6 Reasons to Consider a S&P ETF

There are many reasons to consider an S&P 500 exchange traded fund (ETF) as a way to anchor your portfolio. Despite the recent negative view of buy-and-hold strategies, using one this type of investment as tool within your overall investment approach should be considered. By weighing the following factors within your individual circumstances, you can improve your overall investment profile.

Broad Market Exposure is Important

Buy-and-hold strategies have been maligned in recent months as a part of the wake left from the financial crisis. Critics have pointed out that if you had invested 10 years ago, if you measure to the low point, you would not have made anything. Despite this, exposure to multiple asset classes is important to a comprehensive investment approach. An S&P 500 ETF gives you broad market exposure to U.S. equities.

ETFs Over Mutual Funds at Tax Time

The tax treatment that are given to ETFs as opposed to mutual funds, make them a more attractive option. If you own an S&P 500 mutual fund, those shares are marked-to-market on an annual basis. This means that any gains you earn will be treated as ordinary income. If you instead own an S&P 500 ETF, and hold the position for over a year, you will be liable for capital gains taxes only. The capital gains tax rate is lower for most people than their income tax rate, thus resulting in a significant savings over a course of years..

ETFs Have Lower Fees Than Mutual Funds

If you are considering an S&P 500 ETF investment as a long-term allocation, it is important to take fees into consideration. While mutual funds charge fees across a wide range, ETFs have negligible fees that should have very little impact on performance over time. Compounded over several years, the fee differential is meaningful.

The Right Index Amongst Many

At the core, when you invest in an S&P 500 ETF, you are choosing this as the index in which you want your money invested. When compared to other popular options, like the Dow Jones Industrial Average, the NASDAQ 100, or the Russell 2000, the S&P 500 gives you wide exposure to the largest companies trading in the U.S. Where the Dow is limited to 30 stocks, the NASDAQ is tech-heavy, and the Russell includes many less-established companies, the S&P is diverse yet stable.

History and Liquidity

S&P 500 ETFs are some of the oldest ETFs available in the market place. This means that these products are both liquid (easy to enter and exit), but have sufficient history to allow you to do thorough research. Carefully researching your investments is a critical step toward achieving success and is facilitated by a long history.

Market Exposure is Preferable to Sector Exposure

In addition to the broad market ETFs, there are countless ETFs that track various sectors. While these more specialized instruments are appropriate if you have an informed, shorter-term view, they are unlikely to be core holdings for the same duration. You should consider an S&P 500 ETF to give you a stable, long-term stock investment, and use sector ETFs for shorter-term trading ideas.

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