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ETF Investing: Why the S&P 500 Index Is the Best Investment for Passive Investors?

S&P 500

Passive investment is a popular investment strategy, especially in the developed economies. Passive investment comes with lower risks as you generally gain exposure to a basket of funds across multiple sectors. The S&P 500 Index or Standard & Poor’s 500 is one of the important indexes that is tracked by passive investors. It is also one of the best investment options as the index tracks the 500 largest companies in the U.S.

Active and passive investments are basically two broad investment strategies. In active investment options such as mutual funds, the aim of the fund manager is to beat the market index. However, with passive investment, investors and fund managers replicate the underlying index to generate returns.

Reasons to Invest in the S&P 500 Index

Here are some reasons that make investing in the S&P 500 Index popular among investors.

1.Passive investment

S&P 500 index funds aim to deliver returns similar to the index and not to outperform them. So, investors can implement the buy and hold strategy without any major need for active monitoring of the stock market or carrying out intense trading.

Hence, new investors or investors with little knowledge of the equity markets can invest in this index and earn decent returns over a long period. In the last five and a half decades the S&P 500 Index has generated annual returns of 10% on average.

2. Offer diversification

The S&P 500 Index Fund is a highly diversified index, and it lowers your investment risk. It is because even if a few stocks perform poorly, it won’t affect your entire portfolio as other stocks might perform well during the same time.

With extreme market pessimism, the S&P 500 Index may witness a downward trend that can affect your ETF returns. However, historical data has shown that the market has always recovered from its losses. So, you can expect your S&P 500 index fund to revive sooner than expected.   

3. Wise option for people on a budget

You don’t always need a lot of money to invest in the equity markets. ETFs and other index funds make it easy for individuals with a limited budget to invest. In this current scenario, many individuals and families are going through extreme financial problems. If have a few dollars, you can invest it in an S&P index fund and watch it grow. You can regularly invest your spare dollars or plan on investing a certain amount of money every month in an S&P 500 ETF and derive stable returns.

The Bullish takeaway

For Canadians the iShares Core S&P 500 Index ETF (TSX:XSP) tracks the S&P 500 Index and is one of the best options for passive investors as it offers diversification and lowers your risk significantly.

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