S&P 500 ETFs: All You Need to Know

What's not to love about the long-lived, ubiquitous S&P 500 index?

Since its inception in 1957, the S&P 500 has delivered an annualized return of 10.15% with all dividends reinvested. This is a fantastic rate of return that is highly difficult for the majority of actively managed funds to beat over time.

Consider the latest SPIVA scorecard from S&P Dow Jones Indices, which found that over the last 15 years, a whopping 89.38% of actively managed large-cap U.S. equity funds underperformed the S&P 500. No wonder Warren Buffett endorsed it as the investment of choice for his estate.

Since the debut of the SPDR S&P 500 ETF (SPY (NYSE:SPY)) 30 years ago, a slew of ETFs tracking the S&P 500 index have cropped up. Some of these ETFs offer regular long exposure, others provide factor exposure, while some employ derivatives to boost yields, provide leverage, or offer inverse exposure.

Let's examine the current roster, which includes ETFs from providers like State Street, Vanguard, iShares, Invesco, Global X, ProShares, and Direxion to name a few. The S&P 500 ETF template is incredibly versatile, and there's a whole universe of unique variants out there to learn about.

S&P 500: Regular exposure

As an investment, S&P 500 ETFs have a few unique advantages that make them particularly suitable as a core U.S. equity holding in any portfolio. These include:

• Low expense ratios (as low as 0.03% in some cases);
• Low fund turnover due to the index structure.
• Decent tax-efficiency due to fairly low distributions consisting mostly of qualified dividends.
• Adheres to a rigorous committee security selection process that ensures quality holdings.

While SPY is currently the largest and most popular S&P 500 ETF, it is by no means the cheapest. With an expense ratio of 0.095%, SPDR® S&P 500 (NYSE:SPY) comes in nearly three times as expensive as competitors like the Vanguard S&P 500 ETF (NYSE:VOO) or the iShares Core S&P 500 ETF (NYSE:IVV).

However, SPY continues to dominate thanks to a few characteristics: a high daily trading volume, a minuscule bid-ask spread, and a well-developed options chain. For buy-and-hold investors, State Street (NYSE:STT) released a lower-cost version of SPY, the SPDR® Portfolio S&P 500 ETF (NYSE:SPLG).

S&P 500: Factor exposure

Investors trying to target equity factors like value, size, quality, low-volatility, or high-dividends can also make use of S&P 500 ETFs that implement additional screeners for these factors.

These ETFs can have the potential to outperform regular S&P 500 ETFs, but also can incur high tracking error. In addition, they tend to have higher fees and greater portfolio turnover.

For value investors, options include the Vanguard S&P 500 Value ETF (VOOV), the iShares S&P 500 Value ETF (NYSE:IVE), and the SPDR Portfolio S&P 500 Value ETF (SPYV).

Similarly for growth investors, choices include the Vanguard Vanguard S&P 500 Growth Index Fund ETF Shares (NYSE:VOOG), the iShares S&P 500 Growth ETF (NYSE:IVW), and the SPDR® Portfolio S&P 500 Growth ETF (NYSE:SPYG).

It's worth noting that investors who split their S&P 500 exposure up into growth plus value components and allocate them smartly could potentially benefit from better tax-efficiency.

For yield-hungry investors, several S&P 500 dividend ETFs also exist. These ETFs either target the highest-yielding stocks in the S&P 500 index or those with a long history of dividend growth.

Current options in this category include the SPDR Portfolio SPDR® Portfolio S&P 500 High Dividend ETF (NYSE:SPYD), the ProShares S&P 500 Dividend Aristocrats ETF (NYSE:NOBL), and the Invesco S&P 500® High Dividend Low Volatility ETF (NYSE:SPHD), which also implements a low-volatility screen.

Finally, we have ETFs like the Invesco S&P 500® Equal Weight ETF (NYSE:RSP), which takes the normally top-heavy market-cap-weighted structure of regular S&P 500 ETFs and swaps it for an equal-weight methodology.

S&P 500: Enhanced exposure

For those seeking yield or returns higher than what can be provided by a regular or factor S&P 500 ETF, the use of derivatives can help. For yield maximization, investors can buy S&P 500 ETFs that make use of covered call overlays to boost income.

While these ETFs are expected to underperform on a total return basis over long periods, they can outperform when market volatility is high or when markets trade sideways. In effect, they're simply converting future upside price appreciation into immediate income.

Notable examples of covered call S&P 500 ETFs include the Global X S&P 500® Covered Call ETF (NYSE:XYLD) and the Global X S&P 500® Covered Call & Growth ETF (NYSE:XYLG), with the latter possessing a smaller covered call overlay to ensure a greater degree of share price growth.

For leveraged exposure, investors can make use of ETFs that employ swap derivatives. Many of these ETFs target 2x or 3x the daily returns of the S&P 500 index. These ETFs are intended as short-term trading tools as the leverage target is only accurate for a single day. If held long-term, results can vary wildly due to compounding and volatility drag. In addition, they tend to be fairly expensive.

The current leveraged long S&P 500 ETFs on the market include the Direxion Daily S&P 500® Bull 2X Shares (NYSE:SPUU), the Direxion Daily S&P500® Bull 3X Shares (NYSE:SPXL), the ProShares Ultra S&P500 (NYSE:SSO), and the ProShares UltraPro S&P500 (NYSE:UPRO).

Finally, we have the opposites of these ETFs that offer short exposure, which can also be leveraged. The same risks apply, but with greater severity. Because the S&P 500 index tends to go up over time, inverse S&P 500 ETFs are expected to lose value long-term. Thus, they're intended as short-term hedging tools.

The current inverse S&P 500 ETFs on the market include the ProShares Short S&P500 (NYSE:SH), the ProShares UltraPro Short S&P500 (NYSE:SPXU), the Direxion Daily S&P 500® Bear 1X Shares (NYSE:SPDN), and the Direxion Daily S&P 500® Bear 3X Shares (NYSE:SPXS).

This content was originally published by our partners at ETF Central.