This is an summary and excerpt of my article “Why I Wouldn’t Invest More Than $100,000 In An S&P 500 ETF Or Index Fund“.
Ask 100 fee-only financial advisors how they would invest an extra $100,000 that was not needed for at least 10 years, and odds are that one of the top responses would be to simply buy and hold a low-cost, broadly diversified index fund or ETF.
This article makes no attempt to debate whether to invest in active vs. passive funds, nor whether the S&P 500 is the right or best index to use as a benchmark vs. any other index. Rather, I explain below how an investor may decide to track an index like the S&P 500 through a passive portfolio of direct stock positions instead of through an index fund or exchange traded fund (ETF).
How To Track The S&P 500 As Completely As Possible
The Standard & Poor’s 500 index remains one of the most, if not the most, liquid and widely used investment benchmarks in the world. Ask 100 traders how they would invest US$1 billion in “the market” as quickly as possible, odds are that the top answers would include buying either S&P 500 futures or an S&P 500 ETF. The SPDR (Standard & Poor’s Depository Receipt) S&P 500 ETF (NYSEARCA:SPY) is the oldest (founded 1993) and still by far the most liquid S&P 500 ETF, but is no longer the largest ETF, or even the largest S&P 500 ETF, having been surpassed in size by the lower-cost Vanguard S&P 500 ETF (NYSEARCA:VOO), whose management company pioneered low-cost S&P 500 index funds with the Vanguard 500 Index Fund (MUTF:VFINX) back in 1976.
How To Track The S&P 500 “Closely Enough”
For an investor with $100,000 to invest, it would not make sense to buy shares in all 500+ stocks in the S&P 500, but it is not difficult to track the index “closely enough” with a smaller number of securities. Alongside the questions of how actively or passively a stock portfolio should be managed are the debates on how many stocks are needed to provide enough diversification for an investor.