Exploring Market Options: S&P 500 vs. Invesco S&P 500 GARP ETF
Investors often flock to the S&P 500 (SNPINDEX: ^GSPC) when considering a broad market investment. While it’s a solid choice, alternatives exist that may offer enhanced growth potential. In this article, we will explore the S&P 500’s reliable market representation and examine how the Invesco S&P 500 GARP ETF (NYSEMKT: SPGP) could serve as a superior long-term option.
Understanding the S&P 500 Index
The Dow Jones Industrial Average (DJINDICES: ^DJI), launched as the first major market index, consists of 30 large stocks that reflect the economy. However, its price-weighting system means higher-priced stocks significantly influence the index. As a result, this approach can skew market performance representation.
In contrast, the S&P 500 index uses market capitalization to weight its constituents, meaning that larger companies have a more substantial impact on its overall performance. This method aligns better with economic realities. Another advantage is the S&P 500’s broader base, which includes 500 stocks compared to the Dow’s 30, offering diversified market exposure. Over time, the S&P 500 has established itself as the benchmark for measuring market performance, although it often closely tracks the Dow.
For those seeking a solid long-term investment, an S&P 500 index fund would typically be an excellent choice, utilizing options like the Vanguard 500 Index Fund or the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). Yet, is there a potentially better alternative available?
SPY data by YCharts.
The Functionality of Invesco S&P 500 GARP ETF
Data shows that the Invesco S&P 500 GARP ETF has outperformed the S&P 500 index over the long haul in terms of both share price and overall returns, including reinvested dividends. This performance is particularly noteworthy, as many actively managed funds struggle to match it. The ETF mirrors the S&P 500 GARP Index.
Notably, this index starts with the S&P 500’s broader selection but narrows it down to about 75 stocks. It employs a methodology known as Growth at a Reasonable Price (GARP), which assesses stocks based on their growth potential while considering valuation metrics. Initially, it evaluates all S&P 500 stocks by creating a growth score that looks at three-year earnings and sales growth. The top 150 performers advance to the next evaluation phase.
The second phase involves calculating a quality/value score for those 150 stocks, which considers factors such as financial leverage, return on equity, and price-to-earnings ratios. Ultimately, the 75 companies with the highest scores are selected for the index and weighted according to their growth scores. As demonstrated in the accompanying chart, the Invesco S&P 500 GARP ETF has historically outperformed the S&P 500 index.
SPY data by YCharts.
Understanding Market Dynamics
Investors need to recognize that no single index fund is a guaranteed long-term win. Market performance tends to oscillate over time, so even a robust index like the S&P 500 will have fluctuating periods. While it serves as a reliable indicator of long-term performance, focusing on other approaches, like the GARP strategy offered by the Invesco ETF, can also be beneficial.
The GARP methodology offers a balanced investment strategy, appealing to a wide range of investors. It’s essential, however, to understand its performance won’t always surpass the broader index. Interestingly, current market conditions may present a buying opportunity for those considering the GARP option. For long-term thinkers, adding the Invesco S&P 500 GARP ETF to their portfolios before market sentiments shift could be advantageous.
A Timely Opportunity
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*Stock Advisor returns as of January 6, 2025
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool also holds no position in any discussed stocks. Please see our disclosure policy for details.
The views in this article represent the author’s opinions and do not necessarily reflect those of Nasdaq, Inc.