The market has been highly volatile in recent days thanks to geopolitical issues. If you are looking to put some money to work in the S&P 500 (^GSPC 0.61%) during this period, you should focus on keeping things simple so you don't let your emotions lead you to questionable choices.
A plain vanilla S&P 500 exchange-traded fund (ETF) would be a good call in some cases, but here's an even easier-to-understand S&P 500 index ETF you might want to consider instead given the circumstances of this particular market.
Don't get caught up in the moment
The S&P 500 index is a well-structured measure of the market's performance. With 500 or so stocks selected by a committee to be economically representative, the index offers diversification, human oversight, and a selection of the largest and most important U.S. companies. To get those great qualities for your portfolio, all you have to do is buy one single ETF, such as the SPDR S&P 500 ETF Trust (SPY 0.57%).
Image source: Getty Images.
That said, the S&P 500 index is market-cap weighted. There's nothing necessarily wrong with this approach, but it means that the largest companies have the greatest impact on performance. This seems fairly logical, given that the index is meant to be representative of the broader U.S. economy. The largest companies do, indeed, tend to be the most important.
The drawback of this approach is that the largest companies are often the most popular companies. That's wonderful during a bull market, as investors bid up the prices of hot stocks. However, when a bear market comes along, the most popular stocks are usually overpriced. And they are the ones that usually get sold off quickly and with the greatest fervor.
There's a more nuanced way to invest in the S&P 500 index
The Invesco S&P 500 Equal Weight ETF (RSP 0.01%) takes the stocks that are in the S&P 500 index and weights each one equally. It basically puts the same dollar amount into each holding, allowing each individual stock to have the same impact on overall performance as every other individual stock. A handful of large companies can't have the same impact on performance, up or down, when equal weighting is used.
Data by YCharts.
The impact of this simple and easy-to-understand shift can be material. As the chart above highlights, the Invesco S&P 500 Equal Weight ETF and the SPDR S&P 500 ETF Trust have both fallen from their recent highs, but the Invesco S&P 500 Equal Weight ETF has fallen less. You might argue that the difference is small, which is true.
Data by YCharts.
However, as the chart above shows, the Invesco S&P 500 Equal Weight ETF has outperformed the SPDR S&P 500 ETF Trust, the oldest exchange-traded fund, over the long term. Small differences add up when they persist over long periods of time. To be fair, the Invesco S&P 500 Equal Weight ETF is likely to lag during bull markets and it could be hard to stay with the ETF during those periods. But if you are a long-term investor, going equal weight has clearly worked out pretty well over time.
You don't have to do what everyone else is doing
Emotions are powerful influences in all aspects of life. But when it comes to investing, they can lead you to do the worst thing at the worst time. That's why sticking with simple investment approaches is often best, in both good markets and bad ones. Buying an S&P 500 index fund is one of the simplest investment approaches you can take. But you can keep it simple and take a slightly different approach if you go with an equal-weight version of the S&P. History suggests the Invesco S&P 500 Equal Weight ETF could be the right middle ground today and, perhaps, longer-term.
