Since there are no guarantees, nobody can tell you. And if they try, you should show them the door. If you invest in a particular stock index ETF, you're going to receive the return of that stock market minus the expenses of the ETF. If you invest in a "high yield Fortune 500 stock," you may choose one that does exceedingly well or one that eventually goes bankrupt. The latter point is important...with the diversification of a stock ETF you won't face the risk that an individual stock goes to zero. SecondHalfPlanning.com
Let's take the high yield Fortune 500 stock first. The yield on the Standard & Poors 500 year to date is less than 2% annualized. Yield in the market place is an expression of risk: the higher the yield, the higher the risk. Coupled with the fact that you have all of your investment dollars in one equity, you have to make a very good call to succeed with your investment. Now, let's look at ETF's generically. The majority of ETF's are index products. The major benefit of owning an Index ETF is that you know at all times what you own in the underlying index. An important, secondary consideration is ETF's have a very advantageous tax treatment for taxable investors. When you buy an ETF, your portfolio is constructed on the trade date. If there is a change in the underlying index (AT&T out, Apple in), you still own the same ETF shares. If AT&T was sold for a gain, you have no tax to pay on the gain. As opposed to the high yield equity, you actually own a piece of 500 different companies. Diversification, within reason, is a good investment decision. Now comes the tough part. Symbols SPY and RSP are both S&P 500 index ETF's. If you had invested $1000,00 in each of them 5 years ago, today your RSP investment would be worth significantly more than SPY. How? They own the same index? On the surface, yes. But SPY is capitalization weighted. Bigger companies have a larger share in the construction of the ETF. Apple computer would be approximately 40% of your holding as it is about 40% of the total value of the S&P 500. RSP is equal weighted. When your ETF is built, you will have $2.00 in each of 500 stocks. Over the last 5 years, equal weighted indices have outperformed cap weighted indices across the investment spectrum, so be careful what you buy. At some point in time, the market may favor cap weighted over equal weighted. Will you know when to switch? Hope this has helped.
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