The Optimal S&P 500 ETF for Investing $200 at This Moment
As of now, the S&P 500 has surged approximately 27% in 2024. This is an impressive feat, but there are certain aspects that investors should take into account. For instance, such a rapid rise might be stretching the valuation limits.
Given this scenario, value-focused investors might want to consider investing in Invesco S&P 500 GARP ETF (abbreviated as SPGP, with a price of 0.40%). Even if you're thinking of starting small with an investment of $200, this could be an excellent option. Let me walk you through this S&P 500 variant.
The Role of the S&P 500 Index
In essence, the S&P 500 index endeavors to symbolize the U.S. economy. The companies included in it are chosen based on a specific goal, primarily favoring larger and more significant corporations. Generally, the index performs well and is considered the primary benchmark for the stock market performance.
However, the index has its drawbacks. One of the major concerns is its market capitalization weighting. While this method isn't inherently flawed and is, in fact, superior to the stock price-weighting used in the Dow Jones Industrial Average, market cap weighting leads to larger companies having an outsized impact on performance. During times when certain sectors become particularly overvalued, they can become the primary drivers of market performance.
This seems to be the case now, and an effective way to observe this is by comparing the S&P 500 index to an equal-weighted version of the index. As depicted in the chart, Invesco S&P 500 Equal Weight ETF (abbreviated as RSP, with a price of 0.18%) hasn't fared as well as the market cap-weighted version of the index. Investors who prioritize valuation might want to consider exploring other options if they're contemplating a conventional S&P 500 index fund.
GARP as an Enticing Option
Growth at a reasonable price (GARP) is an investment strategy that aims to find a balance between growth and value when selecting stocks. With the S&P 500 index, a suitable GARP option is Invesco S&P 500 GARP ETF. As the chart shows, it has underperformed the equal-weight version of the index so far in 2024.
This isn't surprising given the small number of large companies driving the S&P 500 index up. Those stocks, which appear somewhat overpriced at present, would mostly be excluded from the Invesco S&P 500 GARP ETF's pool of options. The ETF starts with the S&P 500 index as expected, then considers sales per share growth, earnings per share growth, P/E ratios, financial leverage, and return on equity. Essentially, it's trying to locate growing companies trading at reasonable prices.
While this strategy isn't currently outperforming the stocks that Wall Street favors, over time, the GARP approach has done exceptionally well, as demonstrated in the chart.
While past performance does not guarantee future results, as required by law, Invesco S&P 500 GARP ETF's approach has shown to be successful over time. It's likely that investors will once again value valuation at some point.
On that note, Invesco S&P 500 GARP ETF's average price-to-earnings ratio is around 14.5 versus around twice that level for the S&P 500 index. If when value regains favor, the S&P 500 index could face significant losses.
The Benefits of GARP, Along with Its Drawbacks
Invesco S&P 500 GARP ETF's strategy has shown to be effective in the past and currently provides investors with a more value-focused approach to investing in S&P 500 stocks. However, it represents a subset of the index, with only around 75 holdings. This means it won't provide a holistic representation of the U.S. economy as the S&P 500 index does.
But this also allows investors to shift the focus of their portfolio away from the small number of large companies that are currently driving the S&P 500 index up. This could be particularly appealing if you're concerned that the bull market has progressed too rapidly.
Given the discussion about the S&P 500's market cap weighting and potential overvaluation, some investors might consider diversifying their portfolio by looking into investing in value-focused index funds. For example, they could consider the Invesco S&P 500 GARP ETF, which follows a growth at a reasonable price strategy.
Alternatively, as the text highlights, during times when certain sectors become particularly overvalued, an equal-weighted index could potentially outperform the market cap-weighted version. Investors might want to explore options like the Invesco S&P 500 Equal Weight ETF.
