A subscriber recently asked us if it was wise to place all his funds in one S&P 500 ETF, as is shown by our S&P 500 Conservative Strategy.
In other words, is there a reason to buy multiple S&P 500 ETFs vs. ‘putting all your eggs in one basket?’ Despite the trope the 'eggs' trope that implies the opposite, the answer is No – there is no reason to buy more than one S&P 500-based ETF, as long as you are purchasing a plain-vanilla S&P 500 ETF, such as SPY, IVV, or VOO – and not a more exotic version.
Unlike individual stocks, holding a single ETF position can provide inherent diversification, as long as that ETF spreads your funds across a variety of sectors, market segments, and stocks – which the S&P 500 delivers in spades. The only area where the S&P 500 lacks diversification is from the perspective of size. By definition, the S&P 500 is a large-capitalization index and you do not gain exposure to mid-cap stocks or small-cap stocks.
Not all ETFs have the wide diversification characteristics of a broad market index like the S&P 500. For this reason, it is not advisable to put all your funds into (for example) SMH, the VanEck Semiconductor ETF. Even though this ETF distributes your funds across 26 different stocks, at some point, the entire semi conductor industry could (and has) experience an idiosyncratic downturn while the rest of the market does not. However, a broad-market ETF like those based on the S&P 500 large-cap index is acceptable as your sole, stand-alone investment because it does have ample diversification across st aocks, sectors, industries, quality, value, momentum, and many other criteria.
The other consideration that would prompt multiple ETF ownership is whether or not a particular ETF is likely to survive for as long as you might own it. Usually, mainstream ETFs invest your funds in the actual individual stocks listed in a recognized index. For S&P 500 ETFs, this usually means ownership of all 500 companies in the S&P 500 Index.
So if, for some reason, the ETF-sponsoring company collapses or the closure of a stand-alone ETF occurs, all of your funds are backed up by liquid assets and will be returned. However, the associated stress is undesirable, as is the prospect of your money not working for you while the issue gets resolved.
Therefore, you should check a few criteria that can help you determine the likelihood of an ETF being around for as long as you might own it. Our firm, ETFOptimize.com, which operates multiple high-profit / low-risk, systematic ETF-selection strategies, uses three criteria to assess an ETF’s likelihood for operational continuation, which we call…
a) Time Since Launch – we require at least two years of operation to ensure the launch was successful and the sponsor has worked out any bugs;
b) Ample Assets Under Management (AUM) – you want to see plenty of assets because this can be a proxy for the ETF’s investor appeal and competitiveness – therefore, its likelihood to continue as an ongoing fund. We usually require a minimum of more than $500 Million in AUM, but more is better.
c) Sufficient Underlying Volume. We typically use the FactSet Analytics Block Liquidity measurement as a proxy for liquidity. Factset assesses how easy it is to trade a $1 million-dollar block of the ETF for this measure, using a scale of 1 to 5. You can find this metric for each ETF on the right-hand side column of the ETF.com website when researching individual ETFs.
(Note: ETFs do NOT trade like stocks, and it is meaningless to compare the daily volume of one ETF to another. With ETFs, a more meaningful liquidity measure comes from the liquidity of the individual stocks in the underlying index. Investors should avoid ETFs based on thinly-traded, obscure stock indices.)
The big-three ETFs based on the S&P 500 large-cap index include 1) the SPDR S&P 500 ETF (SPY), 2) the iShares Core S&P 500 ETF (IVV), and 3) the Vanguard S&P 500 ETF (VOO).
The S&P 500 index and these three ETFs based upon it are all market-capitalization-weighted. That means that the largest capitalization companies (measured by the share price multiplied by the number of shares outstanding) are weighted more heavily than smaller companies. The most modest market-cap company in the index would have the lowest weighting.
However, there is a plethora of other ETFs that are variations on the S&P 500 market-cap index, with weighting based on factors such as value, growth, dividends, equal-weight, low volatility, high beta, and many more – but for demonstration purposes, we will focus this example review on the big three S&P 500 ETFs only.
