What is the SPY ETF?
What is the SPY ETF?
The SPDR S&P 500 ETF (commonly referred to as “SPY”) is the oldest and most actively traded exchange-traded fund (ETF) globally, designed to track the S&P 500 Index. Since its launch in 1993, the SPY ETF has provided investors with a simple and cost-effective way to gain exposure to the entire U.S. stock market by holding shares of the 500 largest publicly traded companies. SPY is ideal for investors seeking broad market diversification without needing to select individual stocks.
Composition of the SPY ETF
SPY replicates the S&P 500 Index, which consists of the 500 largest U.S. companies that must meet strict criteria to be included. These criteria include:
- Market Capitalization: Companies must reach a certain size.
- Liquidity: High trading volumes are required to ensure liquidity.
- Profitability: Companies must have generated profits in recent quarters.
The S&P 500 is weighted by market capitalization, meaning larger companies hold a greater share of the index (and, thus, of the SPY ETF). The top 10 companies in the S&P 500 make up a significant portion of the total index value, including prominent names like Apple, Microsoft, and Amazon.
Overview of the SPY ETF Holdings
The SPY ETF holds all the stocks in the S&P 500.
| Sector | Examples of Top Companies |
|---|---|
| Technology | Apple, Microsoft, Nvidia, Adobe |
| Healthcare | UnitedHealth Group, Johnson & Johnson, Pfizer |
| Financials | JPMorgan Chase, Bank of America, Wells Fargo |
| Consumer Discretionary | Amazon, Tesla, Home Depot, McDonald’s |
| Consumer Staples | Procter & Gamble, Coca-Cola, PepsiCo |
| Industrials | Boeing, Caterpillar, Honeywell |
| Energy | ExxonMobil, Chevron, ConocoPhillips |
| Communication | Meta Platforms (formerly Facebook), Alphabet (Google), AT&T |
| Real Estate | American Tower, Prologis, Simon Property Group |
| Utilities | NextEra Energy, Duke Energy |
The Top 20 Holdings of the SPY ETF
The full list of stocks in the SPY ETF is impressive, containing some of the world’s most influential companies. Here are the largest 20 positions and their weightings in the S&P 500 (as of October 2024):
- Apple Inc. – 7.0 %
- Microsoft Corp. – 6.2 %
- Amazon.com Inc. – 3.2 %
- NVIDIA Corp. – 2.9 %
- Alphabet Inc. (Google) – 2.8 %
- Meta Platforms Inc. (Facebook) – 2.3 %
- Tesla Inc. – 2.1 %
- Berkshire Hathaway Inc. – 1.9 %
- UnitedHealth Group Inc. – 1.7 %
- Johnson & Johnson – 1.6 %
- JPMorgan Chase & Co. – 1.4 %
- Visa Inc. – 1.3 %
- Procter & Gamble Co. – 1.2 %
- Exxon Mobil Corp. – 1.1 %
- Home Depot Inc. – 1.0 %
- Mastercard Inc. – 1.0 %
- Chevron Corp. – 0.9 %
- Pfizer Inc. – 0.8 %
- AbbVie Inc. – 0.8 %
- PepsiCo Inc. – 0.7 %
These 20 companies represent about 40% of the index’s value, highlighting how much the SPY is influenced by the largest U.S. companies. A complete list of all 500 companies, sorted by sector and weighting, can be found in the official SPY prospectus or on the issuer’s website.
How Invested Money Flows into the Individual Stocks
A common misconception about ETFs is that invested money directly flows into all the stocks within the ETF. In reality, this is managed through the so-called Creation/Redemption Process:
How ETFs Create New Shares: When an investor buys SPY shares, their money does not go directly into the stocks. Instead, “Authorized Participants” (often market makers or large banks) ensure that enough SPY shares are available in the market. These authorized participants create new shares by purchasing all the stocks in the index in their respective weightings and delivering these stocks to the ETF issuer. In return, they receive newly created ETF shares, which they can then sell on the market.
Liquidation of Shares: When demand for the ETF decreases and investors sell their shares, the opposite happens. The ETF issuer redeems shares, and the stocks supporting the ETF are sold on the market.
Impact of the Creation/Redemption Process on Stock Prices: The Creation/Redemption Process is a key pillar of ETF stability, enabling a nearly seamless replication of the index. When the SPY ETF experiences increased demand, this can indeed influence the underlying stock prices, as the creation of new ETF shares increases demand for the index stocks.
Advantages and Disadvantages of the SPY ETF
Advantages
- Diversification: An investment in SPY offers immediate diversification across 500 large U.S. companies.
- Low Costs: The expense ratio for SPY is around 0.09%, which is very low compared to actively managed funds.
- High Liquidity: The SPY ETF is highly liquid and heavily traded, leading to tight bid-ask spreads and favorable trading conditions.
- Easy Access: A single investment in SPY provides access to a broadly diversified portfolio.
Disadvantages
- Concentration Risk: Since the S&P 500 is market cap-weighted, a relatively small group of large companies makes up a large portion of the ETF’s value, leading to concentration risk, especially in the technology sector.
- Lack of Customization for Individual Investor Needs: Since SPY tracks a broad index, it may not be tailored to specific investment goals or preferences.
Conclusion
The SPY ETF is an excellent choice for investors looking to invest in the U.S. market over the long term. It provides access to the largest and most influential companies and represents extensive diversification within a single investment. Although SPY has some disadvantages, the benefits of a low-cost and easily accessible investment often outweigh them for many investors.