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What’s Wrong With The S&P 500?

Investors have flocked to the S&P 500 for its low cost and simplicity. Today, you can’t scroll social media without seeing the latest stock tip or crazed mayhem behind an underpriced opportunity.

So where does the S&P fall short from Austin Crites, CFA, Chief Investment Officer at Aurora Financial Strategies?

DIVERSIFICATION

Market Weight & Imbalance

The S&P 500 has become increasingly concentrated in recent years. According to FactSet, technology businesses now make up almost 35% of the S&P 500 while some industries offering valuable diversification like oil and gas (4.59%) and utilities (2.47%) are too small of a percentage to protect investors should technology stocks fall.

Why should you care?

There is a purpose to every dollar you invest. It’s all fun and exciting when we see those index oriented ETFs in the green, but that can radically change if those tech giants miss a couple quarterly earnings or analyst expectations.

EXPECTED RETURNS

Paying Top Dollar

FactSet suggests S&P 500 is priced at over 20x free cash flow (the actual cash companies make) meaning investors project a 5% annual yield of return over the next 10 years.

To offer some perspective, after the financial crisis in 2009 investors had access at yields >10%. That tells us that those frothy years we saw last decade are (probabilistically) not in store for the next decade.

Why should you care?

Active equity or stock management is not easy. Hence why so many investors purchase low cost, index-oriented ETFs that track exchanges like the S&P. That’s great! It’s easy and simple, but that doesn’t mean risk is removed.

How can you out-smart the average investor?

The S&P 500 (IVV) is priced significantly higher than normal compared to Small Cap Value stock (Russell 2000 Value ETF - IWN).

Investors are paying more than twice for the S&P 500 as the Russell 2000 Value for the same amount of profits. This means you will likely earn significantly better returns in the future with "Small Cap Value stocks" than you will the "Large Cap Stocks" that dominate the S&P 500.

When this line is towards the top of the chart (like in 2001), the S&P 500 has achieved significantly lower returns than small cap value stocks. When the line is towards the bottom (such as 2006), the S&P 500 has achieved significantly better future returns than small cap value stocks.

Bottom line…if you have big purchases or plan to sell your positions in the future, it may make sense to get a second pair of eyes on your investments. Things can change quick.

Thanks for your partnership on this article, Austin.

HENRY STORIES

Meet Billy Cardwell, CFP®

Billy and I had a discussion around our similar target audience, HENRYs (high earner not rich yet). The ones who make strong salaries, but live a life at the tempo of a Starbucks Cold Brew.

Post-Med School

A physician just began their post-graduate residency. There’s a lot of debt to pay off and some catching up to do. They put a plan together to find the perfect combo between paying off the student loans (PSLF - Public Student Loan Forgiveness) and funding for their retirement.

Newlyweds

“Are we doing what we are supposed to do?” “What’s next?”

This couple has plenty on their mind.

There is a purpose to every dollar you earn. Being intentional with each can be difficult. That’s why Billy puts pen to paper those goals and architects a runway to each.

However, they revisit and iterate. Our circumstances are in constant movement!

Minority Owner of a Thriving Business

A younger owner is in the process of purchasing shares from the majority shareholder. However, he doesn’t have the assets to do so…

• Build a long-term succession plan without disrupting business growth

• Enable the president to sell shares over time and diversify

• Enable the minority owner to purchase shares with little cash

• Enable the minority owner to build additional retirement assets & savings

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