ETF Talk: SPY Offers Investment Intrigue

The SPDR S&P 500 (SPY) has an attention-grabbing ticker, but the broad market stock fund’s mission is no mystery. This exchange-traded fund (ETF) is designed to track the performance of the S&P 500 Index, and to let investors benefit from gains in the performance of this benchmark index. The broad-based nature of the fund also offers diversification that helps to reduce overall risk.
 
The word SPY may conjure up cloak-and-dagger images, but the fund SPY also should create images of intriguing portfolio gains. I recommended this ETF to subscribers of my Successful Investing newsletter last June, and so far, SPY has achieved a double-digit percentage gain. At the close of trading yesterday, the fund was up more than 16% since I recommended it.

However, there is no guarantee that the overall stock market will remain on the ascent. For that reason, diversifying your holdings is a good strategy. Now, a diversified portfolio typically includes exposure to various equities, and SPY provides that diversity for you — and without the risk that investing in individual companies can bring. If one company melts down due to an unexpected financial crisis, a diversified fund such as SPY is insulated from the worst of the fallout.

As one of the first ETFs ever established, SPY is a proven fund that has a large volume of buyers and sellers each day. For an investor, such a high level of liquidity allows you to enter and exit the position with the confidence that a fluid market exists to establish the fund’s fair value.

To give you a sense of SPY’s diversity, consider that its largest holdings feature companies that are household names, but in very different industries. SPY’s biggest holdings as of December 7, 2009, were Exxon Mobil, 3.65%; Microsoft, 2.38%; Proctor & Gamble, 1.87%; Johnson & Johnson, 1.82%; and Apple, 1.77%. These holdings help to anchor the fund and reward you when the S&P index that it tracks is on the rise. And, their diverse nature helps to spread the risk of loss when one of the companies falters.

If you want my advice about which ETFs to buy and to sell, I encourage you to check out my ETF Trader service by clicking here. Please keep in mind that I am pleased to answer any of your questions about ETFs. To send me a question, simply click here. You may see your question featured in a future ETF Talk.