SPY is one of the most popular investments in the world. This ETF tracks the S&P 500 index, giving you ownership in 500 of America's largest companies with a single purchase. Warren Buffett himself has recommended that most investors simply buy the S&P 500 and hold it for the long term.
What is SPY?
SPY (SPDR S&P 500 ETF Trust) was the first ETF ever created in the United States, launching in 1993. It tracks the S&P 500 index, which includes 500 of the largest US companies weighted by market capitalization.
What you own with SPY: When you buy one share of SPY, you own a tiny piece of Apple, Microsoft, Amazon, NVIDIA, Alphabet (Google), Meta, Berkshire Hathaway, and 493 other companies. The biggest companies have the most weight in the index.
Why Invest in SPY?
1. Instant Diversification
One share of SPY gives you exposure to 500 companies across all major sectors: technology, healthcare, financials, consumer goods, energy, and more. This diversification reduces the risk of any single company hurting your portfolio.
2. Proven Long-Term Returns
The S&P 500 has returned approximately 10% annually over the long term. Despite crashes and corrections, patient investors have been rewarded consistently over 10, 20, and 30-year periods.
3. Low Cost
SPY has an expense ratio of 0.0945%, meaning you pay less than $10 per year for every $10,000 invested. There are even cheaper S&P 500 ETFs like VOO (0.03%), but SPY offers superior liquidity.
4. High Liquidity
SPY is the most heavily traded ETF in the world. You can always buy or sell quickly at fair prices with tight bid-ask spreads.
Step-by-Step: How to Buy SPY
Step 1: Open a Brokerage Account
If you do not have one already, open an account with a broker that offers commission-free ETF trading. Popular options include Fidelity, Charles Schwab, TD Ameritrade, and Robinhood. The process takes about 10 minutes online.
Step 2: Fund Your Account
Transfer money from your bank account to your brokerage. Most brokers offer ACH transfers that take 1-3 business days, or instant deposits for smaller amounts.
Step 3: Search for SPY
In your broker's search bar, type "SPY" to find the SPDR S&P 500 ETF Trust. Make sure you select the correct ticker symbol.
Step 4: Decide How Many Shares
Check the current price and decide how many shares you want to buy. Many brokers now offer fractional shares, allowing you to invest any dollar amount.
Step 5: Place Your Order
For most investors, a market order works fine during regular trading hours. If you want a specific price, use a limit order.
Example: Buying SPY
Say SPY is trading at $500 per share and you have $2,500 to invest:
- Whole shares: You can buy 5 shares for $2,500
- Fractional shares: If you have $600, you could buy 1.2 shares
- After your order executes, you own a piece of 500 American companies
SPY vs VOO vs IVV: Which S&P 500 ETF?
Multiple ETFs track the S&P 500. Here are the main differences:
- SPY: Oldest and most liquid, 0.0945% expense ratio, best for active trading and options
- VOO: Vanguard's version, 0.03% expense ratio, best for long-term buy and hold
- IVV: iShares version, 0.03% expense ratio, similar to VOO
For long-term investors, VOO or IVV save you money on fees. For traders or options investors, SPY's superior liquidity is worth the slightly higher expense.
Investment Strategies for SPY
Dollar Cost Averaging
This is the simplest and most effective approach. Invest a fixed amount on a regular schedule regardless of price. If you invest $500 per month, you automatically buy more shares when prices are low and fewer when prices are high.
Why dollar cost averaging works: You remove emotion from investing. You do not need to guess whether the market is high or low. Over time, this approach has helped millions of investors build wealth without trying to time the market.
Lump Sum Investing
If you have a large sum to invest, studies show that investing it all at once typically beats dollar cost averaging about two-thirds of the time. However, dollar cost averaging may help you sleep better at night if markets drop after you invest.
Buy the Dip
Some investors keep cash on hand to buy more SPY during market corrections. While this can improve returns, it requires discipline and a willingness to buy when everyone else is panicking.
Using SPY for Options Trading
SPY is the most popular underlying for options trading due to its liquidity and tight spreads. Common strategies include:
- Covered calls: Generate income on shares you already own
- Cash-secured puts: Get paid while waiting for a better entry price
- Protective puts: Insure your portfolio against market drops
- Vertical spreads: Defined-risk directional trades
Options on SPY are especially useful for hedging an entire portfolio of US stocks.
Tax Considerations
In Taxable Accounts
SPY pays dividends quarterly, which are taxable. If you hold SPY for over a year, gains are taxed at long-term capital gains rates (0-20%). Short-term gains are taxed as ordinary income.
In Retirement Accounts
In IRAs or 401(k)s, you do not pay taxes on dividends or gains until you withdraw money. This makes retirement accounts ideal for buy-and-hold SPY investing.
Historical Performance
Understanding SPY's history helps set realistic expectations:
- Average annual return since 1993: approximately 10%
- Best year: 2013 with a 32% return
- Worst year: 2008 with a 37% loss
- Positive years: roughly 75% of the time
- Maximum drawdown: about 50% during the 2008 financial crisis
Long-Term Growth Example
$10,000 invested in SPY at the start of 2000 would be worth approximately $65,000 today, despite two major market crashes. The same investment in 2010 would be worth about $60,000. Time in the market beats timing the market.
Common Mistakes to Avoid
- Panic selling during drops: Every market correction feels like the end of the world. They never are. Selling at the bottom locks in losses.
- Trying to time the market: Missing just the 10 best days over 20 years can cut your returns in half
- Checking too often: Daily price movements are noise. Focus on your long-term plan.
- Not reinvesting dividends: SPY pays about 1.5% in dividends. Reinvesting these compounds your returns over time.
- Overcomplicating: You do not need 20 ETFs. SPY alone can be the core of a successful portfolio.
Building a Portfolio Around SPY
While SPY can be your entire stock allocation, some investors add:
- International stocks (VXUS): For geographic diversification
- Small caps (IWM): For exposure to smaller companies
- Bonds (BND): For stability and income
- REITs (VNQ): For real estate exposure
A simple portfolio of 80% SPY and 20% BND has performed well historically while reducing volatility.
Track Your SPY Investments
Pro Trader Dashboard helps you monitor your SPY holdings, track your cost basis, and analyze your portfolio performance over time.
Getting Started Today
The best time to start investing in SPY was yesterday. The second best time is today. Here is a simple action plan:
- Open a brokerage account if you do not have one
- Set up automatic monthly transfers from your bank
- Buy SPY (or VOO for lower fees) consistently
- Reinvest all dividends
- Ignore short-term market movements
- Review your allocation once per year
Summary
SPY is one of the simplest and most effective investments available. It gives you instant ownership in 500 of America's largest companies with minimal fees. Dollar cost averaging into SPY over decades has helped millions of ordinary people build substantial wealth. Start today, stay consistent, and let compound growth work in your favor.
Want to explore other ETFs? Learn about investing in QQQ for technology exposure or discover the best dividend ETFs for income.