Do you have $5,000 just sitting there, perhaps burning a hole in your pocket, and you’re unsure of how to put it to good use? If a holiday getaway isn’t on your agenda this December, why not consider a different kind of gift – an investment for your future self?
As we wrap up the year, you might find yourself in a similar position to mine, having explored various investment options and strategies throughout the year, and now pondering where to allocate any remaining funds.
When in doubt, I often find myself returning to a tried-and-true choice: the S&P 500 Index. This option stands out for its simplicity, reliability, and potential for steady growth. Here’s why I like it.
The S&P 500 is very hard to beat
Investing in the S&P 500 is often seen as a benchmark strategy in the world of investing, and for good reason. This index is renowned for its ‘self-cleansing’ mechanism and broad market cap-weighted strategy, making it an exceptionally effective tool for U.S. stock exposure.
One of the key strengths of the S&P 500 is its composition, which is periodically updated to include the largest and, typically, the most successful companies in the U.S. market. This self-cleansing aspect means that the index naturally adapts to include rising stars and exclude those that are declining.
As a result, it consistently captures the handful of stocks that drive the majority of market returns. This dynamic ensures that the S&P 500 remains representative of the current market landscape and continues to reflect the most successful sectors and trends.
The effectiveness of the S&P 500’s strategy is not just theoretical but is also backed by empirical evidence. According to the latest SPIVA (S&P Indices Versus Active) update, a staggering 92.2% of all U.S. large-cap funds have lagged behind their index counterparts over the last 15 years.
This data reinforces the notion that for many investors, especially those who prefer a ‘set it and forget it’ approach, investing in an S&P 500 index fund can be a more effective strategy than trying to pick individual stocks or actively managed funds.
It’s extremely cheap to track
The affordability of tracking the S&P 500 is another key advantage. Thanks to its low turnover and a strict rules-based strategy, it’s very cost-effective for ETFs to mirror this index.
This low-cost attribute is crucial for investors to consider because, just like dividends, fees also compound over time and can significantly impact long-term returns.
Taking the example of the most popular S&P 500 index ETF in Canada, BMO S&P 500 Index ETF (TSX: ZSP), we see this cost advantage in action. ZSP charges a management expense ratio of 0.09%.
For a $5,000 investment in ZSP, this translates to an annual fee of only $4.50. This low fee structure allows investors to enjoy more of their investment returns, as less is being eroded by management costs.
