S&P 500 (INDEXSP:.INX) index funds are simple, convenient outclass and are low cost compared to the mutual funds. But still these funds have drawbacks which we are going to discuss here. An advantage gained by S&P 500 (INDEXSP:.INX) is that make it easy for you to invest in the U.S stocks at a cheap rate. The index’s 500 constituents make up for 80% of the total U.S stock market. S&P Dow Jones indices said that S&P 500 (INDEXSP:.INX) is the best single measure of big Capital U.S equities.
There is an amount of more than US$ 5.14 trillion attached to the index whereas the assets of the index make up US$1.6 trillion of the whole amount. From here it seems great that the S&P 500 (INDEXSP:.INX) accounts for 80% of the stock market and what we are leaving here is only 20% of the stock market but the thing to consider here is that the 20% makes up for thousands of small capital companies and these companies provide diversification.
These companies might have more growth potential as they can be relatively new and therefore if we look from this perspective, the S&P 500 (INDEXSP:.INX) index might not be a good option for some investors. With this there are other options that are open to you as well such as you can keep S&P 500 (INDEXSP:.INX) with a small cap fund that might have performed better than S&P in the previous years. Just like this you can also go for a fund that represents the complete stock market and the one that has performed better than the S&P 500 (INDEXSP:.INX) in the previous years.
The SPDR S&P 500 ETF functions in a way that its 500 components are given weights according to the market capitalization that they have, so the bigger companies influence the index more compared to the relatively smaller companies. However you can cover up this problem too by going for other S&P 500-based ETFs that might give different weightage to their components such as Guggenheim S&P 500 Equal Weight ETF (NYSEMKTRSP) that gives an equal weightage to all of its components.
This index has performed better than the S&P 500 (INDEXSP:.INX) for the last ten years. Just like this the Revenue Shares Large-Cap ETF (NYSEMKT:RWL) gives the weightage of its each component according to their revenue. This again has performed better than S&P 500 (INDEXSP:.INX) for the previous 5 years. In both the cases the outperformance has covered up for the fee difference.
Another issue with S&P 500 (INDEXSP:.INX) is something known as “the Google effect“. When Google was added into the S&P 500 in 2006 its price rose by 7 % overnight and the index funds had to pay a higher price to buy the stock. This has happened several times whenever a new stock is added to S&P 500 and a solution to this is to go for a broader market index. The S&P 500 is enticing but there are other better options available too.