When considering how to invest $5,000, it’s tempting to dive into high-risk, high-reward options, often glorified in popular trading forums like Reddit’s WallStreetBets.
Here, users engage in what are known as “moonshot” investments — highly speculative bets that aim for exponential returns. Typically, these involve purchasing out-of-the-money, short-term call or put options on volatile stocks, particularly around earnings announcements or significant economic events.
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The allure of such strategies lies in their remote potential for massive payoffs, known as “ten-baggers,” where the value could increase tenfold. This is due to convexity in options pricing, which can dramatically increase the value of an option in a non-linear manner as the underlying stock moves.
However, despite the potential for substantial rewards, these investments resemble gambling more than they do sensible investing. Even with limited capital, there are more sustainable, risk-aware and prudent strategies for investing long term.
Here are seven strategies for investing $5,000 that experts recommend:
— S&P 500 index funds.
— Nasdaq-100 index ETFs.
— Developed-market stocks.
— Emerging-market stocks.
— Sector ETFs.
— Thematic ETFs.
— Bitcoin.
S&P 500 Index Funds
According to the S&P Indices Versus Active (SPIVA) Scorecard, 84.7% of all U.S. large-cap funds underperformed the S&P 500 over the past 15 years.
This benchmark includes 500 of the leading companies in the U.S. and represents about 80% of the market’s value, covering all 11 sectors. It’s selected based on a methodical approach that considers size, liquidity and profitability via both a committee process and rules-based methodology.
SPIVA highlights a critical point: Despite the extensive research and sophisticated strategies employed by active fund managers, most funds still fail to beat a passive, methodically constructed and transparent index.
Therefore, if you’re looking for a reliable and time-tested way to invest in the broad U.S. market, S&P 500 index funds offer a straightforward and cost-effective solution.
Popular choices include the SPDR Portfolio S&P 500 ETF (ticker: SPLG) and the Vanguard 500 Index Fund Admiral Shares (VFIAX), which boast low expense ratios of 0.02% and 0.04%, respectively. This means investing $10,000 would incur just $2 or $4 in annual fees.
“In his 2014 letter to Berkshire Hathaway 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’s Heider College of Business. “If that idea is good enough for Mr. Buffett, it is good enough for the vast majority of investors.”
Nasdaq-100 Index ETFs
One standout in the last decade that has outperformed the S&P 500 is the Nasdaq-100 index, boasting a cumulative total return of 394% compared to the S&P 500’s 188%. This performance can be attributed to its unique selection criteria, which focuses on the 100 largest non-financial stocks listed on the Nasdaq.
Although seemingly arbitrary, this methodology has resulted in a significant concentration in top-tier tech giants over the years, with the index currently featuring all of the “Magnificent Seven” stocks: Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Nvidia Corp. (NVDA), Meta Platforms Inc. (META) and Tesla Inc. (TSLA).
Investors looking to tap into this tech-heavy index have several notable options from Invesco Ltd. (IVZ), namely the Invesco QQQ Trust (QQQ) and the Invesco Nasdaq 100 ETF (QQQM).
“QQQ has provided exposure to innovative, technologically focused companies for nearly 25 years,” says Paul Schroeder, QQQ equity product strategist at Invesco. “QQQM also tracks the Nasdaq-100 index and was introduced in October of 2020 with the buy-and-hold investor in mind.”
QQQ offers high trading volume and a well-developed options chain, making it a preferred choice for active traders. Conversely, QQQM, with its lower share price and expense ratio, is more tailored for investors with a buy-and-hold strategy.
Developed-Market Stocks
What do Nestlé SA (OTC: NSRGY), Toyota Motor Corp. (TM), LVMH Moet Hennessy Louis Vuitton SE (OTC: LVMUY) and Shell PLC (SHEL) have in common?
Despite their recognizable brand names in America, these companies are actually based in developed countries such as the U.K., France, Switzerland and Japan, and therefore are not components of the S&P 500. To access these global giants, investors need to look internationally for diversification.
For investors seeking to diversify as a hedge against potentially overvalued U.S. stocks, investing in an international developed market ETF is a cost-effective strategy. The iShares Core MSCI EAFE ETF (IEFA) exemplifies this approach with a low expense ratio of just 0.07%.
IEFA tracks the MSCI EAFE IMI Index, where “IMI” stands for Investable Market Index, indicating it includes not only large-cap companies but also mid- and small-cap firms across the “EAFE,” which stands for Europe, Australasia and the Far East.
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Emerging-Market Stocks
If you’ve already diversified with U.S. and developed-market stocks, consider allocating $5,000 to emerging markets to tap into up-and-coming economies like China, India, Brazil, Mexico, Saudi Arabia, South Africa, Vietnam and South Korea.
