7 Best Ways to Invest in the S&P 500 With ETFs

Investors looking for the cheapest, easiest way of investing in the S&P 500 can consider VOO. VOO is Vanguard's ETF equivalent of their highly popular and long-standing Vanguard 500 Index Fund (VFINX). The ETF is extremely cheap, costing an annual expense ratio of just 0.03%. For a $10,000 investment, this works out to around $3 in fees annually, which is significantly less than actively managed funds or even comparable offerings in 401(k) plans. VOO is highly popular, having attracted sufficiently high AUM to warrant a low bid-ask spread and garnering high daily trading volumes.

VOO might be popular among passive index investors, but the top ETF in terms of AUM and volume is still SPY. Thanks to this, SPY is used extensively by retail and institutional investors around the world, with a minuscule bid-ask spread. If you're looking for a more active trading approach, SPY is a good pick, as the ETF has an extremely well-developed options chain. However, for a long-term buy-and-hold asset, SPY is less ideal than VOO, given that its expense ratio is three times higher at 0.09%. While still low, this difference can add up over time, especially for larger account balances.

Dividend investors seeking high yield and consistent income can buy SPYD, which targets 80 stocks in the S&P 500 with the highest current dividend yields. Currently, the fund's 12-month trailing distribution yield stands at 3.8%, which is much higher than the regular index. This fund is ideal for investors who rely on consistent withdrawals from their portfolios, but may not wish to sell shares for income. Compared to its cousin SPY, SPYD is also somewhat cheaper, with an expense ratio of 0.07%. It is also less concentrated in the technology sector, as its dividend-paying companies tend to come from the energy, financials, health care and consumer staples sectors.

Investors seeking maximum income potential while still investing in the S&P 500 can consider a covered call ETF like XYLD. XYLD sells a derivative called a covered call to generate consistent monthly income. This is an option that gives the buyer the right to buy 100 shares of the underlying ETF (an S&P 500 ETF) at a certain price by a certain date. In exchange, XYLD receives an upfront cash premium. Compared to a regular index fund, XYLD tends to underperform in bull markets, but can outperform in sideways markets. Its total return is lower, but it pays out a higher distribution, with a current 12-month trailing yield of 11.8%. However, the ETF is more expensive with a 0.6% expense ratio.

Investors looking for an S&P 500 ETF that contains a built-in hedge against market crashes can consider SPD. For every $100 invested in SPD, the ETF allocates 96% into a regular S&P 500 ETF. The remaining 4% is invested in a ladder of out-of-the-money put options on the S&P 500 index. These are derivatives that can sharply increase in value when the S&P 500 crashes, thus mitigating some of the losses that SPD incurs. However, during bull markets SPD will likely underperform a regular S&P 500 ETF due to the cost of purchasing new put options as they expire. Think of this cost as insurance, where you pay a premium that may or may not be worth the payoff depending on if the worst-case scenario materializes or not. SPD costs an expense ratio of 0.28%.

Investors looking to day- or swing-trade the S&P 500 without using options, futures or margin can consider a leveraged ETF like UPRO for magnified exposure. UPRO offers investors a daily return targeting 3 times the performance of the S&P 500. For example, UPRO would gain 9% if the S&P 500 gained 3%, and vice versa if it fell. However, this exposure is daily. If held longer than a day, the performance of UPRO can differ significantly due to how compounding works. This is called "volatility decay," and it can cause significant tracking error. Thus, UPRO is best suited as a tactical instrument for short-term speculation as opposed to a long-term investment. The ETF is also costly, with an expense ratio of 0.91%.

The opposite of UPRO is SPXS, which offers daily inverse 3 times exposure to the returns of the S&P 500. Essentially, this ETF does the opposite of what the S&P 500 does. For example, SPXS would gain 9% if the S&P 500 fell 3%, and vice versa if it rose. Over the long term, the share price of SPXS trends toward zero as the S&P 500 tends to gain value over time, necessitating the frequent use of reverse stock splits. Thus, the ETF is highly unsuitable for a long-term hold and is best used as a hedge for risk management if investors think a market crash is on the horizon. Like most leveraged ETFs, SPXS is quite pricey, with a high expense ratio of 1.01%.