Chapter 3
Introduction to ETFs and SPY

Before we dive into charts and strategies, let’s take a step back and meet a few investors — each with different backgrounds, goals, and levels of experience.

Emily is a recent college graduate who just started her first job. She wants to invest, but she’s overwhelmed by all the talk about individual stocks. She’s heard that picking winners is risky and time-consuming. Then someone tells her, "Why not just buy the whole market?" That advice leads her to SPY — a single fund that gives her exposure to hundreds of companies at once. Simple. Diversified. Stress-free.

Then there’s Raj, a busy father of two and a full-time engineer. He’s interested in building long-term wealth but doesn’t have time to follow every earnings report or market rumor. Instead of trying to beat the market, he buys SPY and checks in once a quarter. Over time, his portfolio grows steadily, all without the stress of managing individual stocks.

Finally, meet Lisa, a former stock picker who spent years trying to outsmart the market — only to realize that most actively managed funds don’t consistently outperform low-cost ETFs. Now, she uses SPY as the core of her portfolio and only allocates a small portion to active bets.

These stories aren’t rare — they represent a growing number of investors who’ve turned to ETFs like SPY for their simplicity, diversification, and cost-efficiency. Whether you’re a beginner or an experienced investor rethinking your approach, understanding ETFs is one of the smartest moves you can make.

In this chapter, we’ll break down what ETFs are, how they work, and why SPY — the ETF that tracks the S&P 500 — has become one of the most popular and trusted investment vehicles in the world.

3.1 What are ETFs?

ETFs, or Exchange-Traded Funds, are a type of investment fund that you can buy and sell just like a stock. But instead of representing a single company, an ETF typically holds a collection of assets — such as stocks, bonds, or commodities — bundled into one convenient package. When you buy shares of an ETF, you’re buying a small piece of a much larger portfolio.

Think of an ETF like a shopping basket. Instead of buying each item (or stock) separately, you buy the whole basket — which already contains a carefully selected mix of companies or assets. This gives you instant diversification with a single trade.

ETFs are designed to track the performance of a specific index, sector, or strategy. Some of the most popular ETFs follow broad market indexes like the S&P 500 (SPY), the Nasdaq-100 (QQQ), or the total U.S. stock market (VTI). Others focus on specific industries, regions, or investment styles — like technology stocks, international markets, or dividend-paying companies.

Key Features of ETFs

• Diversification: Most ETFs hold dozens or even hundreds of different securities, which reduces risk compared to investing in a single stock.
• Liquidity: ETFs are traded on stock exchanges during market hours, so you can buy or sell them throughout the day at market prices.
• Low cost: Many ETFs are passively managed and have lower expense ratios than mutual funds.
• Transparency: Most ETFs disclose their holdings daily, so you always know exactly what you own.
• Accessibility: With fractional shares and low fees, ETFs are great for beginners and experienced investors alike.

Why ETFs Are Popular

ETFs have exploded in popularity because they combine the best features of both stocks and mutual funds. Like a stock, they’re easy to trade. Like a mutual fund, they offer diversification. This makes them an ideal choice for investors who want broad market exposure without the complexity of managing individual securities.

Whether you’re building a retirement portfolio, saving for a down payment, or just getting started with investing, ETFs provide a flexible, efficient, and cost-effective way to grow your money over time. In the next section, we’ll take a closer look at SPY — one of the oldest, largest, and most widely traded ETFs in the world.

3.2 SPY: Overview and Historical Significance

SPY is the ticker symbol for the SPDR S&P 500 ETF Trust — one of the most popular, oldest, and widely traded ETFs in the world. Launched in 1993 by State Street Global Advisors, SPY was the first exchange-traded fund listed in the United States. Its goal is simple but powerful: to track the performance of the S&P 500 index, which represents 500 of the largest publicly traded companies in the U.S.

These companies span all major sectors of the economy — from technology and energy to consumer goods, finance, and healthcare. When you buy a share of SPY, you’re essentially investing in a slice of the entire U.S. stock market. It’s like owning a little bit of Apple, Microsoft, Amazon, Google, JPMorgan, and hundreds more — all in one fund.

Why SPY Matters

SPY isn’t just another ETF — it’s a cornerstone of modern investing. Its size, liquidity, and track record have made it a go-to choice for investors of all types, from beginners to professional fund managers.

Here’s what makes SPY historically significant:

• First mover advantage: SPY was the first ETF launched in the U.S., paving the way for thousands of others.
• Massive trading volume: SPY remains one of the most actively traded securities, offering high liquidity and tight spreads.
• Trusted benchmark: It tracks the S&P 500, the most recognized measure of U.S. stock market performance.
• Appeals to all investors: Used by both large institutions and individual traders alike.

3.3 SPY: Performance Over Time

SPY’s First Trading Day (January 29, 1993)

On January 29, 1993, SPY began trading with an opening price of $43.97. It dipped slightly to $43.75 during the session before closing at $43.94. About one million shares traded hands — a strong debut for an entirely new type of investment vehicle.

SPY’s Recent Trading Day (April 24, 2025)

On April 24, 2025, SPY opened at $536.72 and climbed steadily, closing at $545.20. It touched a high of $546.33 and a low of $535.45, with over 35 million shares traded — showcasing its enduring liquidity and importance.

Long-Term Growth of SPY

Since its inception, SPY has delivered strong long-term returns, closely tracking the U.S. economy’s expansion. Historically, SPY has returned about 10% per year on average, including dividends.

Compounding over decades can generate remarkable results. A $10,000 investment in SPY at the beginning of 1993 would have grown to over $220,000 by early 2025, assuming dividends were reinvested.

SPY’s journey demonstrates the power of patient investing in a broad-based, diversified index of leading companies.

