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S&P 500 ETFs are a key component of many portfolios, often serving as a benchmark for long-term performance. Outperforming the S&P 500 is challenging, which is why trillions of dollars are invested in funds tracking this index.
What Are S&P 500 ETFs?
These exchange-traded funds (ETFs) aim to mirror the performance of the S&P 500, a market-capitalization-weighted index representing 500 leading U.S. companies. ETFs allow investors to buy shares that reflect the index’s performance, trading them throughout the day like stocks. The most well-known S&P 500 ETF, SPY, was launched in 1993 and remains a popular choice due to its liquidity and net assets.
Core vs. Tactical S&P 500 ETFs
Core S&P 500 ETFs closely track the index, with minimal deviation and low fees, making them a straightforward option for investors. These funds also provide dividends generated by the companies in the index. Tactical S&P 500 ETFs, on the other hand, may introduce slight variations in portfolio makeup, which can lead to higher fees and differences in performance compared to the core index.
Key Factors to Consider When Choosing an S&P 500 ETF
- Expense Ratios: Most S&P 500 ETFs are passively managed, which keeps fees low. However, if an ETF charges higher fees, it's worth reviewing its performance to see if the additional cost is justified.
- Liquidity: For long-term, hands-off investors, liquidity may not be a major concern. However, for active traders, choosing a more liquid fund with higher trading volumes ensures flexibility in buying and selling shares without impacting returns.
- Inception Date: Older ETFs offer a longer performance track record, which provides valuable insights into how the fund has performed across different economic conditions.
- Share Price and Investment Minimums: Unlike index funds, ETFs typically have no minimum investment requirements, making it easier to start investing with the purchase of just one share.
