Key Morningstar Metrics for SPDR S&P 500 ETF Trust
- Morningstar Medalist Rating: Silver
- Process Pillar: High
- People Pillar: Above Average
- Parent Pillar: Above Average
SPDR S&P 500 ETF Trust SPY offers a well-diversified, market-cap-weighted portfolio of 500 of the largest US stocks. It accurately represents the US large-cap opportunity set while charging a rock-bottom fee—a recipe for success over the long run.
The exchange-traded fund tracks the flagship S&P 500, which selects 500 of the largest US stocks, covering roughly 80% of US market capitalization. An index committee has discretion over selecting companies that meet certain liquidity and profitability standards. This committee-based approach may lack clarity, but it adds flexibility to limit unnecessary changes during reconstitution. It should incur modestly lower transaction costs compared with more rigid rules-based indexes.
The end portfolio is well-diversified and accurately resembles the US large-cap opportunity set. This allows the ETF to capitalize on its low fee, ultimately delivering sound long-term performance on both an absolute and risk-adjusted basis.
The bedrock of this ETF is its market-cap weighting, which harnesses the market’s collective wisdom of each stock’s relative value with the added benefits of low turnover and trading costs. It’s a sensible approach because the market tends to do a good job pricing large-cap stocks. The companies in this portfolio attract liquidity and widespread investor attention, such that prices reflect new information quickly.
However, its market-cap weighting may expose the ETF to stock- or sector-level concentration risk when a few richly valued companies or sectors power most of the market gains. As of December 2023, the portfolio’s top 10 holdings made up a larger portion of the index (31%) than they had in several decades. Its 30% allocation to technology stocks was the highest since the dot-com bubble. But this is not a fault in design: The S&P 500 simply reflects the market’s composition. In the long run, its broad diversification, low turnover, and low fee outweigh these risks.
Performance Highlights
This ETF accurately represents the US large-cap opportunity set, allowing it to leverage its cost advantage that drives sound category-relative performance. These qualities position the ETF for outperformance against US large-cap peers over the long run.
The ETF’s performance closely follows the ups and downs of the US stock market since it is always invested. All else equal, this ETF should outperform its peers that hold cash during market rallies. Likewise, the ETF should lag similar peers when the market falls because it lacks a cash buffer.
The ETF misses out when small-cap stocks outperform large-cap stocks, as they did in the fourth quarter of 2020 because it focuses on the largest and the most established companies. The S&P 500 lagged the Morningstar US Market Index (which includes large-, mid-, and small-cap stocks) by 2 percentage points over the fourth quarter of 2020. Likewise, the ETF can become top-heavy during periods of consolidation among top US companies. This exposes the portfolio to US market risks should another dot-com-type bubble burst; the S&P 500 fell over 40% in the early 2000s.