One thing you can be sure of in the stock market is consistent price swings, which can sometimes be frustrating. It can also be overwhelming to constantly hear about bear or bull markets and when they may be approaching. But, with the S&P 500 up over 7% year to date (as of May 12) after going into a bear market in 2022, many investors have been wondering if a bull market is on its way.
It's easy for investors to want to prepare for what they think the stock market will do, but that's a slippery slope because nobody truly knows. You can make educated guesses, but at the end of the day, they're just guesses.
That's why whether or not you believe a bull market is coming, an S&P 500 exchange-traded fund (ETF) should be your go-to investment.
Cover a lot of ground with a single investment
The S&P 500 is an index that tracks the largest 500 public American companies. It's the most popular stock market index and the benchmark used to gauge its overall performance.
Although the S&P 500 is an index, different financial institutions put together their respective S&P 500 ETFs that mirror it and trade on the stock exchange like individual stocks. Thousands of ETFs are on the stock market, but few can act as a single go-to like an S&P 500 ETF.
One you can't go wrong with is the iShares Core S&P 500 ETF (IVV 0.98%), which contains companies from all 11 major sectors:
- Information technology: 26.12%
- Health care: 14.40%
- Financials: 12.73%
- Consumer discretionary: 10%
- Industrials: 8.50%
- Communication: 8.33%
- Consumer staples: 7.33%
- Energy: 4.39%
- Utilities: 2.90%
- Materials: 4.55%
- Real estate: 2.53%
- Cash and/or derivatives: 0.21%
Diversification is one of the cornerstones of investing, and accomplishing it in a single investment is a blessing for investors. Whether a bear or bull market happens, you always want your portfolio to be diversified.
With a broad ETF like the iShares Core S&P 500 ETF, you may not see some of the remarkable returns that can happen with individual companies during bull markets, but you have somewhat of a safety net that doesn't come with individual companies.
Both bear and bull markets are going to happen eventually, but the difference is there's no guarantee an individual company will bounce back from a bear market. However, you can be all but certain that the S&P 500 will, because an investment in it is essentially an investment in the U.S. economy as a whole.
Don't take the low expense ratio for granted
One of the more underrated benefits of the iShares Core S&P 500 ETF is its low expense ratio. Expense ratios are charged as a percentage of your total investment, and their impact can slide under the radar if you're not careful.
At 0.03%, the iShares Core S&P 500 ETF expense ratio is cheaper than most ETFs on the stock market. The average expense ratio for the typical stock ETF is 0.16%. And although a slight difference may seem ignorable on paper, it can add up to thousands of dollars over time as your investment value grows.
Imagine if two people invested $500 monthly into two funds, averaging 8% annual returns over 20 years. Here's how their differences in fees paid would stack up with different expense ratios.
| Expense Ratio | Amount Paid in Fees | Ending Value |
|---|---|---|
| 0.03% | $900 | $273,600 |
| 0.16% | $4,800 | $269,700 |
Data source: Author calculations, rounded to the nearest hundred.
Even using a generous 0.13 percentage point difference between expense ratios equals thousands more paid in fees. The difference is far greater if you account for investors who may invest in actively managed ETFs, which are much more expensive.
For example, the popular Ark Innovation ETF has a 0.75% expense ratio, which would be over $21,700 paid in fees over that 20-year span.
Emphasize consistency over market timing
At the end of the day, what's likely to decide how successful you are in investing isn't how well you manage to time the next bull market (or any bull market), but how consistent you can remain through the ups and downs. Time in the market is more important than timing the market.
If you need help staying consistent, try using dollar-cost averaging, which involves investing set amounts at regular intervals. Putting yourself on a schedule can help ensure you're regularly investing instead of making investment decisions based on how you anticipate stock prices moving.
In the long run, consistency often reigns supreme. Keep a long-term focus, and don't let short-term movements throw you off your plan.
