It might be tempting to skip volatile S&P 500 stocks and ETFs when you can get 5% from a risk-free savings account. But just know playing it safe can cost you in the long run.
Over the past 10 years, volatile ETFs raced well past safer stocks even factoring in their painful drops during that time. By owning the SPDR S&P 500 Trust in the past 10 years, your annual return was 11.7% annualized. That's well below the 39.4% average annual gain of the top performing non-crypto ETF, Direxion Daily Technology Bull 3X.
The difference in wealth from the two ETFs in a typical $238,000 Charles Schwab account 10 years ago would be $5.9 million. Of course, this is an extreme example. Leveraged ETFs aren't designed to be long-term holdings. But it is a dramatic case of how playing it safe can add up. The top-performing non-leveraged ETF in the past decade, VanEck Semiconductor, gained 23.4% annually.
"Leveraged ETFs tend to be the top and bottom performers over most time periods," said Todd Rosenbluth of Vetta Fi. "But investors are appropriately cautioned from owning these funds for the long term given the elevated risks. They are intended for tactical short term purposes."
Safety Can Cost You Long Term
This example, as dramatic as it is, shows the potential downside to dialing back risk too much. In many cases, you're giving up long-term returns when you play it too safe.
Just look at what happened to nervous investors who 10 years ago decided to overweight diversified bond ETFs versus the riskier S&P 500. The iShares Core US Aggregate Bond ETF returned just 0.89% annually over the past 10 years. That's painfully behind the 11.7% annualized gain of the S&P 500.
Going with bonds versus the S&P 500 on the typical portfolio would have left you with $450,000 less money. Did you really play it safe?
Enough History: What About Now For S&P 500?
Studying the past isn't predictive of the future. The 10-year Treasury wasn't yielding roughly 5% 10 years ago like it is now. And not all investors could have owned these risk assets during volatility.
And it's important to note most investors don't go all-in on any asset class — nor should they. There's usually a mix of bonds and stocks in portfolios. And that's prudent, Rosenbluth says. "Fixed income provides diversification benefits and is appropriate (as it) can serve as an income generator in a broader portfolio," he said. "An all-stocks portfolio can be punished if there's a prolonged bear market."
It's just that some investors might not realize how much playing it safe can cost over time. And there are smart ways to add some risk over time.
Adding Risk To The S&P 500 The Smart Way
Rosenbluth says for the stock portion of your long-term portfolio, find "low cost ETFs that own faster growing companies."
ETFs that own growth stocks, like SPDR Portfolio S&P 500 Growth ETF and Vanguard Growth can be useful ways to add risk. Another angle is adding small companies' shares. iShares Core S&P Small-Cap ETF or Vanguard Small-Cap also add risk that could pay off. Rosenbluth focuses, too, on low-cost ETFs as fees can eat into returns over time.
If you'd like to add slightly less risk that's still worthwhile, Rosenbluth looks at midcap ETFs like iShares Core S&P Mid-Cap. Dividend growth ETFs, like WisdomTree US Quality Dividend, can also pay off over time, he says.
But while some extra risk can pay off over time, don't give up on spreading your money into various assets. "If you have time on your side, the rewards can be high and you can benefit from diversification," Rosenbluth said.
Top Performing ETFs In Past 10 Years
| Name | Ticker | Annualized 10-year return |
|---|---|---|
| Grayscale Bitcoin Trust (BTC) | 47.28% | |
| Direxion Daily Technology Bull 3X | 39.44 | |
| ProShares Ultra Semiconductors | 35.70 | |
| Direxion Daily Semicondct Bull 3X | 35.32 | |
| ProShares UltraPro QQQ | 34.58 | |
| iPath Global Carbon ETN | 32.61 | |
| ProShares Ultra Technology | 31.07 | |
| ProShares Ultra QQQ | 28.23 | |
| VanEck Semiconductor | 23.43 | |
| iShares Semiconductor | 22.96 | |
| SPDR S&P 500 ETF Trust* | 11.7 | |
| iShares Core US Aggregate Bond* | 0.89% |
