When stock traders and investors talk about the “market,” they are usually referring to the S&P 500 (SNPINDEX: ^GSPC). For those looking to invest in the “market,” the simplest route is to buy into an S&P 500 exchange-traded fund (ETF). In fact, that’s exactly what world-famous investor Warren Buffett has recommended most investors do.
There’s just one problem: There are several different ways to invest in the S&P 500. Given that the index is currently hovering near all-time highs, you may want to consider a couple of alternatives that better account for the high valuation. Here are a few of the smartest options as December gets underway.
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The S&P 500 is a committee-selected list of roughly 500 U.S. companies. The chosen stocks are generally large and economically significant. The actual goal of the index isn’t to track the market, but to be representative of the broader U.S. economy.
The stocks in the index are weighted by market cap, so the largest companies have the biggest impact on performance. That makes logical sense, since that’s generally how the economy works.
Overall, the S&P 500 index is fairly well-constructed. However, every ETF or mutual fund that directly tracks the index does the exact same thing. That is why you’ll want to focus on buying the cheapest option that offers the most investment flexibility. The best choice is likely to be 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 worried about the index’s valuation, which is not unreasonable. A compromise for such investors is iShares S&P 500 Value ETF(NYSEMKT: IVE). This exchange-traded fund uses the book value-to-price, earnings-to-price, and sales-to-price ratios to select stocks from the full list of S&P 500 stocks. The goal is, as the name implies, to buy stocks that are relatively cheap.
A value-focused approach could be attractive to more conservative investors, given that fast-growing technology stocks are currently the primary 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 are worried about rotation out of growth and into value, this could be the smart choice for you.
There’s another way for investors concerned about the S&P 500’s heavy weighting in technology (it currently accounts for roughly 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, Invesco S&P 500 Equal Weight ETF gives each of the 500 S&P 500 stocks an equally sized position in the portfolio. This means that each stock has the same impact on performance.
There are two big takeaways. First, the sector weightings shift materially. Technology stocks account for just 14% of the portfolio, placing the sector roughly on par with industrial, financial, and healthcare stocks.
Second, and just as important, no single holding will have an outsize impact on performance. The largest stock in the S&P 500 is Nvidia, accounting for nearly 8.5% of the portfolio. The largest position in Invesco S&P 500 Equal Weight ETF is Warner Bros. Discovery, at just 0.37% of the ETF. If technology takes a tumble, Invesco S&P 500 Equal Weight ETF will likely save you from some of the pain.
While this could be a smart choice for more conservative investors, there is one additional factor to consider. The expense ratio is the highest here at 0.20%. That’s not outlandish, but you’re paying more for the extra work involved in creating and maintaining the uniquely weighted portfolio.
There is no right or wrong way to invest, just the way that works best with 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 all smart ways to invest in the S&P 500 in December. But the smartest one will ultimately be the one that makes the most sense to you.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Vanguard S&P 500 ETF, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
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