Vanguard S&P 500 ETF is a very low-cost way to own the S&P 500.
If you’re concerned about valuation, the iShares S&P 500 Value ETF is an alternative way to own the S&P 500.
The Invesco S&P 500 Equal Weight ETF could be a good option if you want to avoid the technology sector’s current overweight position in the index.
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When stockbrokers and investors talk about the “market,” they usually mean the S&P 500 (SNPINDEX: ^GSPC). For those looking to invest in the “market”, the easiest route is to buy an S&P 500 exchange-traded fund (ETF). In fact, that is exactly what world-famous investor Warren Buffett has recommended to most investors.
There’s just one problem: There are several different ways to invest in the S&P 500. Since the index is currently near all-time highs, you may want to consider a couple of alternatives that better represent the high valuation. These are some of the smartest options as December progresses.
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The S&P 500 is a committee-selected list of approximately 500 American companies. The populations chosen are generally large and economically significant. The real goal of the index is not to track the market, but to be representative of the overall US economy.
Stocks in the index are weighted by market capitalization, so the largest companies have the biggest impact on performance. This makes logical sense, since this is generally how the economy works.
Overall, the S&P 500 index is pretty well constructed. However, every ETF or mutual fund that directly tracks the index does exactly the same thing. That’s why you’ll want to focus on buying the cheapest option that offers the most investment flexibility. Probably the best option is Vanguard S&P 500 ETF(NYSEMKT:VOO)which has an ultra-low expense ratio of just 0.03% and trades throughout the day (mutual funds can only be traded at the end of the day).
As noted, the S&P 500 is trading near all-time highs. Some investors may be concerned about the index’s valuation, which is not unreasonable. A commitment for these investors is iShares S&P 500 Value ETF(NYSEMKT:IVE). This exchange-traded fund uses book-to-price, earnings-to-price, and sales-to-price ratios to select stocks from the full list of stocks in the S&P 500. The goal is, as the name suggests, to buy stocks that are relatively cheap.
A value-focused approach could appeal to more conservative investors, given that fast-growing technology stocks are currently the main driver of the S&P 500’s performance. You’ll pay a little more for this ETF, given its expense ratio is 0.18%. However, if you’re worried about the rotation from growth to value, this could be the smart choice for you.
There is another way for investors concerned about the S&P 500’s heavy technology weighting (it currently makes up about 36% of the index). you can buy Invesco S&P 500 Equal Weight ETF(NYSEMKT:RSP). While the other two ETFs here weight by market cap, the Invesco S&P 500 Equal Weight ETF gives each of the 500 stocks in the S&P 500 an equal-sized position in the portfolio. This means that each action has the same impact on performance.
There are two big conclusions. First, the sector’s weightings change substantially. Technology stocks make up just 14% of the portfolio, putting the sector roughly on par with industrial, financial and healthcare stocks.
Second, and equally important, no single participation will have a huge impact on performance. The biggest stock in the S&P 500 is NVIDIArepresenting close to 8.5% of the portfolio. The largest position in the Invesco S&P 500 Equal Weight ETF is Warner Bros. Discoverywith only 0.37% of the ETF. If technology takes a downturn, the Invesco S&P 500 Equal Weight ETF will likely save you some of the pain.
While this could be a smart option for more conservative investors, there is one additional factor to consider. The expense ratio is the highest here at 0.20%. That’s not unreasonable, but you’re paying more for the extra work involved in creating and maintaining the single-weighted portfolio.
There is no right or wrong way to invest, only the one that best suits your unique intellectual and emotional makeup. Vanguard S&P 500 ETF, iShares S&P 500 Value ETF, and Invesco S&P 500 Equal Weight ETF are smart ways to invest in the S&P 500 in December. But ultimately the smartest one will be the one that makes the most sense for you.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds and recommends Nvidia, Vanguard S&P 500 ETF, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
This is the smartest way to invest in the S&P 500 in December originally published by The Motley Fool
