The stock market has been on a wild ride so far this year. The Nasdaq officially entered bear market territory, falling more than 25% since the beginning of the year, and the S&P 500 is also down roughly 16% in that timeframe.
While this downturn could signal that a full-blown crash is coming, nobody knows for certain what the future holds for the market. Even the experts cannot predict exactly how the market will perform in the near term, and whether we'll see a crash is anyone's guess.
Market downturns can be a smart time to invest more, however, because prices are significantly lower. If the market does crash in the future, there's one investment I'm going to load up on: an S&P 500 ETF.
What is an S&P 500 ETF?
An exchange-traded fund (ETF) is a type of investment that includes multiple stocks within a single fund. An S&P 500 ETF tracks its namesake index, meaning it contains all the stocks within the index itself and aims to mirror its performance.
Because it's impossible to invest in the S&P 500 index directly, investing in an S&P 500 ETF is the next closest thing.
The primary reason I plan to load up on this type of investment is that it's extremely likely to recover from a market downturn. The index itself has faced dozens of corrections, crashes, and bear markets over the decades, and it's always managed to rebound — regardless of how severe those downturns were or how long they lasted.
Also, the S&P 500 itself includes stocks from 500 of the largest and strongest organizations in the U.S. Household names like Amazon, Apple, Alphabet, and Tesla make up the index, and if any stocks are likely to survive a downturn, it's those within the S&P 500.
Should you invest in an S&P 500 ETF?
This type of investment can be a great option for many investors. Not only is an S&P 500 ETF very likely to recover from market volatility, but it's also an easy, hands-off investment.
With an ETF, you're automatically investing in all the stocks within the fund. This means you never need to worry about choosing individual stocks or deciding whether you should sell particular investments. All you have to do is invest in the ETF, and it will do all the work for you.
For some investors, though, the hands-off nature of S&P 500 ETFs can be a downside. If you prefer to have more control over your portfolio, this type of investment may not be the best fit.
Also, by nature, S&P 500 ETFs can only earn average returns. They're designed to follow the market, making it impossible for them to beat the market. For many investors, the relative safety of this type of investment outweighs the average returns. But if your primary goal is to beat the market, you may be better off investing in individual stocks.
The stock market may be shaky right now, but downturns can be one of the best times to invest because you're buying at a hefty discount. S&P 500 ETFs may not be right for everyone, but they could be a smart option for you.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Tesla. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.