Pick up an entire stock index.
You often hear financial pundits saying things like “the market is soaring” or “most fund managers can’t beat the market.” But what exactly do they mean when they say “the market” — and if the market’s so great, how do you go about buying it? The answer to the first question is, “it depends” — they could be referring to one of a number of indices, such as the Standard & Poor’s 500 index, the Dow Jones industrial average or Russell 2000. But the answer to the second question is a definite “yes” — you can buy these indices (including some twists) via exchange-traded funds.
SPDR S&P 500 ETF (ticker: SPY)
The SPY is the oldest (1993), largest ($237 billion) and most liquid ETF (average 87 million shares daily) on the market, and the requirements of its structure — it’s actually a “unit investment trust” — force the fund to be the most accurate and faithful tracker of the S&P 500. Its holdings, then, reflect the S&P 500 and its 500 company holdings to a T, including current top weights in Apple (AAPL, 3.75 percent), Alphabet (GOOG, GOOGL, 2.67 percent) and Microsoft Corp. (MSFT, 2.62 percent). If you want to beat “the market,” you have to beat the SPY.
Expenses: 0.0945 percent, or 9.45 cents annually per $10,000 invested
iShares Core S&P 500 ETF (IVV)
By the previous measure, then, iShares’ IVV — another S&P 500 tracker — actually beats the market quite often. That’s because the IVV’s more flexible structure includes the use of “certain futures, options and swap contracts, cash and cash equivalents” to squeeze a tiny bit more income out of the fund while still providing very (though not perfectly) faithful exposure to the S&P 500. That has led to a few basis points of outperformance versus the SPY over the IVV’s life. Moreover, IVV is a few bps cheaper, which would help generate an extra $900-plus in returns from a $10,000 investment over a 30-year period.
Expenses: 0.04 percent
Vanguard S&P 500 ETF (VOO)
The last of the three is the VOO, which like IVV is allowed to use derivatives and reinvest dividends to help juice returns, but also has a couple of tax advantages. Vanguard also has gotten itself wrapped up in a price war with iShares. VOO once was cheaper than the IVV, at 5 bps to 7 bps, but iShares cut fees on several funds (including IVV to 4 bps) in October 2016, and Vanguard just responded in April by bringing the VOO down to 4 bps. It still has its structure and tax advantages, but the pricing field is level.
Expenses: 0.04 percent
Guggenheim S&P 500 Equal Weight ETF (RSP)
The SPY, VOO and IVV all have a number of common threads, among them being that they’re all weighted by market capitalization. Simply put, that means the larger a company’s market cap, the more assets are invested in its stock. Using the SPY as an example, Apple at 3.45 percent has much more effect on the ETF’s performance than AutoNation (AN), the smallest weighting at 0.13 percent. Guggenheim’s RSP, however, is equally weighted, meaning at every rebalancing, every stock is held equally across the fund.
Expenses: 0.4 percent
SPDR Dow Jones Industrial Average ETF (DIA)
You can make a solid argument that the S&P 500 is a much better gauge of the overall U.S. stock market than the Dow, but the latter still is a venerable blue-chip index that’s followed by many market participants. SPDR’s DIA is the only pure-play ETF that tracks the Dow, whose 30 holdings are weighted by stock price — meaning that Apple takes a secondary role to stocks like Goldman Sachs Group (GS), whose $225 price tag earns it a 7.36 percent weight, and 3M Co. (MMM), which trades around $195 and makes up 6.38 percent of the fund.
Expenses: 0.17 percent
Fidelity Nasdaq Composite Index ETF (ONEQ)
The Nasdaq is a much different critter than the S&P 500 and the Dow. For one, it’s much wider, at 3,000 stocks, and it’s also not restricted to U.S. companies, holding a number of international equities. Fidelity’s ONEQ is the only fund that tracks this index, and while it’s a reasonable facsimile, at just 2,040 holdings, it’s not nearly as faithful as the primary S&P 500 and Dow trackers. It is, like the Nasdaq, tech-heavy at nearly 50 percent of the fund’s weight, with top billing going to Apple (8.39 percent), Alphabet (6.47 percent) and Microsoft (5.85 percent).
Expenses: 0.21 percent
PowerShares QQQ Trust (QQQ)
That said, investors have voted with their wallets, and they’re far more interested in the Nasdaq-100 — and its tracker, the QQQ — than they are the Nasdaq and ONEQ. The QQQ boasts nearly $50 billion in assets compared to just $1.1 billion for Fidelity’s product. The question is — why? Well, for one, QQQ came live in 1999, so it had a five-year jump on marketing momentum. It’s also much more large-cap in nature, tracking just 100 companies, primarily in tech (56.45 percent), discretionaries (21.34 percent) and health care (11 percent). The QQQ outdoes its wider-net brother over every significant time frame.
Expenses: 0.2 percent
Direxion Nasdaq-100 Equal Weighted Index (QQQE)
Given that the QQQ features some really lopsided overweights, such as Apple at nearly 12 percent of the fund and Alphabet at nearly 9 percent, investors who already have plenty of single-stock exposure to larger-cap tech names might do better with Direxion’s QQQE, which is similar to Guggenheim’s RSP in its equal-weight approach. This doesn’t do much to skew the sector weights — in fact, it is actually heavier in QQQE at 57.64 percent. But it does mean that companies like Akamai Technologies (AKAM) and Norwegian Cruise Line Holdings (NCLH) have just as much pull as the Nasdaq-100’s mega-cap tech components.
Expenses: 0.35 percent (includes 20-basis-point fee waiver)
iShares Russell 2000 ETF (IWM)
Few investors ever refer to the Russell 2000 as “the market,” but it’s still one of the “big four” indices (along with the Dow, S&P 500 and Nasdaq), and it’s the premiere index of small-cap stocks — itself an important indication of investor risk appetite. The IWM holds roughly 1,950 members of the Russell 2000. And while top holdings such as Advanced Micro Devices (AMD, $10 billion market cap) and Chemours Co. (CC, $7.4 billion) are on the upper end of the mid-cap scale, the average market cap is well under the $2 billion threshold, so it’s still a representative play on the small-cap space.
Expenses: 0.2 percent
ProShares Short S&P500 ETF (SH)
Lastly, if you ever want to bet against the market — or just hedge against a downturn — ProShares’ SH is one of the most commonly used methods of doing so. The SH is a simple inverse fund that delivers -1x the returns of the daily performance of the S&P 500. That “daily” part is important, as the returns aren’t perfectly mirrored over time. For instance, the SPY is up 73 percent over the past five years, while the SH is down just 52 percent. Still, if you want portfolio protection without having to sell most of your holdings, the SH is a relatively low-risk way to benefit from market declines.
Expenses: 0.89 percent
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