SPY ETF: The SPDR S&P 500 ETF Trust and What It Holds

The SPDR S&P 500 ETF Trust is one of the most popular funds. It aims to track the Standard & Poor’s (S&P) 500 Index, which comprises 500 large-cap U.S. stocks. These stocks are selected by a committee based on market size, liquidity, and industry. The S&P 500 serves as one of the main benchmarks of the U.S. equity market and indicates the financial health and stability of the economy. Also known as the SPY ETF, the fund was established in Jan. 1993.

Understanding the SPY ETF

As noted above, the SPY ETF was established on Jan. 22, 1993. It is an exchange-traded fund (ETF) that tracks the S&P 500 Index. It is often regarded as the first ETF to be listed and remains one of the most actively traded, even with the advent of competing S&P 500 ETFs. In fact, it is considered to be the original fund that tracks the S&P 500.

The ETF was introduced in 1993 and had just $6.53 million in assets under management (AUM) at the time. After a rough start and some initial difficulty finding investors, it soared to more than $1 billion in AUM three years later. As of Sept. 20, 2023, the ETF trust has an extraordinary $406.6 billion in assets.

SPY is listed on the New York Stock Exchange’s (NYSE) Arca exchange, and investors can trade this ETF on multiple platforms. The trustee of the SPDR S&P 500 ETF Trust is State Street Bank and Trust, and its distributor is ALPS Distributors. Because ETF shares trade in a similar manner to stocks, investors can buy and sell SPY shares via their broker throughout the day, including selling them short.

The price of a share of SPY is intended to be one-tenth that of the S&P 500 Index. So, if the S&P is at a level of 4,000, then one SPY share should trade at close to $400.

SPY ETF Portfolio Structure and Costs

Because of its relative age, the ETF is constructed as a unit investment trust (UIT). This means it's a fixed portfolio that forms units that can be created and redeemed with the issuer. Because of this structure, the SPY fully replicates the S&P 500 Index, holding all members of the underlying index at their target weights.

The SPY and other index ETFs provide investors a way to own the entire index by owning a single security for a low cost. As of Sept. 20, 2023, SPY has an expense ratio of 0.0945%. While this ratio is low, it is not the lowest among other ETFs that track the S&P 500 Index. SPY’s expense ratio is more than triple the Vanguard S&P 500 ETF (VOO)’s expense ratio of 0.03%. Keep in mind that these fees do not include any broker fees or commissions.

SPY ETF Top Holdings

The SPY is a well-diversified basket of assets, which allocates its holdings across multiple sectors. The top five listed below are as of Sept. 21, 2023:

• Information Technology: 27.16%
• Healthcare: 13.41%
• Financials: 12.99%
• Consumer Discretionary: 10.70%
  
• Communication Services: 8.80%

The SPDR S&P 500 ETF Trust allocates almost all of its funds into common stocks, which are included in the S&P 500 Index. Its current top 10 holdings are in the following companies:

SPY ETF Performance

With a four-star Morningstar rating, SPY’s returns have closely tracked the S&P 500, an index that has bested the average return of other large-blend funds in the past decade. The SPDR S&P 500 ETF Trust (SPY) has generated an average three-year return of 15.79% as of Aug. 31, 2023. Based on trailing 10-year data, the fund generated average annual returns of 12.66%. Since the inception of the SPDR S&P 500 ETF Trust, the fund achieved average annual returns of 9.92%.

This, of course, tracks the S&P 500’s performance with a beta of nearly 1.00. What is important to note is that the SPY ETF, as it fully replicates the index, has a very low relative tracking error—just -0.03% as of Aug. 31 2023.

SPY Turns 30

The SPY celebrated its 30th birthday on Jan. 22, 2023, by remaining the preeminent S&P 500 ETF despite having higher management fees compared to its younger rivals. While the SPY wasn’t a new strategy when it launched in 1993, it provided a revolutionary way to invest by trading similarly to a stock on an exchange. 

Apart from a first-mover advantage, several factors have cemented the SPY’s longevity:

• The fund has benefited from a growing transition to passive investment management. Although active management funds have taken the lion’s share of net inflows over much of the last 30 years, that trend switched in 2018. In 2021, the U.S. equity fund market share in passive funds reached 54%, partly due to the SPY’s successful long-term track record and growing AUM.
• The S&P’s stellar performance, driven by large-cap technology stocks in the mid-to-late 1990s and after the Great Recession, helped the SPY to continue attracting further inflows. From 1995 to 1999, the blue-chip index gained an average of 28% per year, while from 2009 to 2022, it gained more than 400%.

The ETF’s $406.6 billion asset base, coupled with an average daily trading volume (ADTV) of around $28.5 billion, makes the fund popular with investors who want cost-effective exposure to the S&P 500 and traders who seek deep liquidity. The SPY’s broad appeal assures that it will remain at the forefront of financial markets for the foreseeable future.

The Bottom Line

The SPDR S&P 500 ETF Trust offers investors an efficient way to diversify their exposure to the U.S. equity market without having to invest in multiple stocks. Therefore, the SPY is suitable for any investors who want to include U.S. equities in their portfolio while taking only a moderate level of risk.

That being said, since the SPDR S&P 500 ETF Trust tracks 500 large-cap stocks in the United States, it carries a multitude of risks, such as market risk, country risk, currency risk, economic risk, and interest rate risk. Investors should be aware of both world and U.S. economic data, which could affect the performance of the fund.