In Part One, I discussed how heavily weighted the S&P 500's top stocks are and how, in reality, the bottom 200 stocks in the index don't even matter. Now I would like to talk about potentially better options than buying an S&P 500 index Exchange Traded Fund or mutual fund but still being diversified in a large number of stocks, with a wide range of diversity and having a good chance of beating the S&P 500's returns.
The biggest issue with the S&P 500 is that the top stocks carry all the weighting. The bottom stocks don't mean much. Instead of buying the SPDR S&P 500 ETF Trust (SPY), why not purchase something that doesn't hold as many positions and have all the assets focused on just the top companies. This way, when the bigger companies that mean more anyways move, you have more money in them. And since the larger companies are typically less volatile, your portfolio shouldn't have to worry about as many companies going bankrupt or falling apart as someone who owns the S&P 500 would have to be concerned with.
The first ETF I would like to discuss is the Invesco S&P 500 Top 50 ETF (XLG). The XLG is an ETF that tracks a market-cap-weighted index of the 50 largest US companies. In essence, it holds just the top 50 of the 500 companies that make up the S&P 500. The fund has a weighted average market cap of $668 billion and a yield of 1.34%. XLG also has an expense ratio of 0.2% and $1.65 billion in assets under management. XLG is up 19.19% year-to-date and more than 35% over the past 12 months. On an annualized basis, the fund is up more than 16% over the last 10 years, a figure that easily beats the market average of a little under 10%. Lastly, the funds top ten holdings represent more than 51% of the fund with Apple (AAPL) taking the top spot at 12.69% of the assets.
iShares S&P 100 ETF (OEF) is another fund that you may be interested in. This one holds the top 100 S&P 500 companies, not just the top 50 like XLG. OEF also has an expense ratio of just 0.2% and over $7.22 billion in assets under management. The fund pays a 1.51% yield and is up more than 14% year-to-date, 30% over the last 12 months, and annualized 15.4% over the last 10 years. The top ten holdings represent 42.81%, with Apple controlling 10.6%. The weighted average market cap is $566 billion. This fund is a little more diversified than the XLG, but it has also trailed the XLG's performance, which is likely due to the fund's top ten stocks holding less value than XLG's.
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Another interesting option is the Invesco S&P 100 Equal Weight ETF (EQWL). EQWL also holds the top 100 S&P 500 stocks. However, they are held in an equally weighted manner. So, each stock, in essence, represents the same amount of weighting in the fund. (The individual stocks weighting, of course, change over time as the price of a stock increases and decreases, but the fund's holdings get readjusted throughout the year.) The fund has $61 million in assets under management and a yield of 2.3% with an expense ratio of 0.25%. The weighted average market cap of the 103 holdings is $185 billion. Year-to-date, the fund is up just 1.39%, but it has risen 14.9% over the last 12 months and more than 13.9% on an annualized basis over the last 10 years. This fund is great if you don't want all the extra smaller stocks in the S&P 500 but also don't want Apple or Amazon.com representing such a large percent of your money.
And finally, we have the Vanguard Mega Cap ETF (MGC), which is an ETF that tracks a market-cap-weighted index that covers 70% of the market capitalization of the US equity market. MGC gives you access to large-cap US stocks, and that's it. No small or mid-cap stocks in this fund, which cuts out about half of the S&P 500 stocks. MGC has 249 positions, $2.96 billion in assets under management, an expense ratio of just 0.07%, and a yield of 1.57%. The weighted average market cap for the fund is $443 billion. Year-to-date, the fund is up 11.77%, while being up 25% over the past year and 13.26% over the past ten years annualized. The funds top ten holdings are those of the S&P 500's and they represent 31.58% of the fund, while Apple makes up 7.05%.
All the funds mentioned above, as well as just a standard S&P 500 fund like SPY, Vanguard S&P 500 ETF (VOO), or iShares Core S&P 500 ETF (IVV), will get you sold returns during most years. However, as I mentioned in part 1, the S&P 500 is so heavily weighted to the top stocks, its almost a wonder why they keep the last few hundred even in the index. So, while the fund mentioned above will likely cost you more than the straight S&P 500 index ETFs, they have also outperformed the S&P 500 ETFs over both the short and long terms. For example, the (IVV) has returned 7.97% year-to-date, 20.49% over the last 12 months and 12.71% annualized over the last ten years. But the IVV only costs 0.03% per year.
You may a little more, but you are likely getting a better product with these 'smaller' versions of the S&P 500.
Disclosure: Matt Thalman owned shares of Apple at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.