The ETF Every Long-Term Investor Should Consider - InvestingChannel

The ETF Every Long-Term Investor Should Consider

Proprietary Data Insights

Top Large Cap Growth ETF Searches This Month

Rank Ticker Name Searches
#1 SPY SPDR S&P 500 ETF 283,659
#2 QQQ Invesco QQQ 146,921
#3 VOO Vanguard S&P 500 ETF 43,860
#4 VTI Vanguard Total Stock Market ETF 16,309
#5 DIA SPDR Dow Jones Industrial Average ETF 15,593
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The ETF Every Long-Term Investor Should Consider

As we continue to develop and tie together The Juice’s primary themes (housing, the economy, retirement and ETFs), our installments continue to build off of one another. We’re putting together quite the library for long-term investors and observers of the state of life and place in America. 

Thanks for joining us. And please forward today’s Juice to a friend and tell them they can sign up to receive our newsletter for free at this link.

The other day in The Juice, we suggested taking a long hard look at small cap stocks via the most popular small cap ETF, the iShares Russell 2000 ETF (IWM). We did this because there appears to be at least a small, though meaningful landscape shift happening in the stock market: 

One way to illustrate this is by looking at the S&P 500 Equal Weight Index, which tracks the S&P 500 stocks equally, not by market cap. Therefore, the returns aren’t skewed wildly by the biggest names in the index. One of the leading S&P 500 equal weight ETFs is the Invesco S&P 500 Equal Weight ETF (RSP)

RSP is no longer getting trounced by SPY and QQQ. In fact, it recently hit an all-time high. 

Of course, this doesn’t say much about small caps. But it does say that the market might be spreading out a bit more. So it might make sense to broaden your exposure to a wider swath of stocks beyond the big tech leaders. This includes other large cap stocks, but also small cap stocks.

And even if tech returns to the forefront of the market, it never hurts to diversify a bit. Or a lot. 

And, let’s face it, after the outsized gains, the recent downside here and there has been anything but carnage. 

That said, RSP deserves a serious look. Even though it ranks way down at #14 in Trackstar when we filter for search interest in large cap ETFs. 

The RSP ETF tracks the S&P 500 Equal Weight Index. 

Last November, we did an entire installment defining and illustrating equal weight ETFs:

As we note in our SPY and QQQ lovefests, these two ETFs overexpose you to companies with huge market caps. For example, the top ten holdings in SPY make up 32% of the entire ETF, led by Microsoft (MSFT) at 7.4% and Apple (AAPL) at 7.3%, as of November 28, 2023. It’s even more lopsided in the tech-heavy QQQ where the top ten stocks comprise nearly 50% of the fund. The top five alone — Apple, Microsoft, (AMZN), Nvidia (NVDA) and Meta Platforms (META) — account for 35.5% of QQQ’s composition, as of the other day … 

Bottom line is you might be uncomfortable being overexposed. With putting all or too many of your eggs in one basket. It’s a stretch to say you’re truly diversified in SPY and QQQ given the aforementioned concentrations, even if these funds rebalance from time to time. 

So, enter equal-weight ETFs.

As the name implies, equal-weight ETFs hold the stocks of whatever index they track in equal proportion. Not based on market cap. So, in SPY, for example, names at the bottom of the list, such as Alaska Air Group (ALK), Hasbro (HAS) and Boston Properties (BXP) have as much of a relative impact on performance as Apple or Microsoft.

But here’s the thing that’s easy to miss. 

Owning the S&P 500 via an equal weight ETF isn’t just something you do when the Magnificent Seven falters. That’s a new term anyway. Like FANG and FAANG, eventually it will be replaced by something else. 

Did you know that, according to S&P Global, which owns and manages the equal weight and market cap-weighted S&P 500 indexes:

  • Between January 2003 and December 2022, the S&P 500 Equal Weight Index produced an annualized total return of 11.50% versus 9.99% for the S&P 500, which is weighted based on market cap. 
  • Take the 20-year period ending in 2023 and the equal weight index returned 11.5% compared to 10.3% for the S&P 500 index. 
  • Over the last six months and the last month, SPY, QQQ and RSP are basically neck and neck. 

If you’ve been in the market for the last twenty years and/or plan to be in it for the next twenty, diversification looks something like SPY, QQQ, RSP, IWM alongside a large-cap dividend ETF such as the Schwab US Dividend Equity ETF (SCHD) and, just maybe, something like, if not the WisdomTree U.S. SmallCap Dividend Growth Fund (DGRS)

We took you inside DGRS earlier this week. And we took a nerdy look at SCHD last week when we defined and detailed smart beta ETFs


The Bottom Line: Diversification, man. It’s like a good marriage. You have to wake up and choose it every single day. 

It’s not easy. It can feel boring, but, if you do it the right way, it’s the superior alternative. While you should ride the wave of the heavy hitters in the S&P 500, don’t get lost in the excitement. Other areas of the market exist — equal weight, small cap, dividends — that compete alongside the better known names and provide a hedge, if not meaningful upside when the seemingly perennial leaders stumble.

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