 500 great American businesses, even if 10 of them go under next week, the investment risk is spread and there would be 490 others still generating income and continuing to operate. This ends up being a valuable vehicle for achieving financial independence.
The opposite of investing is stashing your money into a savings account. A savings account does not return enough interest to keep up with inflation and taxes, which may go higher in the coming years. Inflation has made housing, educations, day care, medical care skyrocket over the past 30 years. Money placed in a savings account all that time is now worth half because it will not buy as much of anything.
WHAT IS AN EXCHANGE TRADED FUND?
Here we take a bit closer look at the SPDR S&P 500 Exchange Traded Fund which trades on the stock exchange under the symbol SPY. An exchange traded fund is a bit different because a person can buy individual shares of this index that trade independently on the stock exchange. SPDR is an acronym for the Standard & Poor’s Depository Receipts. The expense ratio of SPY is relatively low at .0945%. But similar investment vehicles and products are the Vanguard S&P 500 ETF and iShares S&P 500 Index, which have lower expense ratios of .05% and .07% respectively. Over long periods of time the expense ratio can make a difference in what you receive for returns.
WHAT IS THE S&P 500?
The S&P 500 is comprised of 500 (actually 505) of strong large and medium sized companies in the US from all different sectors including Health Care, Industrials, Information Technology, Communication Services, Utilities, Financials, Materials, Real Estate, Consumer Staples, Energy.
Owning shares of an ETF like SPY is like having money invested in a fund that mimics the money invested in the US world you see all around us. This includes great American companies that operate all over the world delivering their products and value to customers. Here is a snapshot of some of the companies you probably own shares in without even knowing it because all are part of the S&P 500:
Exxon Mobil, Facebook, Fed Ex, General Electric, General Motors, The Hershey Company, Johnson & Johnson, Kinder Morgan, Kraft Heinz, Microsoft, Occidental Petroleum, Pfizer, Qualcomm, Realty Income, Starbucks, Walt Disney Company, Apple, Boeing, Coca-Cola Company, CVS Health, etc. etc.
The S&P 500 is not a static club from the 1950’s, the companies admitted changes over time as companies come and go and evolve over time. In general, the company needs to be big, with a market cap over $6 billion, that is the value of all shares outstanding. At least 50% of shares need to be available to the public for trading and the companies need to be consistent profit generators. The bottom line is that the companies are a wide swath of the robust American economy and great American companies at the moment.
This is meant to be a brief overview of an S&P 500 ETF, which for many is a perfectly good investment vehicle if balanced correctly with other investments. All investing has an inherent risk because no human knows the future and how different dynamics will effect different businesses. But if a person is pursuing FIRE, most are stashing funds into a broad basket of diversified investments in order to seek maximum returns while managing risk. Some viable options may be the SPY, Vanguard 500 or iShares S&P 500 ETF’s.