A piece of advice that many people, including myself, give to new investors is to just “invest in the stock market,” but that does that mean? Well, for a new investor, I’m just telling you to get your money invested in the total stock market to get those types of returns. That’s easier said than done, but that’s why I am here to explain difference between SPX and SPY.
It’s easy for people that have been investing for awhile to say something like, “just put your money into the stock market”. Well…duh.
Unfortunately, for someone starting out brand new, this is not clear at all and can be very confusing. When we say this, what we’re telling you to do is put your money in an Exchange Traded Fund, or ETF, that mimics the stock market. Let me get even more simplistic.
When measuring the returns of the stock market, there are a few different groupings of companies that people use.
- Dow – 30 Large Companies
- S&P 500 – 500 Largest Companies by Market Cap
- Russell 2000 – Smallest 2000 stocks in the Russell 3000
- Nasdaq 100 – 100 Largest non-financial companies listed on the Nasdaq
Each of these have their own different groupings of stocks that make them up but people will look at those groupings and say, “wow, the market is up 1% today”. What they’re referring to are one of these groupings of stocks, most likely either the Dow or the S&P 500.
Personally, I think that the S&P 500 is the most representative of the total stock market because you get such a vast majority of companies that I would be the most likely to invest in. For that reason, I like to benchmark my returns against the S&P 500 as a barometer for how my investments are performing.
I view the S&P 500 as my “risk free” option where it’s the easy alternative that I could take as a completely hands-off approach to my investing journey if that’s what I wanted. But does that mean that I am literally buying shares of the S&P 500?
Nope! Ok, then what the heck am I buying?!
“What is SPX?”
Well, SPX is the indicator of the actual S&P 500. The S&P 500 has the ticker of SPX when you look it up on a website. For instance, see the screenshot from Market Watch with the SPX price:
But you can’t actually buy shares of the S&P 500, or SPX. In fact, when I go to Fidelity and type SPX into the search bar, you can see that the S&P 500 doesn’t even show up!
Those other tickers such as SPXL, SPXS and SPXU are other ETFs that are based off the S&P 500 but not meant to mimic those returns.
Instead, you’re going to want to invest in an S&P 500 ETF, like SPY. SPY is an ETF that is meant to directly mimic the returns of the S&P 500 and is 10% of the price.
Now, that doesn’t mean that you’re getting some massive bargain or anything, it just makes it a lower price so it’s easier for people to be able to buy shares of this ETF.
Below, you can see the screenshot from Market Watch for SPY:
Contrary to when I tried to type in SPX in the search bar in Fidelity, when I type in SPY, I actually have the ability to purchase this ETF as you can see below:
All that I need to do is select the quantity and the order type that I want to submit and boom – I can own SPY, or as I like to say, the S&P 500 ETF.
The beauty of doing something like this is that you’re just going to lock-in returns that the stock market gets. You’re not going to have crazy highs but you won’t have crazy lows, either.
In fact, a large majority of people actually don’t outperform the stock market because they think that they are smarter than the average investor but they’re not.
They’ll buy and sell stocks foolishly and think they’re day traders, just to inevitably find themselves continuously buying high and selling low, which is likely the exact opposite of what you’re used to people saying!
Buy low, sell high, right?
I honestly don’t think that there is anything at all wrong with just putting your money in SPY, which again is just a smaller, investible mirror image of SPX, with expectations of some might returns.
Over time, investing in the S&P 500 has given you some insane returns when you look at the share price return and the dividend yield:
Looking at those time periods, by literally creating a brokerage account (or preferably an IRA or HSA that is tax-advantaged), you can invest in SPY and capture over 6% annual returns as a very, very conservative number!
Have you ever been able to find a bank account that gives you those types of returns? I know that I certainly haven’t. The process will take you less than 5 minutes to actually buy the ETF and then you never have to touch it again – sounds pretty simple to me!
Now, I am a person that is adamant about being a stock picker, but that’s because I love to get into the nitty gritty and read the financial statements of various companies and make sure that I am finding the one with the most potential upside.
I also know that not everyone is a nerd like me and probably got sick to their stomach just reading those last few sentences – and guess what? That’s totally FINE!
You don’t have to want to read a 10K like I do. Instead, you can simply just invest in SPY and call it a day. Or, you can find an advisor and let them handle your investing for you. Or, you can even subscribe to a great newsletter like Andrew and Dave put out, like the Sather Research Letter or Fat Pitch Fundamentals, that give you an amazing view of the current market environment and some great stocks to purchase at that time!
You just need to know what’s best for you. Owning SPY isn’t just something for newbies – I own some too! Nothing wrong with just taking the stock market returns on some of my investments. The real question is – should you be using SPY to invest or an equal-weight index like RSP?
But that doesn’t mean that’s all I do – I like to up the risk a little bit with some other ETFs, similar to SPY, but instead with some that are following the returns of some up-and-coming companies in the cloud computing world!