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Sometimes, happy financial surprises can happen.
Investing in the stock market can be tough, especially during periods of volatility.
While stock prices have been surging over the last few weeks, some experts warn that this bear market isn’t over, and another downturn could be looming. That can make it especially intimidating to invest right now, because the future is uncertain.
At times like these, choosing the right investments is critical and can make or break your strategy. And there are a few reasons why S&P 500 ETFs can be a fantastic option for many investors.
1. They’re more protected against downturns
No investments are immune to short-term volatility, but S&P 500 ETFs are more likely to bounce back from downturns.
An S&P 500 ETF tracks the S&P 500 index itself, meaning it includes the same stocks as the index and aims to mirror its performance. Historically, the index has recovered from every crash, bear market, and recession it’s ever faced. Regardless of what happens with the market over the coming months, it’s extremely likely the S&P 500 will recover.
Again, this doesn’t mean an S&P 500 won’t experience short-term slumps. But it’s almost guaranteed that this type of investment will rebound eventually.
2. They’re extremely likely to see positive returns over time
S&P 500 ETFs are fantastic long-term investments. Despite facing dozens of downturns over the years, the index itself has historically earned positive average returns over time. In other words, though it will have good years and bad years, those ups and downs will average out over the long run.
Because S&P 500 ETFs track the index itself, they are also likely to experience positive average returns. For example, since its inception in 1993, the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) has earned an average annual return of 9.92% — which is in line with the index’s rough average of around 10% per year.
Whether you’re nervous about investing or simply want an investment you can count on to perform well over time, the S&P 500 has a strong track record of seeing positive average returns.
3. They take the guesswork out of choosing investments
Finally, one of the biggest advantages of S&P 500 ETFs is that they’re low-maintenance and require virtually no effort on your part.
Investing in individual stocks can be a smart option for man people, but that strategy requires many hours of research to ensure you’re choosing the right stocks. With an S&P 500 ETF, you never need to research individual stocks or worry about when to buy or sell. All you have to do is invest consistently, and the fund will do all the heavy-lifting for you.
When to avoid S&P 500 ETFs
For many investors, S&P 500 ETFs are a fantastic option. They’re one of the safer investments out there, they’re low-maintenance, and it’s very likely you’ll see positive average returns over time. But there are downsides to consider, too.
For one, you have no choice but to own all the stocks within the fund. If for whatever reason there are one or two stocks in the S&P 500 that you’d prefer to avoid, there’s no way to opt out of investing in those specific stocks.
Also, it’s impossible to beat the market with this type of investment. S&P 500 ETFs aim to follow the market, which means there’s no way to earn above-average returns. For many investors, this is a worthwhile trade-off for all the advantages of an S&P 500 ETF. But if you’re trying to earn as much as possible in the stock market, investing in individual stocks may be a better fit.
There’s no right or wrong way to invest, and not all investments will be a good fit for everyone. But S&P 500 ETFs can be a fantastic choice, especially during periods of volatility. By weighing the pros and cons, it will be easier to decide whether this investment belongs in your portfolio.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
