We can start out by looking at the broad U.S. stock market and then choose more focused investments. ETFs are the most cost-effective way to invest in hundreds of top companies in the U.S. stock market.
S&P 500 ETFs
An S&P 500 ETF tracks the S&P 500 index, allowing us to invest in 500 large companies like Apple, Microsoft, Amazon, Facebook, Google, Tesla, Berkshire Hathaway, JP Morgan, and Johnson & Johnson in one investment. $SPY and $SPLG are the most popular S&P 500 ETFs. Both ETFs are issued and managed by State Street Global Advisors, an institutional asset management firm that invented the world's first ETF.
SPDR S&P 500 Trust ETF
The SPDR S&P 500 Trust ETF is the first ETF ever created and trades under the ticker symbol $SPY.
$SPY has the most liquidity with over $350B under Management, meaning there are many buyers and sellers for $SPY. It's effortless to find someone willing to buy or sell shares. Since $SPY trades at several hundred dollars per share, it has an expensive entry point to buy one share. $SPY was trading at over $400 per share in June 2021.
SPDR Portfolio S&P 500 ETF
State Street created SPDR Portfolio S&P 500 ETF with the ticker $SPLG to provide investors with a lower-priced entry point.
We can expect $SPLG and $SPY to have similar returns since they both track the same index. However, one share of $SPLG is much more affordable at about 1/10th the price per share of $SPY. The lower cost per share means buying smaller amounts of the same shares that make up $SPY. $SPLG was trading at over $40 per share in June 2021.
SPY or SPLG?
When starting a portfolio, it's risky to invest all of our money at once. Doing so exposes us to market-timing risk; the chance of investing right before a market crash. We can reduce this risk by using dollar-cost-averaging to make our investments in smaller, more frequent bites.
The advantage becomes less relevant if our brokerage allows us to buy fractional shares, the ability to buy a piece rather than a whole share.
The S&P 500 only includes 500 of the biggest companies listed on the stock exchanges. It doesn't contain the many mid to small-sized companies that often grow faster than large companies. Instead of an S&P 500 ETF, a total market ETF would include smaller companies.
Vanguard Total Stock Market ETF
$VTI is the ticker of the Total Stock Market ETF created by Vanguard, another famous asset management firm, to give investors access to smaller stocks in addition to companies in the S&P 500.
Comparing the annual returns of $VTI to the S&P 500, $VTI has better returns than the S&P 500 in some years but not others.
However, if we look at averaged returns over 5 years, $VTI has performed slightly better. In times of economic growth and expansion, smaller companies tend to provide higher returns than larger companies, but larger companies perform better during economic contraction and recession.
Besides broad stock market ETFs, we can invest in specialized ETFs or ones that represent other asset classes. We can use them to increase or decrease our portfolio's risk like the examples below.
Invesco QQQ Trust
$QQQ is an ETF created by Invesco to track the top tech companies, more specifically the Nasdaq-100 index.
Tech stocks tend to be riskier but can have higher returns than the total market or S&P 500. At times, the 5-year return of $QQQ has seen nearly double the S&P 500's return. Tech stocks are susceptible to economic downturns and rising interest rates. There's no guarantee of future returns, so high returns can significantly decrease in the future. $QQQ is often used to take more risk for potentially higher returns.
iShares Core US Aggregate Bond ETF
We can also invest in other types of assets through ETFs. $AGG is the ticker symbol for the CORE US Aggregate Bond ETF created by iShares. This ETF makes it easy for us to invest in bonds by following the total U.S. investment-grade bond market.
In general, bonds earn much lower returns than stocks; however, bonds tend to perform better during recessions. When a bond ETF is added to a portfolio with stocks, it helps lower our portfolio's risk. A bond ETF like $AGG helps lower the portfolio's risk by diversifying across multiple asset classes when added to a portfolio invested in stocks.
The number of investment options available can seem overwhelming. A good strategy is to start with a broad investment like a Total Market or S&P 500 ETF. Over time, you can add more ETFs of other asset classes like bonds or more targeted ETFs like tech. Which ones you add depends on if you want to add or reduce risk.
Some modern brokerages like Robinhood, TD Ameritrade, Stash, and Public offer fractional shares that allow you to buy more expensive products like $SPY without needing to purchase a full share. There isn't a significant difference between ETFs like $SPY and $SPLG if you can buy fractional shares.