The S&P 500 (^GSPC 0.77%) went through a correction, a drop of at least 10%, but less than 20%, in early 2025. But as July got underway, the index is once again near all-time highs. The average price-to-earnings ratio of the Vanguard 500 Index ETF (VOO 0.80%), an S&P 500 tracker, is around 26x, which is lofty. But Tom Gardner, CEO of The Motley Fool, still sees pockets of opportunity. Here's where you should be looking for good investments.
The "market" is a collection of stocks
The S&P 500 is a curated list of the 500 largest publicly traded companies in the United States, selected by a committee at S&P Global, and meant to be representative of the broader U.S. economy. The companies in the index tend to be well-known businesses that are economically important.
But how exactly is the index constructed? It is a market-cap weighted average of the stock prices of these 500-odd stocks.
Image source: Getty Images.
First, with only 500 or so stocks in the index, it clearly doesn't include every single stock that makes up the market. So there are plenty of investment options outside the S&P 500 index. And even within the index, there are stocks and sectors that are performing well, and those that aren't. The average of the good and the bad is what you see in the single index number, which, because of the market cap weighting, is driven most by the largest stocks in the index.
This is how Tom Gardner can say that the S&P 500 index suggests the market is expensive and, at the same time, suggests that there are still pockets of opportunity for investors to exploit.
NYSEMKT: VOO
Key Data Points
Where would Tom Gardner look today?
In a recent interview, Motley Fool CEO Tom Gardner specifically suggested three investment areas that might still offer long-term opportunity: value stocks, foreign stocks, and dividend stocks. Here's a quick way to dig into each one.
Meanwhile, Gardner also asserted that if you aren't into buying and selling individual stocks, you should probably be looking at exchange-traded funds (ETFs).
In my view, both pieces of advice are extremely relevant in today's market conditions. However, if you are leaning towards investing in ETFs, why not invest in ETFs comprising stocks that are generally overlooked? In other words, why not invest in ETFs specializing in dividend stocks, value stocks, and international stocks?
On the value side of things, you can go broad and buy Vanguard Value ETF (VTV 0.54%), or hone in on the S&P 500 stocks with Vanguard S&P 500 Value ETF (VOOV 0.42%). There's some overlap between these two index tracking ETFs, in that Vanguard Value ETF is focused on large companies, and so is Vanguard S&P 500 Value ETF. However, using the S&P 500 as a base list of investments adds a screening layer that ensures the companies included are both large and economically important. They have performed similarly over time, as the chart highlights.
That said, a look at the top holdings of either one of these value-focused ETFs could help you start your search for individual stocks. ExxonMobil (XOM +0.87%), Procter & Gamble (PG +1.28%), and Johnson & Johnson (JNJ +1.89%) are in the top 10 of both ETFs and might be worth a deeper dive. Note that all three are reliable dividend payers, too, which keys in on Tom's advice to look at dividend stocks (more on this below).
On the international front, investors could go with Vanguard Total International Stock ETF (VXUS 1.97%). Given the complexity of buying foreign stocks, it is probably best to stick with an ETF on this front, and a broad-based option like this one covers a lot of ground easily and quickly. However, you can bias your investment toward dividends with Vanguard International High Dividend Yield ETF (VYMI 0.96%), which basically takes all foreign stocks that pay dividends and buys the 50% of the list with the highest yields.
If you are intrepid enough to buy individual foreign stocks, well-known dividend paying companies Nestle, Royal Bank of Canada, and Shell make the top 10 of the dividend-focused ETF. Vanguard International High Dividend Yield ETF's price performance has lagged that of Vanguard Total International Stock ETF, but when you look at total return, which assumes reinvested dividends, the high-yield ETF does better. Vanguard International High Dividend Yield ETF's yield is 4.1% compared to just 2.9% for Vanguard Total International Stock ETF.
If you're focused on dividends, meanwhile, Schwab US Dividend Equity ETF (SCHD 0.38%) is one of the best options available. The index this ETF tracks is fairly complex. It only considers companies that have increased their dividends for at least a decade. Then it creates a composite score that looks at cash flow to total debt, return on equity, dividend yield, and the company's five-year dividend growth rate. These are all things that you would probably consider if you were researching a dividend stock.
The 100 highest composite-scoring companies, weighted by their market caps, make up the index. Some of Schwab US Dividend Equity ETF's top holdings are Texas Instruments, Chevron, and Merck.
But here's the most important piece of advice from our CEO that I'd echo: Hold on to these investments for a period of three to five years. Stock investing is about patience, where you let winners run for a long time.
What to do now?
That said, you'd need to ultimately do your own research, digging deeper into each of these ETFs and any of the stocks that you might find interesting. Notice that there is a bit of a theme on the stock front.
Energy stocks, pharmaceuticals, and consumer staples makers showed up in several of the top 10 lists across the ETFs highlighted. If the specific stocks highlighted aren't to your liking, you might find value, foreign, and dividend stocks in these broader areas that you like enough to buy, even though the broader market looks expensive right now.
The big takeaway here, however, is that you shouldn't throw in the towel just because the S&P 500 index looks pricey. The market is much bigger than the S&P 500, and there is usually some investment opportunity to find if you look hard enough, and you stay focused on the long term.
