The Constituent List of the S&P 500 is a Who’s Who of American business. To be added to the S&P 500, a company must be U.S. based and it must have a total market capitalization of at least $5 Billion. In other words, the company’s stock must be valued at least $5 Billion.
Many investors are unaware that this index represents very close to 100% of the American equity market when measured by capitalization.
The S&P 500 is a market capitalization weighted (or cap weighted) index, which means that the more valuable an individual company’s stock becomes, the more it contributes to the S&P 500’s overall return. Because of this type of weighting it’s no surprise that its common for up to 75% of the S&P500’s return comes from only fifty to seventy-five stocks.
For most private investors, the core of a dependable investment portfolio should consist of one of the largest, heavily-traded and diversified building blocks, like the S&P 500, so that you have a broad representation of industry sectors and companies. It adds instant diversification and serves as the anchor for your portfolio, a constant position that may be adjusted in its portfolio weighting as your objectives change.
The three largest (by dollar amount of invested assets) are:
Blackrock iShares Core S&P 500 ETF (IVV)
State Street Global SPDR S&P 500 ETF (SPY)
Vanguard S&P 500 ETF (VOO)
If you are like a growing number of investors who are opposed to the ESG practices of those three largest money managers, you can buy the entire S&P 500, and voice your opposition by investing your core money with the newcomer from Strive Management, STRV.
While S&P 500 ETFs may appear to be a one stop shop investment, it’s really not a one stop shop solution. Your portfolio should be personalized, that is, constructed according to your objectives-based financial goals.
Your clearly defined goals should inform the allocation decisions you make, which will likely include exposure to other equity sub-asset classes (like small- and mid-cap), non-US based companies, international, fixed income, cash and alternatives, like precious metals, commodities and real estate.
Indeed, an S&P 500 ETF can serve as the core to a well-constructed, well-managed and diversified portfolio, but it is generally not the complete solution. A well-constructed portfolio should be appropriate to your stage of life, your specific goals and tolerance for risk, among other key considerations.
The moral of this short story is: While a large cap, diversified ETF is a smart and wonderful core holding, it is not a complete portfolio. Steer clear of one position wealth, no matter how convenient it may appear. One position wealth is the antithesis of a solidly constructed asset allocation portfolio, designed to manage overall portfolio risk.