3 Types Of ETFs You Need To Know About

Over the next couple of months and into 2025, The Juice will detail and discuss how to invest in a way that maximizes opportunity (as in, access choices) previous generations simply did not have. 

This means we will cover how to construct a portfolio that— 

• grows and safeguards your long-term nest egg, 
• leaves room for aggressive speculation, 
• and diversifies traditionally, but also — maybe most importantly — with alternative investments. 

If you haven’t already, forward The Juice to a friend and tell them to subscribe for free (at the link at the bottom of the page) because our aim is to help you be better with money — be a better investor — as we head into the new year. 

Alternative investments exist in categories all their own (e.g, real estate, collectibles, private equity) and as sub-categories within more traditional investment vehicles. Particularly within ETFs. 

We discuss the difference between passive and active ETFs all of the time. We’ll brush up on that in this ongoing series. We’ll also get into some of the newer and most sophisticated ETFs that let you get aggressive in the quest for big profits. 

But, today, some basics. Because, without the basics, you don’t have much. 

From broad (and least aggressive) to more specific (and more aggressive).

Low-Cost Broad Market, Market Cap ETFs

Pretty straightforward. We’re talking market-tracking ETFs such as the SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ), which mirror the composition and performance of the S&P 500 and Nasdaq-100 by market cap. 

This means you’ll be overweight the biggest companies in the world. 

For example, the five top holdings in SPY — Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), Amazon.com (AMZN) and Meta Platforms (META) — account for about 26.3% of the ETF. 

It’s even more pronounced in QQQ where the top five companies — AAPL, NVDA, MSFT, Broadcom (AVGO) and Advanced Micro Devices (AMD) — comprise approximately 32.4% of the ETF. 

There’s nothing wrong with this, but just know that when you buy SPY, QQQ and ETFs like them, you are super overweight the stock market’s biggest names. 

Low-Cost Broad Market, Equal-Weight ETFs

If you want more equal exposure, you buy an equal-weight ETF. 

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 United Airlines (UAL), Hasbro (HAS) and Boston Scientific (BSX) have as much of a relative impact on performance as Apple or Microsoft.

The Invesco S&P 500 Equal Weight ETF (RSP) is the equal-weight ETF of choice for many investors. 

While RSP tends to lag SPY and QQQ, it has turned in a pretty good performance against them in recent times. 

ETFs That Maximize Exposure To The Biggest And Best Stocks

We’re not talking about the ETFs that give you amplified exposure to an index or even a particular stock. We’ll get to those later in the year and this series. 

We’re talking about ETFs that take an index such as the S&P 500 and own just the top names in it. 

For example, the Invesco S&P 500 Top 50 ETF (XLG) owns, as the name strongly implies, the top 50 stocks in the S&P 500, based on market cap. The top five names in XLG (obviously, AAPL, NVDA, MSFT, AMZN and META) make up a whopping 44.75% of the fund. 

The bottom five — Comcast (CMCSA), Pfizer (PFE), Danaher (DHR), Applied Materials (AMAT) and NextEra Energy (NEE) — take up just 2.84% worth of space. 

XLG has crushed it over the last year, returning nearly 42%. That puts it ahead of SPY, QQQ and RSP. 

However, the question that you have to ask is does this type of concentration make sense as a long-term strategy? Is it the type of approach that works until it doesn’t? 

This question sits at the core of our goal to help you build a diversified portfolio that’s nothing like the one your grandparents told you about. 

The Bottom Line: The Juice thinks you need a core approach that’s sort of old school. Keep SPY, QQQ and a handful of other more traditional buy-and-hold investments and strategies (such as dividend growth investing) close. But we also think this approach shouldn’t tie up nearly all of your capital. 

With the large number of ETFs, alternative ETFs and pure alternative investments available to everyday investors, it’s time to create a new definition of diversification. You can allocate aggressively and broadly — more than ever before — but you can also do it smartly so you don’t put the ultimate goal of building long-term wealth at risk. 

Stick with The Juice as we guide you through the process. If there’s an alternative investment or approach you’d like to know more about, let us know by using the feedback link at the bottom of the page.

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