Similarly, the index will only select the top 500 U.S. companies. If a company grows more and more successful, it will eventually replace another company’s spot in the S&P 500 when it overtakes it – so you’re always invested in the best 500 companies. In this sense, the index is emotionless and very efficient.
Here’s the growth of the SPY over the last ten years:
The chart shows that the SPY closely follows the return of the index which it tracks: the S&P 500. If you invested $10,000 in the SPY ten years ago, it would be worth approximately $16,800 today (a 68% return) – even when taking into account the Global Financial Crisis of 2008/09. Of course, if you were one of the more savvy investors and bought the SPY in 2009 and held it to today, your return would be even higher – a 180% return.
Relationship between U.S. GDP and the S&P 500
I mentioned that a growing American economy means a rising S&P 500 as well and you might be wondering about the correlation:
As you can see from the chart above, there is a positive correlation between the U.S. economy and the S&P 500.
Why is that so?
The reason is straightforward. When the US economy is strengthening, U.S. consumers spend more and it is very likely that they will spend their most of money with one of the top 500 U.S. companies. These companies grow more successful and their stock prices rise which in turn brings the entire index upward.
This article was republished with permission from The Fifth Person.