ETFs
Before buying the Vanguard S&P 500 ETF, here are 3 others I would buy first
Invest in Vanguard S&P 500 ETF (NYSEMKT:VOO) is a smart way to secure your fair share of the stock market’s return.
Lowest exchange-traded fund (ETF) spending ratea strong history of close monitoring of the S&P500 and its simplicity make it attractive to new investors and seasoned veterans. Even Warren Buffett has money in the index fund.
However, many investors might consider diversifying beyond the S&P 500. The index is currently heavily concentrated in the stocks of just a few companies. Microsoft, NvidiaAnd Apple represent more than 20% of the value of the index, at the time of writing.
If you want to further diversify your portfolio, there are three ETFs that might be better options than continuing to purchase the Vanguard S&P 500 ETF.
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1. Invesco S&P 500 Equal Weight ETF
The S&P 500 is full of some of the most valuable companies in the world. But if you invest in a regular index fund like the Vanguard S&P 500 ETF, you’ll end up owning mostly the biggest of the big. One way to correct this imbalance is to purchase an equal-weighted S&P 500 index fund like the Invesco S&P 500 Equal Weight ETF (NYSEMKT:RSP).
This Invesco ETF invests its assets equally among all constituents of the S&P 500. It rebalances once per quarter, ensuring that weightings never vary too far from equality. So even when Nvidia shares rise 50% in a quarter, the fund manager will sell some of it and reinvest the profits in underperforming stocks at the end of each quarter.
The equal-weighted index has historically outperformed the market-cap-weighted index. This has not been the case over the past decade as the performance of ultra-large-cap stocks has outpaced overall market returns. But over the long term, equal weighting benefits from increased investment in a wide range of companies.
The Invesco S&P 500 Equal Weight ETF will cost investors a little more than the Vanguard S&P 500 ETF. Its expense ratio is 0.2%. Still, it’s an inexpensive way to increase exposure to the 497 other S&P 500 companies other than Microsoft, Nvidia or Apple. And despite buying and selling shares every quarter, the fund has never distributed any capital gains to shareholders.
2. Vanguard Russell 2000 ETF
Although the S&P 500 is often used as a barometer of the entire market, the total stock market is much larger than the approximately 500 companies that make up the index. There are over 3,000 stocks available in the market.
You can invest in the entire stock market by purchasing a global index fund like Vanguard Total Stock Market ETF. But this index fund suffers from the same weighting issues as the S&P 500 ETF. Plus, the expected returns of the two are virtually the same.
The story continues
Instead, investing in a small-cap index fund can give you greater market exposure beyond the 500 largest companies. A small-cap segregated fund allows you to narrow down how much you invest in smaller companies compared to your overall portfolio.
THE Vanguard Russell 2000 ETF (NASDAQ: VTWO) tracks the small-cap Russell 2000 index, which outperformed the S&P 500 for the 35 years from its inception in 1979 until 2014. Since 2014, however, large caps have dominated the market, outperforming small caps.
But there are several indications small caps could be about to make a comeback. The Vanguard Russell 2000 ETF provides low-cost exposure to the index with an expense ratio of just 0.1%.
3. Avantis US Small Cap Value ETF
Small-cap stocks have historically outperformed larger companies over the long term, and small-cap value stocks have done even better.
By focusing on small-cap value stocks, you focus on small but often profitable companies. These companies are more likely to survive an economic downturn and are less sensitive to interest rate fluctuations since they are not as reliant on debt.
While smaller growth stocks might be a hit, they’re more likely to be a draw for investors. Small-cap value stocks consistently outperform as a group.
One of the best ETFs for small-cap value investors is the Avantis US Small Cap Value ETF (NYSEMKT:AVUV). Although it is technically an actively managed fund, it behaves more like a passive index fund. The managers set security selection and weighting criteria based on profitability and valuation indicators, and invest in a diversified portfolio of 761 securities. It aims to outperform the Russell 2000 Value Index.
With an expense ratio of just 0.25%, it’s not too expensive, even compared to fully passive small-cap value funds. And the management team has a solid track record of performance, coming from Dimensional Fund Advisors.
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Adam Levy holds positions in American Century ETF Trust-Avantis Us Small Cap Value ETF, Apple and Microsoft. The Motley Fool holds positions in and recommends Apple, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Total Stock Market ETF, and Vanguard S&P 500 ETF. The Mad Motley has a disclosure policy.
Before buying the Vanguard S&P 500 ETF, here are 3 others I would buy first was originally published by The Motley Fool