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

Ong Kai Kiat is an avid investor. His expertise and focus is on how global macroeconomic affairs affect investment outlook and choices. He writes regularly about topics related to the economy, market outlook, ETFs and the occasional stock article.

8 Comments

  1. Serendib

    November 5, 2015 at 8:09 am

    I thought Fifth Person was targeted at Singapore/Asia-based investors? If so, this article does a poor job. Investing directly in US-listed ETFs exposes foreign investors (unless your country has a DTA with the US) to withholding tax of 30% on dividends and in the event of death, estate taxes.
    there is a better way:
    https://www.bogleheads.org/wiki/Nonresident_alien_with_no_US_tax_treaty_%26_Irish_ETFs

    • The Fifth Person

      November 5, 2015 at 11:42 am

      Hi Serendib,

      Thanks for pointing this out to our readers here!

      Yes, we’re aware of the 30% withholding tax for dividends which is why we don’t advocate a dividend investment strategy for US stocks; we mainly stick to Singapore and the region.

      The ETF is mainly for long-term capital growth and there is no tax on capital gains. As for estate taxes, it makes sense to liquidate any US securities before death — which, for most us, should happen in our 60-70s onwards!

    • Adam

      November 5, 2015 at 2:31 pm

      Hi Serendib,

      Thanks for sharing the resource! It’s great information.

      Regarding US estate taxes, there’s an interesting discussion here about whether foreigners need to pay estate duty for US assets upon death. It seems certain that there is an estate tax (since the IRS website states so as well), but there are other views saying that there isn’t when you purchase US stocks through a local broker since the shares are held in their nominee account:

      http://tankinlian.blogspot.sg/2010/03/estate-duty-in-us-on-non-residents.html

      In any case, it makes most sense to be conservative and assume there is an estate tax and consult a tax expert on how to plan for this financially.

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  3. momo

    November 5, 2015 at 6:13 pm

    Agree with Serendib.
    Vanguard FTSE All-World UCITS ETF VWRD (USD) on the London Stock Exchange is a better choice.

    • Adam

      November 5, 2015 at 7:47 pm

      It’s a different ETF. The Vanguard FTSE All-World UCITS ETF VWRD tracks the FTSE All-World Index while the SPDR S&P 500 ETF tracks the S&P 500 index.

      Not to say one is better than the other though! 🙂

      • momo

        November 6, 2015 at 4:42 pm

        Apologies didnt deliver what i meant.

        Vanguard FTSE All-World UCITS ETF VWRD (USD) on the London Stock Exchange is a better choice for the average singaporean retail investor. 🙂

  4. Pingback: 5 Reasons Why I’m Bullish on the U.S. Economy & the S&P 500 ETF | The Fifth Person

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