Got $500 to Invest in Stocks? Put It in This ETF

Just $500 can get you a share of the top 500 U.S. stocks with this low-cost ETF.

| More on:
exchange-traded funds

Image source: Getty Images

Investing in the stock market with $500 might seem like a challenge, especially in an environment where share prices of many leading companies are soaring.

This high entry cost makes it difficult to achieve meaningful diversification with a modest investment, even when taking advantage of fractional shares. Diversification is crucial in investing as it helps spread out risk; however, with limited funds, your ability to buy into a variety of stocks is constrained.

The solution lies in turning to an Exchange-Traded Fund (ETF) that encompasses a broad range of stocks, effectively offering built-in diversification. Moreover, ETFs often trade at relatively low prices per share compared to buying individual stocks, making them an ideal choice for investors with smaller amounts.

Among the myriad of options available, TD U.S. Equity Index ETF (TSX:TPU) stands out as one of my personal favourites. This ETF provides exposure to a wide array of U.S. equities, making it a smart pick for those looking to invest $500 in the stock market efficiently and effectively.

How does TPU work?

TPU operates by holding a diversified portfolio of stocks selected to mimic the performance of the Solactive 500 Large-Cap Index.

This index is akin to the well-known S&P 500 Index, which many investors are familiar with, but there are some notable distinctions. While both target the largest 500 U.S. stocks, the S&P 500 incorporates specific rules regarding profitability and is subject to selection by a committee.

In contrast, the Solactive 500 Large-Cap Index follows a more straightforward approach to its composition, offering an alternative representation of top U.S. companies.

When you invest $500 in TPU, it’s a common misconception to think that your investment is evenly distributed across all 500 stocks, with each receiving an equal share of your money. However, this isn’t how the ETF operates. Instead, TPU is designed with a market-capitalization-weighted approach.

This means that the amount of money allocated to each stock within the ETF is proportional to the company’s market capitalization (share price x shares outstanding). As a result, larger, more established companies receive a larger portion of the investment compared to smaller companies.

This weighting approach reflects the overall market composition, ensuring that your investment is more heavily influenced by the performance of major players in the U.S. economy.

How much does TPU cost?

Investing in ETFs comes with certain costs, one of which is the management expense ratio (MER), a fee deducted from your investment annually and expressed as a percentage of your investment.

The MER covers the costs of managing the ETF and is directly subtracted from the ETF’s returns over time, affecting your investment’s net performance.

TPU currently charges a MER of 0.07%. This rate is quite low compared to many actively managed funds, reflecting the cost-efficient nature of funds which passively track a market index.

To put this into perspective, investing $10,000 in TPU would result in $7 in annual fees. For a smaller investment, such as $500, the cost works out to just 35 cents annually.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

Dividend Stocks

3 Dividend Stocks to Double Up on Right Now

Some of these dividend stocks will take longer to recover than others, but they'll certainly pay you to stick around.

Read more »

edit Person using calculator next to charts and graphs
Stocks for Beginners

Watching This 1 Key Metric Could Help You Beat the Stock Market 

If you're looking for the best way to beat the TSX 60, look at this key metric and find a…

Read more »

Online shopping
Stocks for Beginners

Is Couche-Tard Stock a Buy?

Couche-Tard stock (TSX:ATD) may be up 11% in the last year, but quarterly results have been shrinking, leaving investors on…

Read more »

Happy Retirement” on a road
Stocks for Beginners

2 TSX Stocks That Could Help Set You Up for Life

Looking for some of the best TSX stocks to add to your portfolio? Here's a duo to consider that can…

Read more »

A close up image of Canadian $20 Dollar bills
Stocks for Beginners

Low-Risk Investors: Why IAG Stock Could Be Your Best Bet Yet!

IAG (TSX:IAG) stock operates in a stable sector, with a strong dividend and returns. And there are even more reasons…

Read more »

Dollar symbol and Canadian flag on keyboard
Stocks for Beginners

3 Canadian Stocks Tailor-Made for Beginning Investors in 2024

There are some great options to buy now for beginning investors. Here are three stocks to buy today and hold…

Read more »

grow dividends
Stocks for Beginners

Check Out This Soaring Stock up 486% in 5 Years — With More Gains Likely to Come

Shares of this stock are soaring, up 486% in the last five years. But this small-cap stock has a lot…

Read more »

Dividend Stocks

For Passive Income, These REITs Are a Fantastic Bet

These two small-cap REITs are making some headway in 2024, and that should continue this year and beyond as they…

Read more »