Exchange-traded funds (ETFs) can be a fantastic choice for those looking for a low-effort investment that could help you make a lot of money over time. But with countless ETFs to choose from, it can be tough to decide where to invest.
S&P 500 ETFs track the S&P 500 index itself, so each fund includes stocks from 500 of the largest and strongest companies in the U.S. These companies range from tech behemoths like Apple and Amazon to century-old brands like Procter & Gamble and 3M.
While S&P 500 ETFs have plenty of perks, they're not the right investment for everyone. Here are three reasons you may want to buy this type of ETF, and one good reason to avoid it.
Image source: Getty Images.
Why the S&P 500 ETF can be a great investment
1. It's a low-effort investment
As with all ETFs, the stocks within the fund are chosen for you -- which can help take the guesswork out of investing. You don't need to research individual companies or keep up with industry trends. Simply invest whatever you can afford each month, and the fund will do the rest.
This ETF can be a smart option, then, for those looking for a "set it and forget it" type of investment. Whether you're new to the stock market or simply want an investment that requires next to no effort on your part, the S&P 500 ETF could be a good fit for your portfolio.
2. It can better protect your savings
Because each ETF contains stocks from 500 companies, this creates instant diversification and can limit your risk.
The hundreds of stocks within each S&P 500 ETF are also from a wide variety of industries, ranging from tech to healthcare to utilities to financials and more. In general, the more diverse your portfolio is, the lower your risk. Even if an entire industry takes a hit during a market downturn, your investment is more likely to survive when it's well diversified.
3. It's almost guaranteed to see positive long-term returns
There are never any guarantees when investing. However, investing in an S&P 500 ETF is about as close to guaranteed long-term returns as you can get in the stock market.
The S&P 500 itself has a decades-long history of recovering from even the worst downturns. In fact, analysts at Crestmont Research examined the index's rolling 20-year total returns and found that in every single 20-year period, the S&P 500 earned positive total returns. In other words, if you had invested in an S&P 500 ETF at any point in history and held it for 20 years, you'd have made money.
Over the last two decades alone, the S&P 500 has experienced remarkable returns -- despite facing some of the worst recessions and market crashes in history in those years.
Since 2000, it's experienced everything from the dot-com bubble burst to the Great Recession to the COVID-19 crash to the most recent slump. Yet it's still up by more than 200% in that timeframe.
When to avoid the S&P 500
1. It's harder to build a significant amount of wealth
S&P 500 ETFs come with a slew of advantages, but there's one major drawback: They can only earn average returns. This type of investment is designed to follow the market, so it's impossible for it to beat the market.
To decide whether this is a dealbreaker for you, consider your investing goals. If you're looking primarily for a low-maintenance investment that can limit your risk while still helping you make money over time, the S&P 500 ETF is still a good choice -- despite its lower returns.
On the other hand, if you're willing to put more time and effort into your strategy, investing in individual stocks may be a better option. This approach does require more research (and can carry more risk), but if done well, you could potentially beat the market substantially. Over the long haul, that could result in earning tens or even hundreds of thousands of dollars more.
There's no single correct way to invest, so the right investment for you will depend on your goals and priorities. If you're looking for a simpler and safer investment that can help build wealth over time, the S&P 500 ETF may be a fantastic fit for your portfolio. But if you're looking to maximize your earnings, individual stocks may be the better option for you.