CONTINUITY CRITERIA APPLIED TO THE BIG-THREE S&P 500 ETFs
We’ll use the information provided on ETF.com to review the necessary criteria quickly. Here is how the big-three S&P 500 ETFs rate on the three criteria:
SPDR S&P 500 ETF (SPY):
1. Launched on Jan. 22, 1993, SPY was the first ETF offered in the US.
2. AUM: $280 Billion, which makes it the largest ETF by assets.
3. Factset Liquidity rating: 5 of 5
iShares Core S&P 500 ETF (IVV):
1. Launched on May 15, 2000, IVV has existed for more than 19 years.
2. AUM: $195 Billion, which is enormous
3. Factset Liquidity rating: 5 of 5
Vanguard S&P 500 ETF (VOO):
1. Launched on Sept. 7, 2010, VOO has been operating for more than nine years.
2. AUM: $124 Billion, which is far more than enough assets to suggest the fund will continue well into the future.
3. Factset Liquidity rating: 5 of 5
Bottom Line: Each of these three ETFs offer far more than enough to satisfy each of the three Continuity Criteria.
So, how do you select one of these ETFs if they are so similar?
All other factors being fairly equal, you should choose an ETF based on its Expense Ratio. The Expense Ratio is the fee charged by an ETF’s sponsor as a management fee to cover the costs of operating the fund.
If the Expense Ratio is the same when comparing two ETFs based on the same index, you can choose based on the average bid/ask spread.
While these three large, actively traded ETFs feature almost no spread between the bid and ask price, when comparing other ETFs that don’t trade as efficiently, you should check to see what the cost of the spread will be when you execute your trades.
The average spread on each trade can be more of a factor than the annual Expense Ratio when comparing two ETFs based on the same index, particularly if you are buying shares frequently as part of a systematic investment process each time you get paid (highly recommended).
Winner: Since the criteria we will use here is the Expense Ratio, the Vanguard S&P 500 ETF (VOO) wins the contest with the lowest expense ratio at 0.03%, followed by the iShares S&P 500 ETF (IVV) with an Expense Ratio of 0.04%, and the SPDR S&P 500 ETF (SPY) with a 0.09% Expense Ratio bringing up the rear at a distance (three times as costly as VOO).
Per the analysis on this page, you would only need to purchase shares of the Vanguard S&P 500 ETF (VOO) to have a low-cost, well-diversified investment portfolio. However, the historical annual performance of the S&P 500 at about 7%-8% (10%-11% with reinvested dividends) may not be enough to satisfy an investor's financial needs for the future.
To outperform the market (i.e., the S&P 500), an investor will need to employ a proven, consistent and reliable investment strategy. That's where ETFOptimize enters the picture, having been the leading provider of systematic investment strategies since 1998. See the next section for an example of one of our quantitative ETF strategies, or review all the models in our ETF Investment Strategy Suite here.
Quantitative Model Track Record
There is only one definitive way to avoid the emotional roller-coaster of the investment world, and that is by using a quantitative investment strategy – and sticking with it). A sytematic approach offers you a proven method to avoid the stress of highly complex choices between one asset and another, and allows you to entirely ignore the financial media and the talking heads who seek to manipulate your emotions and wallet.
Our Optimum Equity/Fixed Income (4 ETF) Strategy gained approximately 110% over the last two years, which means that the funds invested were more than doubled in a two-year timeframe. Moreover, since its inception, the strategy has recorded 13 consecutive money-making years and 13 consecutive years of beating the S&P 500 as well as the model's benchmark (70-30 blend of SPY/BND).
In 2018, this strategy attained an Annual Return of 19.3% with its worst drawdown being -8.76% – despite 2018's often wild turbulence and the S&P 500's loss of -5.25% that year. In 2019, the model has produced even better performance, with a return of 63% YTD (Annualized Return of 78%) and a Max Drawdown of only -6.9%. You can see performance charts since inception and for other time-frames, with complete strategy details at this link.
