Strong Performance in the S&P 500: What Investors Should Know
The S&P 500 has had a remarkable year in 2024, with returns exceeding 26% as of December 27. This index serves as a reflection of the overall U.S. economy, indicating robust growth. However, it’s important to note that not every stock within the S&P 500 has performed equally. Investors should be aware of the high benchmark for beating the market when evaluating individual stocks.
For many investors, S&P 500 ETFs, such as the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) and the iShares Core S&P 500 ETF (NYSEARCA: IVV), are a staple in their portfolios. These funds provide simple access to a wide range of stocks within the index. Whether or not you currently own one of these funds, there are compelling reasons to consider increasing your investment in S&P 500-focused options.
Reducing Costs: The Impact of Expense Ratios
Expense ratios, which are fees charged to investors for managing ETFs, can significantly influence long-term returns. As of December 26, 2024, SPY remains the largest S&P 500 ETF, boasting over $632 billion in assets under management and an expense ratio of 0.09%. In contrast, the Vanguard S&P 500 ETF (NYSEARCA: VOO) has assets of $583 billion and a lower expense ratio of 0.03%, making it a more cost-effective option for investors. While both figures are relatively low compared to the ETF market as a whole, the savings can compound considerably for long-term investors.
Furthermore, ETF providers are motivated to reduce fee structures for S&P 500 funds to attract more investments. Since these funds essentially track the same index, expense ratios are a key factor when investors are deciding among different funds.
The Power of Dollar-Cost Averaging
Investors who already allocate assets to S&P ETFs will likely benefit from continual contributions over time, thanks to the strategy of dollar-cost averaging. Historically, the S&P 500 has shown a tendency to increase, achieving new highs throughout 2024. By investing regularly in S&P 500 funds—even at peak prices—investors can leverage dollar-cost averaging to enhance future returns.
Some investors may hesitate, worrying that purchasing an S&P ETF at this high point signifies a poor investment. However, analysis of historical trends suggests that bullish momentum is likely to persist, making long-term investments a potentially wise choice.
ETFs vs. Other Investment Avenues
Options for accessing the S&P 500 extend beyond ETFs to include various mutual and index funds. However, ETFs are often more appealing due to their lower expense ratios, particularly when compared to Class C mutual funds that typically have elevated fees.
Additionally, ETFs like the SPDR Portfolio S&P 500 ETF (NYSEARCA: SPLG) can outperform certain other S&P 500 funds, which may experience variances due to tracking errors when their portfolios diverge from the index’s composition. Moreover, funds that adjust their holdings at differing rates may further contribute to tracking inaccuracies or decrease transparency for investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
