The S&P 500 ETF have become very popular assets for long term investors. This is because they replicate an index with great earns historically, with a media gross profitability of 10% since 1957. Although there have been certain drops like in 2008 when it dropped 37%, it’s still one of the indexes with best recovery. In 2009 it grew 26,5 in an economic world in crisis and in 2010 it also grew 15%.
Combining the index with the low cost of S&P 500 ETF investors are in front of a great tool for making money. Those who are looking for exchange traded funds have S&P 500 ETF among the best alternatives.
S&P 500 ETF and the risks of technological concentration
Albeit the excellent historical behavior and low cost, those who defend ETF investment also argue that you can buy diversification in a simpler way. These ETF include the 500 higher capitalization enterprises in the United States of America market. However, this virtue is paradoxically a risk because of technological concentration.
S&P 500 ETF is comprised by shares from the best 500 enterprises from the index. The problem is that they reflex the weight of each company in the ETF. For example, if NVIDIA represents the 7% of S&P 500 then, your ETF share will include 7% of Nvidia. In an index ruled by technology, the concentration of capital is inevitable.
- The S&P 500 index includes a 32% presence of technological actors. It’s the main driving force for the index historical growth.
- If the technology sector enters an uncertainty period, or even if the expectations get cold, the S&P 500 ETF will also suffer from it.
- Regional concentration is another risk for ETFs. USA seems a great country for investors, but any economic problem or a stricter law for enterprises will make those who only invest in S&P 500 ETF lose money.
Then, is it a good idea to invest in it? Yes, but you should also have an investment portfolio with different assets. If you include ETF from other indexes you will be protected from market movements.
Real diversification when investing on S&P 500 ETF
It’s not about avoiding investment in the S&P 500 ETF but creating a real diversification portfolio. When you buy ETF of other regions and sectors, you can protect your investment from national or sector fluctuations.
An interesting alternative for investors seeking diversification is MSCI World ETF. It’s comprised by 1.500 enterprises from 23 countries all around the world. Although this ETF also suffers from regional risks. USA has most of the companies and the 60% of the MSCI World ETF is linked to the economy of the United States of America.
In terms of diversification, investing in MSCI World ETF and S&P 500 ETF is inefficient. Your portfolio will have duplicated assets that won’t help your economy. For example, you will have Apple, Tesla, Alphabet, Microsoft or Amazon shares in both ETF.
For real diversification, you can choose the MSCI World ex-USA ETF that includes the biggest enterprises excluding the United States of America. You will find shares from Europe, Canada, Japan and Australia companies.
This ETF offers real diversification in terms of region as well as sectors. It’s not only a technological ETF but it also includes car industry, banks, heavy industry and raw materials.
Emerging Markets options
Another interesting diversification option is MSCI Emerging Markets ETF. This product allows for greater exposition to China, India and Brazil enterprises. It’s a good alternative to invest in new economies with greater growth potential.
All the ETF in this list help you to diversify between regions and sectors, but they are always focused on big companies. Each ETF uses the bigger companies of the index for each country in order to make for a competitive asset.
The small caps
Real economy also includes companies with low capitalization or small caps. This companies don’t earn millions of thousands of millions of dollars a year, but they have certain advantages your for investment portfolio. You can invest in new companies and growing sectors. This is usually a higher volatility index with less liquidity and trading volume.
In order to invest in small caps you have several options from specific indexes in each country or region like the Russell 2000 or Stoxx Europe Small 200, or bigger ones like MSCI World Small Cap.
Diversification in the investment world is a basic protection for any person who wants to reduce risks. It’s important to learn the basics when operating on the S&P 500 ETF, not only because of the concentration, but also because of the risks of economic changes.