The Unique ETF that Beats the Market

The S&P 500 ETF (SPY) is far and away the most popular ETF amongst financial pros.

But buying an ETF that mirrors the index isn’t the only, nor the most profitable, way to invest.

Today, we want to explore an ETF that takes a unique approach and offers some key insights about investing as a whole.

Key Facts About XLG

• Net assets: $2.38 billion
• 12-month trailing yield: 1.08%
• Inception: May 4, 2005
• Expense ratio: 0.20%
• Number of holdings: 53

Is bigger always better?

According to Invesco’s S&P 500 Top 50 ETF (XLG), yes it is.

Comprised of the top 50 companies in the S&P 500 weighted by market cap, the XLG outperformed all other S&P 500-style ETFs on our list.

Unsurprisingly, the ETF is heavily weighted towards technology stocks.

Source: Invesco

By investing in the largest stocks in the S&P 500, the XLG naturally buys companies performing better than others.

That’s why the top holdings include Apple, Microsoft, Amazon, and now NVIDIA.

Source: Invesco

Performance

What’s interesting is the top 50 stocks consistently outperform the S&P 100 largest companies, meaning that going with bigger companies tends to yield higher returns.

Source: Invesco

That flies in the face of many discount and value investors and instead favors momentum traders.

Competition

To make the lofty claim the XLG outperforms other S&P 500 strategies, we compared it to the other top searches by financial pros.

• SPDR S&P 500 ETF (SPY): The gold standard of investing, the SPY is a low-cost ETF that mirrors the S&P 500.
• Invesco S&P 500 Equal Weight ETF (RSP): While the SPY holds companies in proportion to their weighting, the RSP gives everything equal weight, meaning every stock makes up ~2% of the total portfolio.
• iShares S&P 500 Growth ETF (IVW): Another take on the S&P 500 is a focus on growth stocks using the IVW. This ETF holds companies with higher growth characteristics such as a 3-year change in EPS and sales, as well as 12-month change in share price. 
• ProShares S&P 500 Aristocrats (NOBL): As the odd duck of the group, the NOBL tracks S&P 500 companies that have increased dividend payments every year for the last 25.

As you can see from the chart below, a focus on higher growth yields better returns. However, it’s also more volatile and exposed to larger drawdowns during market routes.

Our Opinion 10/10 

The XLG isn’t as well known as its peers. However, it’s unique niche tends to outperform in the long-run.

A balanced strategy to consider: invest in SPY, RSP, and XLG, shifting towards growth when markets are depressed and balance when they’re overextended.