Morningstar CEO Kunal Kapoor discusses long-term investment options in ETFs during The Craman Countdown.
Most investors recognize that the S&P 500 is a strong vehicle for building long-term wealth. It’s often viewed as the go-to option for retirement accounts. Self-directed investors frequently choose either the Vanguard S&P 500 ETF or the iShares Core S&P 500 ETF and consider it sufficient. There’s a reason these two are among the largest ETFs globally, boasting a combined total exceeding $1.6 trillion in assets.
For many, the S&P 500 serves as their entire investment portfolio. However, this approach can omit many asset classes, which might lead to missed opportunities for growth, increased risk, and a lack of steady income. Without diversifying, you might end up with excessive volatility due to high-tech concentration and the nature of index growth slopes.
Key Points
- The S&P 500 typically returns around 10% annually in the long run—adequate for a core retirement investment.
- Approximately 38% of the index is represented by the top 10 stocks, making it heavily reliant on a small number of tech companies.
- Investing solely in the S&P 500 excludes small-cap stocks, international equities, bonds, gold, and cryptocurrencies—assets that can provide valuable diversification.
- While the S&P 500 ETF is solid as a main holding, a balanced retirement portfolio needs more variety.
Citigroup projects that U.S. ETF assets will surpass $25 trillion by 2030.
Why Relying Only on the S&P 500 Can Be Limiting
Looking at the S&P 500’s performance over the last decade or so might lead some to think it’s the only investment worth having. This has sometimes been dubbed the focus on the Magnificent Seven, which has often beaten other sectors and investment styles.
However, beyond performance, the S&P 500 includes many top-tier companies in the U.S. economy, such as Apple, Microsoft, and Amazon. These firms pull in billions and have shown resilience for years, suggesting their longevity in the market.
Goldman Sachs has acquired Innovator Capital, raising ETF assets to $90 billion.
These companies really do represent sound foundations from which to build a robust portfolio.
Investing Beyond the S&P 500
Sure, the S&P 500 is probably the best index to focus on, but it’s not flawless.
Vanguard funds are increasingly leading in emerging markets investing.
There’s quite a bit that potential investors miss out on by limiting themselves to just the S&P 500.
- Small and medium-cap stocks: The Vanguard Total Stock Market ETF, which encompasses the entire U.S. stock market, includes roughly 3,500 stocks. The 3,000 not represented in the S&P 500 make up about a quarter of the total U.S. market cap. Small and mid-cap stocks tend to have different sector distributions and can experience various economic cycles. Ignoring them might mean passing up a significant slice of the economy.
- International equities: Recent trends show that foreign stocks can outperform U.S. ones, especially during stagnant periods. They also respond differently to economic conditions compared to U.S. firms.
- Bonds: While they may not be thrilling, bonds help counterbalance portfolio risks and add an essential income stream, especially as retirement approaches.
- Gold: This precious metal often performs well in times of inflation and geopolitical uncertainty and has low correlation with stocks, serving as a risk mitigation strategy.
- Cryptocurrency: Assets like Bitcoin have emerged as a legitimate class. Including cryptocurrencies as part of a diversified asset allocation can be reasonable.
By engaging with a range of market cycles—beyond just large-cap U.S. stocks—you can better manage portfolio fluctuations and create a setup that aligns well with your financial objectives and risk tolerance.
The Case for More Than Just the S&P 500
The S&P 500 serves as a solid core holding, but there’s definitely a need for more.
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I strongly believe in the power of diversification to mitigate risk. Achieving this often means incorporating various asset classes. Most of the time, it’s less about selecting individual winners and more about investing in the global economy and allowing compound interest to do its thing in the long term.
