How to Invest in the Stock Market as a Whole

Background

In this article I establish that investing in the S&P 500 is a good idea. An investment in the S&P 500 is considered an investment in the stock market as a whole, since the S&P 500 consists of about 500 large US companies, which comprise about 85% of the entire US stock market.

So, how do you invest in the S&P 500? You could invest in all ~500 companies that make up the index, but that would take a lot of time. Enter the ETF.

How to Invest in the Stock Market as a Whole, Part I: The ETF

“ETF” is an acronym for “exchange traded fund.” There are two parts to the idea of an ETF.

The first part of the ETF is that it’s a fund. In other words, it’s a basket of securities. A financial security is an instrument such as a share of stock, a bond, or an option contract. But for our purposes, we’re interested in a basket of stock.

A financial company can create this basket of shares from all 500 S&P 500 companies. Then, you would buy a share of the basket, rather than buying shares of all 500 individual companies.

The second part of the ETF is that it’s exchange traded. That means that it’s easier to access. The fund is listed on stock exchanges, just like regular company stock is. This fact is noteworthy because not all funds can be flexibly traded this easily.

For instance, if you want a mutual fund, you may need to create an account with the issuer of the fund. There may be a minimum investment amount. And you can’t buy or sell the mutual fund whenever you want – mutual funds can only be traded at the end of the day. If the price goes up between when you indicated the desire to buy, and when you actually did buy – too bad! (Conversely, if you’re ready to sell your mutual fund, and the price goes down before the end of the day – also too bad!)

So, an ETF is a basket of stock that gives you exposure to the entire S&P 500 in one easy move, and it can be flexibly traded from any brokerage.

Wait a minute, there was a new word there – what’s a brokerage?

How to Invest in the Stock Market as a Whole, Part II: The Brokerage

The brokerage is your door to the stock market. You can’t buy shares of stock on Amazon; you need a brokerage for that.

So what is a brokerage? It’s a financial institution that gives you direct access to the stock market. The brokerage shows you the various stocks/ETFs out there, shows you what their current prices are, and presents you with buy/sell buttons to – you guessed it – buy or sell shares.

While you can’t buy ETFs on Amazon, the good news is that setting up a brokerage account isn’t much more difficult than setting up an Amazon account.

More good news is that there are several good brokerages out there. You can read individual reviews of brokerages here, but I will let you know that my general recommendation is Webull. You can read my review about Webull here.

Back to ETFs

Now that we’ve defined a brokerage, let’s loop back to ETFs. Remember how ETFs are a convenient way to invest in multiple companies? Let’s go a bit deeper.

There are thousands of ETFs out there, with every variety of purposes. But we’re interested in ETFs that track the S&P 500. (In general terms, an ETF will track an index by consisting of stocks in the index, though this isn’t necessarily the case.)

Which ETF should you buy? Well, any popular S&P 500 ETF will accurately track the S&P 500. The bid/ask spread1 isn’t much of a factor since popular ETFs are liquid (have a large trading volume) and therefore have a bid/ask spread of only one cent.

So the first factor that might be relevant is the cost to hold the ETF. Since ETFs take work to create, the company that creates the ETF charges an operating expense to investors who hold the ETF. The fee is called the expense ratio (the ratio of the operating expense to the price of the fund) and it is stated in terms of holding the ETF for one year. Popular index ETFs have billions of dollars under management, so the fee is often negligible.

For instance, consider the State Street Global Advisors SPDR S&P 500 ETF Trust (ticker: SPY), the first ETF ever created. SPY holds $357 billion under management, and it has an expense ratio of about 0.1%. That means that for a $1000 investment in SPY, if the investment is held for one year, the expense would only be about $1.

While SPY has an expense ratio of about 0.1%, its issuers also created a lower cost ETF with an expense ratio of only 0.02%: SPLG. SPLG is among the cheapest ETFs in the world.

Another factor that could be relevant in choosing your ETF is the share price of the ETF. While some brokerages allow you to buy a fractional share (part of a share), others do not. Depending on how much you’re planning to invest, SPY might not be the best option, given that its price at the time of writing is $399.

So, choosing an ETF with a low expense ratio and a low share price might be the best route to take. SPLG’s price at the time of writing is less than $47.

Therefore, SPLG is a good ETF to buy in order to invest in the stock market as a whole.

Another benefit of SPLG is that it makes it easier to sell covered call options (a strategy that typically outperforms the S&P 500). We begin our discussion of the covered call here.