Will This ETF Hit the $1 Trillion Mark First?

Many investors have adopted a passive investing approach that incorporates heavy allocations to exchange-traded funds. By using ETFs, investors can easily build a portfolio that has a ton of diversification, because each ETF has an underlying portfolio of dozens, hundreds, or even thousands of different stocks.

In previous articles in this Voyager Portfolio series, you learned about the history of the SPDR S&P 500 ETF Trust ETF (NYSEMKT: SPY) and how its performance has helped to make many investors rich. But despite the many milestones that this ETF has already achieved, one that still eludes it is reaching the $1 trillion mark in assets under management. This third and final article on the SPDR S&P 500 ETF looks at what it would take for the fund to surpass this historic mark and whether it's likely to be the first to do so.

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A colossus in the ETF universe

The SPDR S&P 500 ETF has attracted a lot of money because of its simplicity and its solid returns. Indeed, it's a favorite among institutional investors, who are very comfortable with its structure as a unit investment trust and appreciate the high levels of liquidity the ETF features in trading. That's important when certain institutions routinely make billion-dollar trades and can't afford to worry about whether a big order is going to move the market against them.

Also, in recent years, the SPDR S&P 500 ETF has gained a reputation for tracking the fortunes of the largest companies in the world. That's because the index it tracks, the S&P 500, has increasingly seen the weightings of its largest stocks rise. Among top holdings, you'll find very familiar technology names, including Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), and Microsoft (NASDAQ: MSFT). Indeed, these holdings are significant enough that they make the contributions of the much smaller stocks that round out the group of 500 insignificant by comparison.

What it would take to reach $1 trillion

For the SPDR S&P 500 to top $1 trillion in assets under management, it would need to boost its holdings by just over $300 billion from its current total of $693.3 billion as of March 2. Put another way, from its current total, the ETF would need to gain about 44% in value.

Keep in mind, though, that there are two variables that contribute to the total assets of the fund. It's tempting to say that all it would take to get to $1 trillion is for the ETF to post roughly 10% returns over the course of four years. In a strong market environment, the S&P 500 might rise 44% even faster, and that could help support the ETF's asset base as well.

The second variable, though, is tough to predict. ETF assets ebb and flow depending on the decisions that investors make. If shareholders get leery about the stock market's prospects, they can always sell their shares. If enough investors sell, the market makers responsible for creating and redeeming blocks of ETF shares will reduce the outstanding share count of the fund, marking permanent outflows. By contrast, if investors have high demand for fund shares, then these market makers might create new blocks of ETF stock, thereby reflecting fund inflows and increasing the asset base.

The SPDR S&P 500 ETF might not be first across the finish line

As it happens, despite having nearly $700 billion in assets, the SPDR S&P 500 isn't actually the largest fund in the ETF universe. And because the two other funds in question also track the S&P 500, it's highly probable that a market upswing could take them above $1 trillion earlier than the SPDR.

Nevertheless, the SPDR S&P 500 ETF has established its usefulness for investors. Given that the Voyager Portfolio has the goal of owning overlooked individual stocks, it's not going to invest in this ETF. However, for investors looking for ways to diversify or simplify their lives, the SPDR S&P 500 ETF is worth close consideration.

Dan Caplinger has positions in Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.