Whether you’re an experienced investor or are just getting started in the stock market, periods of volatility can be nerve-wracking.
The market has seen plenty of ups and downs over the last few months, and some investors worry we could be headed toward a crash. With so much uncertainty in the world right now, there’s a chance that more turbulence could be on the way.
While nobody can say for certain whether a crash is on the horizon or not, there is one investment that can help you prepare: the S&P 500 ETF.
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How an S&P 500 ETF can protect your money
An S&P 500 ETF is a fund that includes the same stocks as the S&P 500 index itself, with the aim of mirroring the index’s long-term performance.
Because these stocks are from some of the largest and strongest companies in the US, that makes this type of fund more likely to survive stock market downturns. Strong companies can still take a hit during crashes, but there’s a very good chance that the majority of these stocks will be able to bounce back eventually.
By investing in an S&P 500 ETF, it’s likely your investments will rebound from downturns as well. Again, no investment is immune to volatility, so even S&P 500 ETFs will likely see short-term dips when the market is down. But over the long run, it’s highly likely this type of fund will see positive average returns.
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Should you invest in an S&P 500 ETF?
S&P 500 ETFs are one of the safer types of investments, making them a smart option for risk-averse investors. The index itself has a decades-long history of recovering from downturns, so the chances are good that this type of fund will continue performing well over the long term.
(^SPX data by YCharts)
One potential downside, however, is that they cannot earn above-average returns. The S&P 500 itself is generally considered a strong representation of the stock market as a whole. Because S&P 500 ETFs are designed to follow the market, it’s impossible for them to beat the market.
For many investors, this isn’t a deal breaker. But if one of your primary goals is to earn higher-than-average returns, S&P 500 ETFs may not be the best fit for you.
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Additionally, when you invest in an S&P 500 ETF, you have no choice but to own a stake in every company within the index. If there are certain stocks you’d rather not own, there’s no way to avoid investing in them when you own this type of fund. Again, this isn’t necessarily a bad thing for most investors, but it’s important to keep in mind before you buy.
Whether a market downturn is looming or not, it’s wise to be prepared just in case. While S&P 500 ETFs aren’t right for everyone, they can be a fantastic investment to keep your money as safe as possible.
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