These regions showcase promising demographic trends such as growing populations, rising middle classes and rapid digitization, which may bolster economic growth.
For exposure to these dynamic markets, ETFs offer a convenient investment vehicle. These funds allow you to access stocks that are not available through American depositary receipts (ADRs) or global depositary receipts (GDRs).
For broad exposure, the Vanguard FTSE Emerging Markets ETF (VWO) is a popular choice with a low expense ratio of 0.08% and a portfolio encompassing more than 5,900 market-cap-weighted stocks across multiple emerging economies.
For a more unorthodox approach, the iShares MSCI BIC ETF (BKF) focuses on stocks from three major BRICS nations — China, India and Brazil. To round out coverage of the BRICS nations, consider adding the iShares MSCI South Africa ETF (EZA).
Note that exposure to Russian markets is currently complex due to the sanctions imposed following the country’s invasion of Ukraine in 2022, which affected the accessibility of Russian stocks.
Sector ETFs
When investing in the S&P 500, it’s important to recognize that allocations across the 11 sectors it includes are not uniform. For instance, technology commands a hefty 32% of the index, whereas sectors like energy, utilities, real estate and materials each make up only about 3% or less.
If your investment strategy involves overweighting these lesser-represented sectors to achieve a more balanced portfolio or to adopt a contrarian stance, sector-specific ETFs can be a useful 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.”
For those looking to strategically increase their exposure to specific sectors, Vanguard offers a suite of sector-specific ETFs. Each of these funds charges an expense ratio of just 0.1% and provides broad exposure across small-, mid- and large-cap stocks within each of the 11 sectors.
Thematic ETFs
The Global Industry Classification Standard (GICS) is a widely used method for categorizing companies into sectors. However, some investment themes do not fit neatly into GICS-defined sectors.
Take the reshoring trend, for instance, which refers to the process of businesses moving manufacturing and services back to their country of origin due to factors like supply chain disruptions, trade wars and geopolitical tensions.
If you wanted to invest in this theme, you might consider an industrial sector ETF. Yet, such an ETF might not pinpoint the companies directly benefiting from reshoring initiatives due to its broader focus. For investors looking to capitalize specifically on the reshoring movement, a thematic ETF is ideal.
“Thematic ETFs invest in companies that are aligned with specific trends or themes, such as artificial intelligence, cybersecurity or defense technology,” says Pedro Palandrani, head of product research and development 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.”
The Tema American Reshoring ETF (RSHO) serves as a perfect example. It is an actively managed ETF with a 0.75% expense ratio and a focused, high-conviction portfolio of 30 stocks spanning industrials, materials and health care that’s poised to potentially benefit from domestic reshoring efforts.
Bitcoin
According to CoinMarketCap, there are currently about 10,000 tradable cryptocurrencies. Yet, in this crowded field, Bitcoin stands alone at the top.
Since its creation in 2009 by the enigmatic Satoshi Nakamoto, Bitcoin has surged to become the largest cryptocurrency by market capitalization, boasting a value of more than $1.7 trillion as of Nov. 15.
“Bitcoin — up over 100% in the last year — is no longer a niche asset, and there are now multiple ways to add it to your portfolio,” says Chris Kline, chief operating officer and co-founder of BitcoinIRA. “Each method has its own unique benefits and drawbacks, so it’s important to consider which is most suitable for your situation.”
The most direct way is purchasing Bitcoin through a cryptocurrency exchange such as Coinbase Global Inc. (COIN). Here, investors can buy Bitcoin and either keep it in a hot wallet for quick transactions or transfer it to a more secure cold wallet. “Buying Bitcoin directly through an exchange means you own the actual Bitcoin, not just an IOU,” Kline explains.
In early 2024 another investment avenue opened up with the launch of spot Bitcoin ETFs. These ETFs allow investors to trade ownership in Bitcoin just like they trade stocks, and to do so through a regular brokerage account. This method simplifies Bitcoin investment as it requires no advanced knowledge of storage or security.
However, it’s important to note some drawbacks with ETFs when it comes to custody. “In this case, you don’t own Bitcoin directly — you own shares in an ETF that tracks the price of Bitcoin,” Kline says. This echoes the popular crypto adage, “Not your keys, not your coins.”
Lastly, there are specialized platforms that integrate direct Bitcoin custody into an individual retirement account (IRA) structure, offering significant tax advantages. “For long-term Bitcoin investors, choosing an IRA could prove to be both the most profitable and prudent strategy,” Kline says.
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7 of the Best Ways to Invest $5,000 originally appeared on usnews.com
Update 11/15/24: This story was previously published at an earlier date and has been updated with new information.
