When you keep a significant amount of cash in a checking account, you might think it’s safe, but in reality, your money could be slowly losing value. This isn’t about the risk of theft or volatility; it’s about the silent thief known as inflation.
Essentially, even though the dollar amount in your account stays the same, the amount of goods and services you can buy with that money decreases over time. To understand this fully, there are two types of returns to consider — nominal and real.
Nominal returns are the face value of your returns — the straightforward percentage increase or decrease in your money. Real returns, however, are what matter more because they take inflation into account, showing how much your purchasing power has actually changed.
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For example, imagine a basket of groceries that cost $100 last year. Due to inflation, this year, the same groceries cost $130. If your money is just sitting in a checking account earning no interest, you can buy less with it this year compared to last. Thus, your purchasing power has decreased.
This negative effect also compounds over time. According to Visual Capitalist, $1 in 1913 had the same buying power as about $26 in 2020. With the inflation spikes of 2021 and 2022, that disparity has likely increased even more.
So, what’s the solution? Smart investing. By taking calculated risks and investing in diversified assets like stocks, bonds or commodities, you can not only preserve but potentially grow your purchasing power.
Here are seven expert-recommended strategies for investing $5,000 effectively:
1. S&P 500 index funds.
2. Nasdaq-100 index ETFs.
3. Sector ETFs.
4. Thematic ETFs.
5. ESG ETFs.
6. BDCs.
7. REITs.
1. S&P 500 Index Funds
Investing in an S&P 500 index fund is one of the simplest and most effective ways to participate in the growth of the U.S. stock market over the long term.
This benchmark comprises 500 large U.S. companies across 11 market sectors, such as technology, consumer staples, communications, health care and energy. It is market-capitalization-weighted, meaning larger companies have a bigger impact on the index’s performance.
When you invest in an S&P 500 index fund, whether it’s through a mutual fund or an exchange-traded fund (ETF), your money is distributed across these 500 companies.
The fund manages all the legwork, from adjusting the portfolio to align with the index to handling dividend payments, which are typically distributed quarterly. This allows you to benefit from the overall growth of these major corporations without having to manage the individual stocks yourself.
Historically, the S&P 500 has delivered impressive returns. For example, over the past decade, the index achieved an annualized return of 12.6% as of May 30, with dividends reinvested. During this period, 87.2% of all U.S. large-cap funds did not outperform the S&P 500, highlighting the challenge of trying to beat the market through active management.
“In his 2014 letter to Berkshire Hathaway Inc. (BRK.A, BRK.B) shareholders, Warren Buffett said that when he passes away, the instructions for the trustee for his wife will be to put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund,” says Robert Johnson, professor of finance at Creighton University Heider College of Business. “If that idea is good enough for Mr. Buffett, it is good enough for the vast majority of investors.”
2. Nasdaq-100 Index ETFs
The S&P 500 index isn’t the only benchmark available for those seeking exposure to the U.S. stock market. Another notable option is the Nasdaq-100 index.
This index includes 100 of the largest companies listed on the Nasdaq stock exchange and excludes financial sector companies entirely.
It’s well-known for its strong emphasis on technology, communications and consumer discretionary giants, heavily weighting industry leaders such as Microsoft Corp. (ticker: MSFT), Apple Inc. (AAPL), Nvidia Corp. (NVDA), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Tesla Inc. (TSLA).
The most popular method of investing in the Nasdaq-100 index is via the Invesco QQQ Trust (QQQ), which charges a 0.2% expense ratio, or $20 in annual fees for a $10,000 investment.
“QQQ tracks the Nasdaq-100, which provides exposure to the 100 largest non-financial companies listed on Nasdaq, and it has provided exposure to innovative, technologically focused companies for nearly 25 years,” says Paul Schroeder, QQQ equity product strategist at Invesco. “It is the second-most-traded ETF and fifth-largest ETF in the world, accounting for 27% of all large-cap growth ETF assets.”
While QQQ is a popular ETF for active traders due to its high liquidity and options chain, Invesco also has a companion fund with a smaller price per share and lower expense ratio available.
“The Invesco Nasdaq 100 ETF (QQQM) also tracks the Nasdaq-100 index and was introduced in October of 2020 with the buy-and-hold investor in mind,” Schroeder says. “The ETF has a 0.15% expense ratio, lower than the 0.2% expense ratio of QQQ.”
3. Sector ETFs
If you’ve invested in broad-market ETFs like the iShares Core S&P 500 ETF (IVV), you’ve been predominantly exposed to sectors like technology, financials and health care.
However, such ETFs often provide minimal exposure to out-of-favor sectors like utilities, real estate and materials, which together currently comprise less than 7% of the S&P 500.
For those looking to adjust their exposure — perhaps shifting toward more defensive positions in anticipation of a recession with utilities or speculating on potential interest rate cuts with real estate — sector ETFs can be an invaluable tool.
“Using a sector ETF as a satellite for your core investments may enable you to capitalize on trends and opportunities within a particular sector that you believe could outperform the broader market,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. “Sector selection involves more work and input on your part but allows you to tailor your investments to align with your expectations for specific industries.”
