4 Cheap and Easy Ways to Buy the Stock Market
Apr 27th 2013 11:30AM
Updated Apr 27th 2013 3:30PM
Millions of investors around the world rely on the stock market to help them grow their wealth and meet their long-term financial goals. But many investors steer clear of stocks because they're not sure how to pick the best ones to invest in or how to avoid problem stocks that can cost them their entire life savings.
Fortunately, if you want a cheap and easy way to add stock market exposure to your investment portfolio, then your smartest move could be to buy one of many exchange-traded funds that seek to mirror the returns of the S&P 500 or other benchmarks covering similarly large swaths of the stock market. To give you a sense of the variety of such funds that are available, let's take a look at four ETFs that invest primarily in S&P 500 stocks to compare their good and bad points.
SPDR S&P 500
The granddaddy of the ETF world, the fund known as the Spiders takes a brute-force approach to index investing, owning shares of all 500 stocks in the S&P 500 in roughly the same proportion as their weightings in the index. With identical holdings to the S&P, the SPDR ETF essentially guarantees that you'll match the index's return, less minimal net expenses of less than 0.10% annually.
Vanguard Total Stock Market
In addition to having its own separate S&P 500-tracking ETF that uses the same approach as the SPDR ETF yet charges just half the expenses, Vanguard also offers its Total Stock Market ETF, which owns not just the 500 stocks in the S&P but also 2,700 more stocks that make up the MSCI US Broad Market index. The result is a small amount of exposure to small- and mid-cap stocks in addition to its core large-cap holdings. When smaller companies perform better, that gives the Vanguard ETF an advantage over SPDRs and other S&P-tracking funds, and its rock-bottom 0.05% expense ratio is about as cheap as you can get.
Guggenheim S&P 500 Equal-Weight
Equal-weight ETFs own the same stocks as regular S&P 500-tracking funds, but with a catch: rather than weighting the amount it invests in each stock by market capitalization, the Guggenheim ETF has roughly equal dollar amounts invested in all 500 of its holdings. Lately, that has produced better returns than the overall S&P, because of weak performance from the S&P's largest companies. With an expense ratio of 0.40%, the Guggenheim offering isn't the cheapest ETF available, but if you like simplicity and think that smaller companies are poised to outperform their larger counterparts, then the equal-weight ETF may be the right pick for you.
ProShares Ultra S&P 500
The ProShares ETF uses leverage to provide double the daily return of the S&P 500. In addition to holding individual stocks, the ETF also uses derivatives like swaps and futures contracts to get its leveraged return. Yet as the company's website notes, returns over periods longer than a day won't necessarily be double the S&P's return, and in some cases, the fund's long-term returns can move in the opposite direction from the stock market. With an expense ratio of 0.91%, this ETF is cheap only in comparison to trying to implement a similar derivative-based strategy yourself, but it's most appropriate for those with short time horizons trying to maximize their short-run returns, or those who believe that the market will move sharply upward for an extended period without many pullbacks.
Keep it simple
Expert investors get a whole lot more complicated with their investing strategies, seeking out stocks that will outperform the S&P 500 and similar benchmarks. But if you're more comfortable spending the bulk of your time on things other than investing, then choosing one or more of these simple ETFs could be just the answer you've been waiting for.
The article 4 Cheap and Easy Ways to Buy the Stock Market originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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