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As of November 11, 2019
KEY: The blue line shown is the benchmark: a 70%-30% weighted, buy-and-hold of the S&P 500 ETF (SPY) / and Total Bond Market ETF (BND).
The red line shows the "Optimal Equity/Fixed Income (4 ETF) Combo Strategy's" performance for 2019, with a return to Nov. 11 of 63.39% and a CAGR of 78%.
• See MORE Performance Charts and ALL Details for the Optimal Equity/Fixed Income (4 ETF) Strategy
Since its inception, the Optimal Equity/Fixed Income (4 ETF) Strategy has produced a return of 2,710.90% (30.93% AR). However, its performance has increased in recent years, with an Annual Return of about 54% in the last two years and an Annual Return of about 56% over the last 12 months, (and don't forget that 78% Annualized Return year-to-date)! Click here to learn more about this model.
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The ETFOptimize quantitative investment strategies have a proven track record of consistently high-performance success over long periods. Our premium model strategies have provided an average annual return of 30.53% since the inception of our first model in 2000 – and that performance is a multiple of more than quadruple (415%) the annual return of the S&P 500 over the same period, and more than eight times more than the index' return since 2000. The ETFOptimize strategies, collectively, have beaten the S&P 500 in 77 of 77 years (100%)!
The ETFOptimize strategies operate using our proprietary, quantitative financial-analysis programming that has been continuously upgraded and refined over the last 25 years, accompanied by high-speed computer servers and high-quality, point-in-time investment and economic databases. As ETFs have become increasingly popular over the last 20 years, we've embrace these products, which offer investors instant-diversification – eliminating the individual company risk inherent in stocks.
Why not look over our strategy lineup now and see which if there's one that's a fit for you? It's actually very affordable to put a high-performance, quantitative investment strategy to work for you every week of the year. The ETFOptimize models are available by subscription starting at just $9 per month.
We even offer a Complimentary S&P 500 Conservative Strategy for those with no experience with our firm or with systematic investing, and who would like a long-term, 90-day trial before subscribing (with no credit-card required to register).
Do some research; we don't think you'll find a superior approach to investing – offered at such an exceptionally low cost, and making consistently high-performance investment results affordable for even the smallest investor. You control your money in your own account and follow our clear instructions for trades, which occur an average of only about three-six times per year. We provide you with weekly updates of your strategy and an analysis of the market that always tells you what's critically important.
Plus, you can subscribe without risk because each model is backed by a 60-day, 100% Moneyback Guarantee if you decide that algorithmically based strategies are not your cup of tea. Our firm, Optimized Investments, Inc., has an A+ Rating with the Better Business Bureau and a perfect record of satisfied customers – nary a single complaint since the BBB began reviewing our firm in 2004.
Take a moment to sign up for the strategy of your choice now – while all the benefits of a quantitative investment approach are fresh in your mind. You can get started for less than 50-cents a day with a very low-risk, high-profit investment strategy that produces solid performance through thick and thin – in any type of market environment.
Moreover, remember that you have nothing to lose – if you change your mind anytime in the first two months – for any reason (or no reason at all) – just let us know and we'll return every penny you paid! Visit our ETF Investment Strategy Suite today and select a quantitative strategy perfect for you:
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STILL NOT SURE?
If you're still not sure if a quantitative investment model is right for you, sign up for our complimentary S&P 500 Conservative Strategy. It's doesn't produce a high return, but it's much better than buy-and-hold of the S&P 500 ETF and you'll get a free, 90-day experience to learn how our models and our website operates. No credit card is required to register!
(Complimentary 90-day model is for inexperienced investors only, please. Please select our S&P 500 Persistent Profits Strategy if you would like our most conservative Premium Strategy with all paid-subscriber benefits for only $9 per month.)