Should you invest in multiple S&P 500 ETFs?
Holding too many ETFs in your portfolio introduces inefficiencies that in the long term will have a detrimental impact on the risk/reward profile of your portfolio. For most personal investors, an optimal number of ETFs to hold would be 5 to 10 across asset classes, geographies, and other characteristics.
You only need one S&P 500 ETF
You could be tempted to buy all three ETFs, but just one will do the trick. You won't get any additional diversification benefits (meaning the mix of various assets) because all three funds track the same 500 companies.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
Some index funds provide exposure to thousands of securities in a single fund, which helps lower your overall risk through broad diversification. By investing in several index funds tracking different indexes you can built a portfolio that matches your desired asset allocation.
The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.
Aim for around 10 to 20 diversified ETFs that align with your goals and risk tolerance. There is no fixed number of ETFs that can be classified as “too many” as it ultimately depends on an investor's individual goals, risk tolerance, and investment strategy.
S&P 500 index funds will be nearly identical to one another in terms of their performance and their holdings, or the particular stocks held within the fund. Investing in multiple S&P 500 index funds will not necessarily further diversify your portfolio.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.
Investing in an ETF that tracks a financial services index gives you ownership in a basket of financial stocks versus a single financial company. As the old cliché goes, you do not want to put all your eggs into one basket. An ETF can guard against volatility (up to a point) if some stocks within the ETF fall.
Is it better to invest in one fund or multiple?
Our principles for good investing highlight the importance of diversification. It's impossible to know which asset class, country, continent, or industry sector will perform best or worst in any given year, so it may be better to hold a mix of investments - also known as a diversified portfolio.
It's easy to see why S&P 500 index funds are so popular with the billionaire investor class. The S&P 500 has a long history of delivering strong returns, averaging 9% annually over 150 years. In other words, it's hard to find an investment with a better track record than the U.S. stock market.
According to Standard and Poor's, the average annualized return of the S&P index, which later became the S&P 500, from 1926 to 2020 was 10%. 1 At 10%, you could double your initial investment every seven years (72 divided by 10).
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
If the S&P 500 outperforms its historical average and generates, say, a 12% annual return, you would reach $1 million in 26 years by investing $500 a month.
Known as the 4% rule, Bengen argued that investors could safely set their annual withdrawal rate to 4% of their initial retirement pot and adjust it for inflation without running out of money over a 30-year time horizon.
A leveraged ETF uses derivative contracts to magnify the daily gains of an index or benchmark. These funds can offer high returns, but they also come with high risk and expenses. Funds that offer 3x leverage are particularly risky because they require higher leverage to achieve their returns.
Setting a rule of five per cent helps investors avoid owning too many ETFs and essentially sets the limit at 20 ETFs (100/5) if a portfolio consists solely of ETFs. Deciding on the weighting of a position for a stock is very different than deciding on a weighting for an ETF.
The SPDR S&P 500 ETF Trust reigns supreme as the most popular S&P 500 ETF. The first ETF launched in the U.S. has maintained this status thanks to its strong institutional backing and first-mover advantage. SPY doesn't have the lowest expense ratio on our list. But it makes up for this in liquidity.
Is it safe to put all your money in S&P?
So if you're happy with a portfolio that performs comparably to the stock market as a whole, then sticking to S&P 500 ETFs alone isn't a bad idea. However, if you assemble a portfolio of individual stocks that perform better, you might enjoy a 12% or 15% return over time -- or more.
But if you're looking to beat the S&P 500 over the long haul, one ETF stands apart: Invesco QQQ Trust (QQQ). The Invesco QQQ ETF, usually just called QQQ, is a top performer this year.
VOO is a broader and more diversified index fund of 500 stocks. QQQ has historically outperformed VOO by a significant margin but has higher concentration risk and volatility (measured by beta). Both funds are excellent, low-fee stock index fund options for your portfolio.
Vanguard S&P 500 ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VOO is a great option for investors seeking exposure to the Style Box - Large Cap Blend segment of the market.
Under the Investment Company Act, private investment funds (e.g. hedge funds) are generally prohibited from acquiring more than 3% of an ETF's shares (the 3% Limit).
