When people are either jumping for joy or fit to tear their hair out because of the performance of the American stock market, they’re usually responding to news about the “Dow”. The Dow is the colloquial term for the Dow Jones Industrial Average. It’s an index reflecting the prices of 30 of the largest publicly traded stocks. And in truth, it’s probably not the most accurate reflection of the stock market. That distinction would likely belong to the S&P 500, the almost 100-year-old stock index that takes into account the share prices of the 500 biggest publicly traded American companies. The S&P covers a whole lot of terrain; companies in the S&P represent about 80% of the entire market capitalization of the US stock market, so owning something that mimics the composition of the S&P is a lot like being able to have a pocket-sized reproduction of the entire market.
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Considering how many different mutual funds there are out there to be bought (over 9,000 in the US alone) you might be surprised to learn that there’s really only a handful of ETFs tracking the S&P 500. There are so few, in fact, that we’re going to tell you about all the major ones!
Investors in Canada will be stoked, chuffed, whatever the local word for excited is to know that they too can benefit from the growth of the American stock market since the ETFs listed below trade on the Toronto Stock Exchanges.
Main ETFs that track the S&P 500
We’ve organized the ETFs from largest to smallest, based on assets under management (AUM) as of January 2019. We’re not suggesting you choose any particular ETF but rather, we wanted to provide the information you need to make an informed choice.
|Name||Symbol||AUM (in millions)||Issuer||Morning Star Rating||Expense Ratio|
|SPDR® S&P 500 ETF||SPY||$244,903,891||SPDR State Street Global Advisors||4 stars||0.09%|
|iShares Core S&P 500 ETF||IVV||$153,991,870||BlackRock||4 stars||0.04%|
|Vanguard S&P 500 ETF||VOO||$93,147,815||Vanguard||5 stars||0.04%|
PDR (“the Spider”), the very first ETF and still one of the largest, was started to track the S&P. Since 1926, the first year of the S&P’s existence, the average return on the index has been 10.1 percent — no matter how you slice it, this is a good return. That said, nobody knows how the S&P 500 or any other investment for that matter may perform in the future. Investors should understand that past performance doesn’t guarantee future stock market gains. Any investment is speculative.
What do you do if you want to get in on the S&P 500 action? One option is to start trading yourself and purchasing shares in an S&P tracking exchange traded fund, or ETF. If the idea of making trades causes your head to spin, you might be best served using a robo-advisor. They invest your money for you, generally in market tracking ETFs similar to the S&P 500. It’s very possible, your portfolio will include the stock of companies within the S&P 500 or even an S&P 500 ETF.
How To Pick A S&P 500 ETF
Let’s be real. Though there are some writers who will point out the minute differences between how the various ETFs track the S&P when it comes right down to it, they’re all pretty darned similar in almost all respects. The one exception is in their MERs, or management expense ratios, the amount of the fund deducted annually to cover the issuer’s overhead. The beauty of all S&P tracking ETFs is because they require no management, their MERs are very, very low, particularly when compared to actively managed mutual funds, which will often run over 1%.
All three ETFs listed here carry low MERs, but iShares’ and Vanguard’s offerings are both .05 % lower than the Spider’s. What does this mean in dollars? For a small investor, over the short term, not a lot. If you’re like us and still use your pinky and thumb for addition, a fee calculator like this one shows that someone holding a $10,000 investment in an ETF with a .04% MER will pay $4.00 in a year, versus $9.00 for the .09% expense ratio.
But larger investments and the compounding effect of fees with a longer time horizon will magnify the effects. As an example, let’s say you had an investment that returned 7% per year. Over a 30 year period, a $500,000 initial investment will pay $42,507 in fees with a .09% MER, versus $18,892 with .04%, the difference representing an amount that could score you one of these amazing classic cars now or perhaps a gently used teleporting machine thirty years in the future.
How To Buy An S&P 500 ETF
The first rule of buying ETFs: Pay attention to trading costs. A .05% savings between two accounts becomes a lot less impressive if you have to pay a $50 trading commission to buy an ETF. You can use a trading platform to buy ETFs comprising of S&P 500 companies. Even low-cost online trading platforms will generally charge trading fees, but if you hunt around, you’ll be able to find tons who charge under $10 per trade or some that even charge no commission at all. Cheapskates will always read the fine print (and young cheapskates often grow up to be old millionaires.)
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