State Street’s lineup of “Select Sector” SPDR ETFs is particularly useful here. These ETFs offer targeted exposure to 11 different Global Industry Classification Standard (GICS) segments of the S&P 500 for just a 0.09% expense ratio.
For extra exposure to real estate and utilities, investors can buy the Real Estate Select Sector SPDR Fund (XLRE) and the Utilities Select Sector SPDR Fund (XLU), respectively.
4. Thematic ETFs
“Thematic ETFs invest in companies that are aligned with specific trends or themes, such as artificial intelligence (AI), cybersecurity or defense technology,” says Pedro Palandrani, vice president and director of research at Global X ETFs. “These trends are often long-term in nature, which means that thematic ETFs can offer investors exposure to potential growth opportunities.”
These ETFs are often more niche and specific in scope compared to a sector ETF. They’re designed to offer targeted exposure to innovative industries by applying either customized indexes, proprietary rules-based selection criteria or active management.
Some ETF examples corresponding to the themes Palandrani identified include the Global X Artificial Intelligence & Technology ETF (AIQ), the Global X Cybersecurity ETF (BUG) and the Global X Defense Tech ETF (SHLD).
“These strategies have gained popularity as they allow investors to capitalize on transformational trends and emerging investment opportunities by focusing on specific themes and investing through an ETF wrapper,” Palandrani says. “Just five years ago, the aggregate assets under management in U.S.-listed thematic ETFs was around $25 billion — today, that sits at $90 billion.”
[READ: 7 Top-Rated ETFs to Buy Now]
5. ESG ETFs
For investors who prioritize environmental, social and governance (ESG) issues, traditional broad-market index funds might not align with their values.
For instance, a common S&P 500 index ETF like IVV includes holdings in industries some investors may find controversial, such as fossil fuel companies like Exxon Mobil Corp. (XOM), tobacco producers like Altria Group Inc. (MO) and defense contractors like Lockheed Martin Corp. (LMT).
However, there are nuances when it comes to picking the right ESG ETF. “Many ESG ETFs from BlackRock and Vanguard simply follow ESG indices from providers like MSCI,” says Samuel Adams, CEO and co-founder of Vert Asset Management. “If an investor is seeking a more authentic experience, they might want to find an ETF from a manager who is practicing shareholder engagement to encourage companies to adopt sustainable practices.”
Thus, an ESG investor may choose to eschew a “big box” option like the Vanguard ESG U.S. Stock ETF (ESGV) over a “boutique” competitor like the Calamos Antetokounmpo Global Sustainable Equities ETF (SROI), which comes from a firm with a high emphasis on sustainability and proxy voting.
But instead of merely applying exclusionary criteria to screen out non-ESG-compliant companies, investors can also take the opposite view to selectively target ESG-friendly companies or themes.
“We think it’s important for investors to realize there is a wide range in ESG ETFs with regards to the approaches taken to selecting companies and in the commitment level to sustainability,” Adams says. “Today, there are thematic ETFs that focus on specific areas like climate solutions, water, real estate, gender, diversity, veganism, etc.”
Real-life ETF examples of some of the ESG themes Adams identified include the SPDR MSCI USA Gender Diversity ETF (SHE) and the U.S. Vegan Climate ETF (VEGN).
6. BDCs
If you’re looking to invest $5,000 and are interested in private equity or private credit markets, which are typically reserved for accredited and high-net-worth investors, you might consider business development companies (BDCs) as a publicly listed alternative.
BDCs operate by raising capital to invest in or lend to private enterprises, often targeting small-to-medium-sized businesses across a variety of different industries.
These companies are structured to function similarly to closed-end investment funds, but with a significant difference: They must distribute at least 90% of their taxable income to shareholders.
This pass-through mechanism allows BDCs to offer high dividend yields, making them an attractive option for income-seeking investors who want exposure to private market investments.
Popular and large BDCs include Ares Capital Corp. (ARCC) and Blackstone Secured Lending Fund (BXSL). Some, like Main Street Capital Corp. (MAIN), even pay dividends on a monthly basis.
7. REITs
Similarly, while $5,000 might not be enough to buy a rental property, you can still gain income from real estate by investing in a public real estate investment trust (REIT).
REITs own, operate and finance income-producing real estate and are traded like regular stocks. Like BDCs, they are subject to a rule that requires them to distribute at least 90% of their taxable income to shareholders, resulting in higher-than-average dividend yields.
One of the biggest perks of investing in a REIT is the ability to target specific real estate sub-sectors. For instance, if you want to invest in hotels, you could buy shares of Apple Hospitality REIT (APLE). If your interest lies in self-storage facilities, Public Storage (PSA) could be an option. You can even indirectly invest in industries like artificial intelligence and cloud computing through data center REITs like Digital Realty Trust (DLR).
Alternatively, if you want to diversify across a broad range of REIT sub-sectors — such as residential, commercial, retail or industrial — a comprehensive REIT ETF like the Schwab U.S. REIT ETF (SCHH), which charges a low 0.06% expense ratio, is an economical and accessible choice.
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7 of the Best Ways to Invest $5,000 originally appeared on usnews.com
Update 05/31/24: This story was previously published at an earlier date and has been updated with new information.
