Comments on: Beat the S&P 500 by Investing in the S&P 500

By: Michael

Michael — Mon, 19 Dec 2005 03:26:25 +0000

PensKL,

I think the purpose of a handful of ETFs is to match the market - namely those ones that mimick an index, QQQQ, SPY, DIA, MDY, etc. But there are over 100 more that are made to allow people to target a specific sector, style, country, region, etc. I think the mere existence of something like RSP invalidates your argument about the purpose of ETFs.

As far as safety, I guess it depends on your definition. To me it’s safer to allocate your money equally among 500 stocks than to be over-weight on some. What happens to SPY & RSP if GE blows up? I think one would be ’safer’ in RSP in that instance.

As for RSP doing worse if the ‘market’ goes down — I think that’s an over-simplification. As Roger said above, which one does better or worse is more a function of how those mega-caps perform relative to the other stocks in the S&P.

By: PensKL

PensKL — Mon, 19 Dec 2005 02:06:58 +0000

The main purpose of investing in ETF’s is to match your returns with the market, not to beat the market. SPY is a safeguard in any portfolio. If the market goes down RSP will do worse than the market thus making SPY the safer choice. RSP has a higher turnover 55% compared to SPY 2.23%. This results in a higher expense ratio of 0.4% for RSP compared to a 0.11% for SPY. SPY is a safer investment because they have a higher dividend yield (1.63% v 0.96%) and their performance will match the return of the S&P 500.

By: Roger Nusbaum

Roger Nusbaum — Sun, 18 Dec 2005 17:29:09 +0000

I have written about RSP a few times in the past and own it for a couple of very small accounts. As you say it works because small usually beats large. It will lag the next time we have a 1997-1999 mega cap lead rally.

Obviously I don’t know when that will be but it will happen again. Great post, Mike.