3.4 Benefits of Trading SPY

SPY is one of the most traded and widely recognized ETFs in the world — and for good reason. It offers a unique combination of stability, liquidity, diversification, and simplicity that makes it an ideal core holding for both beginners and experienced traders.

Here are some of the main reasons why trading SPY is so appealing:

1. Broad Market Exposure

When you buy SPY, you’re not just buying a single stock — you’re buying a slice of the entire S&P 500, which includes 500 of the largest and most established companies in the U.S. This gives you instant diversification across sectors like technology, healthcare, financials, consumer goods, and more. It’s a simple way to track the overall U.S. economy with a single trade.

2. High Liquidity

SPY is one of the most actively traded securities on any exchange. This means there’s always a buyer and a seller, so you can enter and exit positions quickly with minimal price slippage. High liquidity also results in tight bid-ask spreads, reducing your transaction costs.

3. Tight Correlation with the Market

Because SPY tracks the S&P 500 index so closely, it serves as an excellent proxy for the broader U.S. market. This makes it useful not only for long-term investing but also for market timing, hedging strategies, and technical analysis. If you’re trying to build a strategy based on market trends, SPY is a reliable indicator.

4. Low Management Fees

SPY is passively managed, which means it simply tracks an index rather than trying to beat it. As a result, the expense ratio is very low — often less than 0.10% per year. That means more of your money stays invested and compounds over time.

5. Reliable Data and Historical Performance

Since SPY was launched in 1993, it has over 30 years of historical price data. This is extremely valuable for backtesting strategies, studying market behavior, and building data-driven models. Many other ETFs simply don’t have this kind of track record.

6. Suitable for Both Investors and Traders

SPY is versatile. Long-term investors use it as a low-cost, diversified foundation for retirement or wealth-building. Short-term traders use it to take advantage of intraday price movements, trends, or market news. It supports a wide range of strategies and timeframes.

7. Tax Efficiency

Unlike mutual funds, ETFs like SPY are structured to be tax-efficient. Through a unique in-kind creation and redemption process, SPY minimizes internal sales and capital gains distributions — helping long-term investors avoid unexpected tax surprises.

In summary, SPY combines the best features of individual stocks and diversified funds. It’s simple, powerful, and incredibly efficient — which is why it’s the centerpiece of the strategies explored throughout this book.

3.5 SPY vs. Other ETFs

While SPY is the central focus of this book, it’s worth comparing it to two other highly respected and widely traded ETFs: QQQ and VOO. All three track large-cap U.S. equities and are excellent long-term investment options, but each has its own strengths and trade-offs.

QQQ — Invesco QQQ Trust

QQQ tracks the Nasdaq-100 index, which includes 100 of the largest non-financial companies listed on the Nasdaq. It’s heavily concentrated in the technology sector, with large holdings in companies like Apple, Microsoft, NVIDIA, and Amazon.

Pros:

• High exposure to fast-growing tech and innovation-driven firms.
• Strong returns during technology-led bull markets.

Cons:

• Sector-concentrated — primarily tech and communications.
• More volatile and susceptible to sharp drawdowns.

Over a 26-year period from 1999 to 2025, QQQ turned a $10,000 investment into approximately $107,890 — a total return of 978.9%. The compound annual growth rate (CAGR) was 9.53%, which is impressive. However, QQQ also experienced an extreme maximum drawdown of nearly -83%, making it riskier for long-term buy-and-hold investors.

VOO — Vanguard S&P 500 ETF

VOO tracks the same S&P 500 index as SPY but is issued by Vanguard, a firm known for its focus on low-cost investing. VOO boasts an ultra-low expense ratio of just 0.03%, compared to SPY’s slightly higher fees.

Pros:

• Extremely low annual cost.
• Strong long-term performance tracking the S&P 500.
• Ideal for passive, buy-and-hold portfolios.

Cons:

• Less liquid than SPY, especially for options trading.
• Options on VOO have wider bid-ask spreads and lower volume.
• VOO does not offer daily expiring options — only weekly and monthly expirations.
• No meaningful strategic advantage over SPY beyond lower expense ratio.

For most investors focused purely on long-term holding costs, VOO can be an excellent choice. However, for traders who require tight spreads, high liquidity, or daily-expiring options, SPY remains the superior vehicle.

Why This Book Focuses on SPY

All three ETFs — SPY, QQQ, and VOO — are strong choices, but this book focuses on SPY for three key reasons:

• Unmatched Liquidity: SPY is one of the most actively traded securities in the world. This makes it ideal for both backtesting strategies and real-time execution, with minimal slippage.
• Daily Options: SPY is one of the few ETFs that offers daily-expiring options, making it highly flexible for advanced strategies — even though this book sticks to long-term trading.
• Better Long-Term Return (Buy-and-Hold): From 1993 to 2025, SPY delivered an annualized return of 10.12%, turning a $10,000 investment into over $223,000. QQQ, over 26 years from 1999 to 2025, returned 9.53% annually, growing $10,000 into roughly $107,890. Despite QQQ’s reputation for high returns, SPY has historically outperformed it in buy-and-hold scenarios — and with significantly lower risk.
• Lower Risk Profile: SPY’s maximum historical drawdown was -55%, compared to QQQ’s -83%. When considering the ratio of annual return to drawdown, SPY has a clear edge: 0.183 vs. QQQ’s 0.115. This makes SPY not just more profitable, but also more stable over time.

These real-world metrics support SPY’s role as the foundation for data-driven, long-term trading strategies — exactly the kind of approach we’ll explore throughout this book.

SPY’s long history and broad market exposure make it an ideal candidate for backtesting. That’s exactly what we’ll do later — simulate decades of trades on SPY to see which strategies would have worked best.