We have long recommended low-fee, diversified index funds for many, if not most, investors. Here are two to consider, each of which exists in exchange-traded fund form, making it easy to invest. Each has tripled investors’ money over the last decade.
The Vanguard S&P 500 ETF (ticker symbol: VOO) aims to duplicate the performance of the S&P 500 index, which tracks 500 of the largest U.S. companies. The index fund spreads its dollars across stocks from all 11 market sectors, and it covers about 80% of the entire U.S. stock market. The fund has a very low expense ratio of 0.03%. (The Motley Fool owns shares of and has recommended the Vanguard S&P 500 ETF.)
The Invesco S&P 500 Quality ETF (ticker symbol: SPHQ) offers approximately the performance of the S&P 500 Quality Index, which selects the highest-quality S&P 500 companies based on three factors: how effectively each company turns shareholder equity into profits, how high its debt level is compared to shareholder equity and how persistent and sustainable its earnings are.
The Invesco S&P 500 Quality ETF invests in 100 stocks, and its constituents are supposed to represent the very best of the broader index. Its expense ratio is 0.19%.
Ask the Fool
From T.M. of Bountiful, Utah: Is it smart or stupid to invest in stocks by borrowing against a credit card?
The Fool responds: It’s not smart.
Think about it this way: The average credit card interest rate, according to a Forbes Advisor report, was recently a whopping 28%. If you’re paying 28% interest on money you borrowed, you’re going to want to earn more than that on it — a tall order. Over the long term, the average annual growth rate for the stock market has been around 10%; even Warren Buffett’s amazing record just doubles that.
You might luck out with an amazing stock or two, but it’s still hard to top 28%. Apple’s stock has averaged 27% annually over the past five years, while Microsoft averaged 24%. But Starbucks averaged less than 13%, and IBM averaged 6%. You could even lose what you put in: Pfizer averaged a loss of 5%, and Airbnb averaged a loss of over 8%.
From F.E. of Middletown, Del.: What are the world’s biggest employers?
The Fool responds: Walmart and Amazon.com top the Fortune Global 500 list, with 2,100,000 and 1,541,000 employees, respectively. They’re followed by China National Petroleum (1,087,049), Chinese power company State Grid (870,287), Hon Hai Precision Industry (767,062), China Post Group (752,547), Accenture (721,000), Volkswagen (675,805), the U.S. Postal Service (576,065) and Chinese automaker BYD (570,060). Other major U.S.-based employers include FedEx (518,249), Home Depot (471,600), Target (440,000) and Kroger (430,000).
Some military forces exceed those numbers, though. Per Statista.com, India’s Ministry of Defence recently employed 3 million people, while the U.S. Department of Defense employed 2.9 million and China’s People’s Liberation Army employed nearly 2.6 million.
The Fool’s School
There’s a lot of jargon in the financial world. Here are some explanations of terms you’ll likely run across.
∗ American Depositary Receipt (ADRs) and American Depositary Share (ADSes): Types of securities that allow Americans to easily invest in companies based outside the U.S., such as AstraZeneca and Nokia. An ADR is a receipt for the shares of a foreign-based company held by a U.S. bank, while an ADS is an actual share. ADRs and ADSes trade like stocks on U.S. exchanges, with shareholders entitled to all dividends and capital gains of the underlying stock.
∗ Basis point: A common way to describe a change in interest rates. One basis point is 1/100th of a percentage point, so half a percentage point can also be described as 50 basis points.
∗ Institutional investors: Large-scale investors using their clients’ money to invest — such as pension funds, insurance funds, hedge funds and mutual funds.
∗ Prime rate: The interest rate that lenders charge their best, most reliable customers.
∗ Real return: The inflation-adjusted return of an investment. For example, the stock market’s long-term average annual return has been about 10%, while inflation has averaged around 3% over many decades. Subtracting 3% from 10% gives you the real return — approximately 7% annually.
∗ Sector fund: A mutual fund that invests its shareholders’ money in a particular market sector, such as financial services, energy, telecommunications or banking.
∗ Special dividend: A dividend that’s not part of a regular (typically quarterly) schedule. Some companies, such as Costco, issue dividends at times of their choosing, when they have ample extra cash they can distribute to shareholders.
∗ Volume: The amount of a stock (expressed in shares or dollars) that is traded during a particular period.
Learn more in our financial dictionary at Fool.com/terms.
My Dumbest Investment
From Y.: My most regrettable investment move happened long ago. I’d bought shares of Cisco Systems on its way up an incredible climb. I did question then whether it merited its price-to-earnings (P/E) ratio of 200 — and doubted that it was worth that much. I hung on, though. Well, the stock soon crashed, and I lost half my money.
The Fool responds: Stock valuations really do matter. You might invest in the best stock ever, but if you do so when its price has gotten way ahead of itself, there’s a decent chance the price will fall closer to its intrinsic value in the coming months or years, putting you in the red. If it recovers eventually, your total gain may end up being much less than it would have been had you bought at a lower price.
There’s no way to know for sure exactly what a stock is really worth, but tools such as P/E ratios can offer clues. Cisco’s five-year average P/E was recently 56.8, per YCharts.com — and its five-year median P/E was 18.5. The average P/E of the total technology sector was below 33, per CSIMarket.com. Given those numbers, Cisco’s stock would seem pricey today even if its P/E was 50 or 100. It actually hovered around 18 in mid-September, though, suggesting the stock might be fairly valued now.
Who Am I?
Tracing my roots back to 1894, I’m America’s oldest branded poultry company. I began on a family farm in New Jersey and was incorporated in 1927 with the name you might know me by. In 1998, I started raising antibiotic-free birds with all-natural feed. In 2005, I debuted gluten-free nuggets and tenders, and in 2017, I opened the world’s first organic-certified chicken hatchery focused on animal welfare. By 2000, I employed more than 700 people and worked with more than 90 farm families. Today, headquartered in Fredericksburg, Pa., I’m a fifth-generation family business now owned by Sechler Family Foods. Who am I?
Can’t remember last week’s trivia question? Find it here.
Last week’s answer: Canadian Pacific Kansas City, or CPKC