After a spectacular nine-year run, it has never seemed easier to make money in U.S. stocks.
So I was surprised to hear from a reader recently asking “for an easy way to diversify into the U.S. market.” The easiest way? The answer since the market bottomed in the winter of 2009 has been to pick pretty much anything. Looking ahead, you’ll need a better plan that that.
May I suggest an ETF tracking the S&P 500 as the easiest way to invest in the U.S. market going forward? Kinda boring, I know. But boring is greatly underrated as an investing attribute. Exciting investments burn out. Boring investments have their up and down cycles, but the best of them have the sturdiness needed to be a long-term winner.
All the bigger ETF companies have S&P 500 ETFs both with and without currency hedging, and fees are typically just below 0.1 per cent. Shockingly cheap, in other words.
Think of an S&P 500 ETF as a wrapper for 500 big U.S. companies across all sectors, many of them global giants. Close to 5 per cent of the S&P 500 index is Apple Inc., while another 3 per cent or so is Amazon.com. The old economy is in there, too. J.P. Morgan Chase & Co., Johnson & Johnson Inc. and Exxon Mobile Corp. are all among the top 10 holdings.
You’re missing out on smaller, faster-growing companies when you hold an S&P 500 index ETF. It’s possible to get the big companies of the S&P 500 mixed with smaller firms in a total market ETF, but the value is debatable. Total market ETFs holding U.S. stocks cost a little more than S&P 500 ETFs, and returns in the past five years have not justified the premiums.
One criticism really sticks to the S&P 500. Annualized gains for the five years ended July 31 come in at 18.6 per cent in Canadian dollars, which is pretty much double the more optimistic forecasts of what to expect from stocks in the long term. Here’s an easy strategy for buying the easiest way to diversify into the U.S. market: Put yourself on a monthly contribution plan to build a position. Or, if you have a lump sum, divide it into quarters and invest a slice every three months for the next year.
Long term, most investing pros can’t beat the S&P 500 on a net, after-fee basis. So buying an E&P 500 ETF isn’t just easy. It’s also smart.