No matter how much I rack my brain, I can't think of a better
investment than an index fund that tracks the
. And the biggest and best-known of the bunch is the
SPDR S&P 500
, an exchange-traded fund run by Boston-based
I could go on and on about why this is the case and why it's
therefore a good time to buy the popular index now, but I'll
limit myself to two reasons.
The SPDR S&P 500 is cheap and easy
Very few investors have an unlimited amount of time to
research investment alternatives. On top of this, even fewer have
the expertise needed to identify a great stock.
Sure, a guy like Warren Buffett makes investing in common
. But the reality is that it's extremely hard to do so
profitably. By his own admission, Buffett reads upwards of 500
pages of annual reports a day to gain the necessary insight to do
Suffice it to say that most of us have neither the time nor
the discipline to follow this approach. And this is why the SPDR
S&P 500 can serve as such a valuable proxy.
As Buffett himself noted in
latest annual letter to shareholders
My advice to the trustee [of my wife's portion of my estate]
could not be more simple: Put 10% of the cash in short-term
government bonds and 90% in a very low-cost S&P 500
index fund. (I suggest Vanguard's.) I believe the trust's
long-term results from this policy will be superior
to those attained by most investors -- whether pension
funds, institutions or individuals -- who employ
Why would Buffett do this? Because the S&P 500 tracks the
biggest and best publicly traded companies in America --
to learn more about how the index works. According to Standard
& Poor's, "The index includes 500 leading companies and
captures approximately 80% coverage of available market
On top of this, unlike a mutual fund, an ETF charges very low
management fees. The SPDR S&P 500 sports an expense ratio of
only 0.09%, meaning that it charges you less than a tenth of a
percent of your investment each year. An actively managed mutual
fund, by contrast, will cost you somewhere in the neighborhood of
The SPDR S&P 500 will probably maximize your returns
The second reason to invest in the SPDR S&P 500 is that
doing so will almost certainly produce better returns than
leaving your money in cash or buying and selling individual
The research on this point is
: The vast majority of investors underperform the market.
Industry research suggests that the broader market beats the
average investor by a factor of two -- that is, for every 1%
return generated by a typical investor, the broader market gains
Indeed, even the lion's share of hedge funds can't match the
S&P 500. Take the chart below, which compares the most widely
followed hedge fund index to the performance of the large-cap
index since 2005. As you can see, the average
has returned roughly 30% over this stretch, while the S&P 500
is up by about 60%.
The one downside to buying the SPDR S&P 500 right now is
that stocks are admittedly expensive. At its current price, the
fund is more than 25% higher than its pre-crisis peak.
Additionally, according to valuation data curated by Yale's
Robert Shiller, there have only been a handful of occasions in
the past when the S&P 500, as a whole, was more expensive
than it currently is. During the last 130-plus years, the average
10-year cyclically adjusted price-to-earnings ratio of the index
has been 16.55. Today, it's 25.4.
The bottom line on the SPDR S&P 500
There's a reason the SPDR S&P 500 is the nation's largest
exchange-traded fund, as there are few downsides to using it as
the core -- or even the only -- holding in your long-term
Is right now the most ideal time to buy it?
That's open to debate, given the current heights of the stock
market. At the same time, however, if you're investing for the
long run, the timing of when you buy is much less important than
the length of your holding period. And it's for this reason that
I believe there's never a bad time to invest in the SPDR S&P
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Should You Buy the SPDR S&P 500?
originally appeared on Fool.com.
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