The Dow Jones Transportation Average and the Dow Jones Industrial Average are two of the oldest stock market tracking indexes still in use today. Their longevity shows just how important following market trends is for many investors.
Yet despite their history, those Dow Jones indexes have a few limitations when it comes to the overall market. First and foremost, they only track a handful of companies. The Dow Industrials covers 30 stocks, while the Transports handles 20. Second, by their nature, they are sector-tracking indexes, covering "industrial" and "transportation" type companies respectively, rather than the overall market.
In addition, both are price-weighted indexes whose values are based on the market price per share of each of the companies in the index. That's a bit problematic, as it means that things like stock splits can dramatically shift the impact a company can have on an index that it's a part of.
With those limitations in mind, perhaps it's time to forget the Dow Jones, and rather consider a different ETF.
Image source: Getty Images
A magnificent alternative way to index
On that front, the Invesco S&P 500 Equal Weight ETF (RSP +0.46%) takes a vastly different approach to indexing, making it a magnificent way to get a broad basket of investments in a single purchase. The Invesco S&P 500 Equal Weight ETF starts with the roughly 500 stocks in the S&P 500, and then it buys an approximately equal stake in each of those companies.
NYSEMKT: RSP
Key Data Points
The S&P 500 index covers roughly 80% of the entire market capitalization of US stocks, making it a pretty broad-based market tracker. By equally weighting (that is, buying the same dollar amounts of) the constituents of that index, the Invesco S&P 500 Equal Weight ETF takes that diversification to the next level.
In more traditional S&P 500 index tracking ETFs, the ETF will use a market capitalization based weighting, making bigger companies a bigger part of the ETF's holdings. While that helps those ETFs match the performance of the index, they come with a bit of a diversification drawback. The top 10 companies -- 11 stocks because of a company with two share classes in it -- represent more than one third of the value of the total index.
By equal-weighting the investments, the Invesco S&P 500 Equal Weight ETF's top 10 investments instead represent around 2.5% of the total value of the fund. While that means the Invesco S&P 500 Equal Weight ETF won't perfectly match the performance of the S&P 500 index itself, it does mean that investors aren't as tethered to the biggest companies in it. If you're investing in an index ETF in part for the sake of diversification, that is a plus for the Equal Weight version of the fund.
Overall, the Invesco S&P 500 Equal Weight ETF has delivered returns around 10% annualized over the past 10 years. While slightly behind a "standard" S&P 500 index fund over the same period, it still has been a reasonable way to make money by owning a broad swath of the biggest companies in the United States.
Get started now
As awesome as investing can be when it comes to building net worth over time, compounding means that the longer you invest, the better your chances are of ending up with a decently sized nest egg. The sooner you get started, the more time you will have available to you to let that compounding work its magic.
So make today the day you determine whether the Invesco S&P 500 Equal Weight ETF is worthy of a spot in your portfolio. After getting a solid foundation in place for your investments, you'll likely be glad you didn't wait even longer to get started.
