You have countless options to choose from when deciding on investments, and the types you buy will depend on your personal preferences and investing style. S&P 500 ETFs can be a fantastic choice. This type of investment tracks the S&P 500 index and includes stocks from 500 of the largest companies in the U.S.
While S&P 500 ETFs have their advantages, they're not right for everyone. And there are a few reasons you might — or might not — consider buying this type of investment. Below are three reasons why you may choose an S&P 500 ETF.
1. They're more likely to survive market crashes
The stock market will always be subject to volatility, and any investment you buy will need to be strong enough to withstand downturns. While most investments will experience short-term losses during a market crash, S&P 500 ETFs are extremely likely to bounce back over time.
The S&P 500 has a decades-long track record of surviving even the worst market crashes. Not only has it survived market turbulence, but it's earned positive long-term returns, too. Since its inception, it has earned an average rate of return of around 10% per year.
Because S&P 500 ETFs track the index, they're likely to earn positive returns over time, as well — regardless of what the market does.
2. They're low-maintenance investments
If you don't particularly enjoy researching dozens of stocks and digging into each company's financials, S&P 500 ETFs may be a fantastic option because these are hands-off investments. You don't need to choose any stocks, you never have to buy or sell investments, and you don't have to research the individual stocks within the fund.
These funds perform best when they're left alone for as long as possible, so all you have to do is invest. If you're looking for a “set it and forget it” type of investment, S&P 500 ETFs can be a smart choice.
3. They provide instant diversification
A properly diversified portfolio is key to investing success. No stock is infallible, and if you put all your money behind a single company, it can be a recipe for disaster.
When you invest in an S&P 500 ETF, you're instantly buying stocks from 500 companies from a wide variety of industries — from tech to healthcare to utilities and more. And because these companies are some of the largest and strongest organizations in the country, your portfolio isn't only diversified, it's also full of solid stocks.
Even in consideration of the above three reasons, S&P 500 ETFs may not be right for you. Here are two reasons why.
1. It's impossible to beat the market
S&P 500 ETFs aren't right for everyone, including those whose goal is to beat the market. The S&P 500 itself is considered a strong representation of the stock market as a whole, so these funds are designed to follow the market.
In other words, S&P 500 ETFs by definition cannot beat the market. For many investors, average returns are an acceptable trade-off for the advantages this type of fund offers. But if you want to earn higher-than-average returns, these funds may not be right for you.
2. You can't personalize your portfolio
When you invest in an S&P 500 ETF, you have no choice but to buy all the stocks within the fund. If there are a couple of companies you'd rather not own for whatever reason, there's no way to opt-out of just those stocks — you have to own all or none of them.
For that reason, this type of investment may not be best for those who want a highly personalized portfolio. If you fall into that category, you may be better off buying individual stocks. With that strategy, you'll own only the companies you're truly passionate about.
S&P 500 ETFs can be great investments for many people, but whether they're right for you will depend on your investing style. If you're looking for a low-maintenance and stable investment, these funds may be a good fit. But if you want to beat the market or personalize your portfolio, you may be better off looking elsewhere.
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