BT INVEST

A Personal Finance and Investment Arm of The Business Times
MARKET TODAY:

Archive

How to Invest in the Top 500 U.S Companies with the S&P 500 ETF

How to Invest in the Top 500 U.S Companies with the S&P 500 ETF

The SPDR S&P 500 ETF (NYSE: SPY) is the oldest and most successful ETF in the world and tracks 500 of the most successful companies in the United States across various sectors.

Find out more about ETFs: A Simple 4-Step Introduction to ETFs

In my opinion, SPY is the most cost-effective method to gain exposure and ride on the economic growth of the U.S. For those of us who are bullish on the U.S. in general but don’t know which particular U.S. stock to buy, then going with the SPY might be your best choice.

The table below provides the basic characteristics of SPY:

SPY table

Source: Yahoo! Finance/Morningstar

SPY is highly established and liquid with $168 billion in assets and 149 million shares exchanged on average over three months. State Street Global Advisors is the institution behind the SPY and they are the second largest asset manager in the world with US$2.4 trillion in assets under management — behind only BlackRock.

Here are the top ten holdings for the SPY:

SPY top 10

Source: Yahoo! Finance

The top ten holdings of the SPY would give you a general idea of the composition of SPY. It contains technology companies like Apple and Microsoft, energy companies like Exxon Mobil, and pharmaceutical company like Pfizer. It is a highly diversified ETF; the top holding (Apple) weighs less than 4% of the total fund and the top ten at only 16.94%. This means that if any company were to get into trouble and see its stock price fall, it would not affect the SPY significantly.

Another great thing about the SPY is that it will always contain the top 500 companies in the U.S. The best way to illustrate this is like how football clubs are promoted to (and relegated from) the Premier League based on their performance.

Similarly, the index will only select the top 500 U.S. companies. If a company grows more and more successful, it will eventually replace another company’s spot in the S&P 500 when it overtakes it – so you’re always invested in the best 500 companies. In this sense, the index is emotionless and very efficient.

Here’s the growth of the SPY over the last ten years:

SPY returns

Source: Morningstar

The chart shows that the SPY closely follows the return of the index which it tracks: the S&P 500. If you invested $10,000 in the SPY ten years ago, it would be worth approximately $16,800 today (a 68% return) – even when taking into account the Global Financial Crisis of 2008/09. Of course, if you were one of the more savvy investors and bought the SPY in 2009 and held it to today, your return would be even higher – a 180% return.

Relationship between U.S. GDP and the S&P 500

I mentioned that a growing American economy means a rising S&P 500 as well and you might be wondering about the correlation:

SPY-GDP

Source: InvestModels

As you can see from the chart above, there is a positive correlation between the U.S. economy and the S&P 500.

Why is that so?

The reason is straightforward. When the US economy is strengthening, U.S. consumers spend more and it is very likely that they will spend their most of money with one of the top 500 U.S. companies. These companies grow more successful and their stock prices rise which in turn brings the entire index upward.

So the question is: How is the U.S. economy doing right now and will it continue to grow upwards for the next few years to come?

I look at this from four main areas:

  • Overall U.S. economic growth
  • U.S. retail conditions (consumer consumption represents 70% of U.S. GDP)
  • U.S. labour conditions
  • U.S. Purchasing Managers’ Index

I cover this in my next article: 5 Reasons Why I’m Bullish on the U.S. Economy & the S&P 500 ETF

Are you looking for a formula that can consistently pick out the best companies to invest in and make you a LOT of money in the stock market? If you are, then this might finally be the answer you've been looking for. Because this is the same exact formula we used to create 7-figure results in a single stock portfolio - and we did it in just two years. Find out what this formula is right here.

Do you think that it's nearly impossible to double or triple your investment in blue-chip stocks? If you want the stability and security of a blue-chip company but are looking for the supercharged returns of smaller, high-growth stocks, then we want to tell you that it is possible. In fact, we want to show you how we uncovered one company that's a market leader in its industry... but was still growing its revenues by up to 20.4% a year and its net profits by up to 39.8% a year. Click here to find out which company and download a FREE report that shows you how we made 243.5% returns in this "super" investment.

If you enjoyed this article, get email updates (it's free).

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this course material and/or document be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of the Fifth Person Pte Ltd (“the Authors”); and are merely the written opinions and ideas of the Authors, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Authors make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Authors, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.
 
Ong Kai Kiat
Ong Kai Kiat

Ong Kai Kiat is an avid investor and forex trader. His expertise and focus is on how global macroeconomic affairs affect investment outlook and choices. He is a frequent contributor on Seeking Alpha under the author name FX Analyst and is currently ranked #4 in Forex and #5 in ETF Quick Picks and Lists. He writes regularly about topics related to forex, market outlook, ETFs and occasional stock articles.