What You Should Know About the World’s Most Popular Fund

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Exchange traded funds are changing the game for the average investor.  These funds provide access to industries and markets that you likely couldn’t access otherwise.  However, combining the diversity of a mutual fund with the all-day tradability of a stock isn’t necessarily the recipe for success.

The sheer volume of shares traded in these funds is staggering.  Topping the list is the SPDR S&P 500 (NYSEMKT: SPY), which trades nearly 133 million shares each day.  With 790.1 million shares, the fund is turning over 17% per day.  It’s essentially a trading vehicle for investors who are seeking to make directional bets on the market.  Does that mean the average investor should stay away?  I don’t think so, and here’s why. 

Not only is the fund the most popular, it’s unsurprisingly the top fund by assets under management with more than $112 billion.  While the fund invests across the 500 largest publicly traded companies in the US, it’s very heavily weighted at the top.  The top five holdings are:

<table> <tbody> <tr> <td> <p><strong>Apple </strong><span class="ticker" data-id="202686">(NASDAQ: <a href="http://caps.fool.com/Ticker/AAPL.aspx">AAPL</a>)</span></p> </td> <td> <p>4.32%</p> </td> </tr> <tr> <td> <p><strong>ExxonMobil </strong><span class="ticker" data-id="206209">(NYSE: <a href="http://caps.fool.com/Ticker/XOM.aspx">XOM</a>)</span></p> </td> <td> <p>3.21%</p> </td> </tr> <tr> <td> <p><strong>General Electric </strong><span class="ticker" data-id="203664">(NYSE: <a href="http://caps.fool.com/Ticker/GE.aspx">GE</a>)</span></p> </td> <td> <p>1.76%</p> </td> </tr> <tr> <td> <p><strong>Chevron </strong><span class="ticker" data-id="203255">(NYSE: <a href="http://caps.fool.com/Ticker/CVX.aspx">CVX</a>)</span></p> </td> <td> <p>1.63%</p> </td> </tr> <tr> <td> <p><strong>International Business Machines </strong><span class="ticker" data-id="203983">(NYSE: <a href="http://caps.fool.com/Ticker/IBM.aspx">IBM</a>)</span></p> </td> <td> <p>1.61%</p> </td> </tr> </tbody> </table>

Those five firms represent 12.5% of the index, while more than 20% of its assets are invested in the top ten holdings.  That puts a lot of weight behind the ETF’s daily movement on just a handful of companies.  Taking a deeper look into these top five gives fund investors a bit more insight into what they’re actually investing.

Apple – With a half trillion dollar market cap and more than $100 billion in cash, Apple is truly amazing.  The tech giant is trading at a very reasonable 13 times earnings and it now pays a respectable 2% dividend.    Analysts expect the company to grow earnings by more than 20% annually over the next five years.  Truly the company is an investor’s dream; it’s cheap, pay a decent dividend and is growing quickly. 

ExxonMobil – The $400 billion Exxon is even cheaper than Apple as it trades at less than 10 times earnings.  The company pays a 2.5% dividend and is spending billions to buy back shares.  Unlike Apple, Exxon isn’t projected to grow much at all over the next five years as analysts are projecting less than 1% annual growth.  Exxon though is a good proxy for oil and that commodity will be what drives Exxon’s future.

General Electric – At $225 billion, GE is an amazing amalgamation of businesses that is truly representative of the global economy.  From jet engines to light bulbs and financial services to entertainment, the company’s reach into our daily lives is incredible.  At just 16 times earnings, investors are paying a fair price for a company that analysts expect will grow 10% annually over the next five years.  Add in a 3% dividend and it is easy to understand why investors love this company. 

Chevron – With half the market cap of Exxon, this oil giant offers a bit more value to investors than its larger peer.  Not only do shares trade at less than nine times earnings but the company’s dividend is a percent higher than Exxon’s at 3.5%.  Analysts also expect the company to grow faster with the 5 year average clocking in at 6.5%. 

IBM – Rounding out the top five is the $217 billion iconic tech giant.  The company trades at less than 14 times earnings while paying a dividend just under 2%.  The company is projected to grow at about 9.5% annually over the next five years. 

Bottom Line

While the SPDR S&P 500 is heavily weighted to just five companies, these five are among the largest, most stable in the world.  Investors not only gain access to the success of these five great companies, but the 495 other great American firms that make up the rest of the fund’s assets. 

What’s even better is that the fund give you access to all this at a very low 0.09% expense ratio.  That’s a staggering savings to what most mutual funds will charge these days.  If you want to invest in America’s best but don’t have time to watch your investments then the SPDR S&P 500 is a great place to park your money. 

latimerburned is short shares of SPDR S&P 500 (Author's Note: This is a market hedge) and owns shares of Apple and has the following options: Apple. The Motley Fool owns shares of Apple, General Electric Company, International Business Machines, and ExxonMobil. Motley Fool newsletter services recommend Apple, Chevron, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus