ETFs are great at boosting your returns while controlling risk. But if you're looking to simply max out gains, it's hard to compete with individual S&P 500 stocks.
Had you invested $10,000 a year ago in the best S&P 500 stock, Super Micro Computer, you'd have $24,000 more than had you bought the top U.S. diversified ETF, Invesco S&P 500 Momentum ETF, show data from Morningstar Direct and S&P Global Market Intelligence.
It's a good reminder that even the top momentum ETF can't keep up with the S&P 500 stock.
"While you will own a collection of stocks that are related to one another in some form (with an ETF), there will be unique drivers for each position that can partially offset one another," said Todd Rosenbluth, head of research at Vetta Fi. "For example, with a momentum ETF, the positive price movement of a single stock can turn negative much faster than a collection of stocks."
Looking At The Winners
Talk about a home run. Picking up $10,000 of Super Micro Computer a year ago would have been a gain for the ages.
That stake in the maker of high-performance computing systems is up nearly 300% in a year's time. That means the $10,000 position would be worth $39,953 now.
On the other hand, the top diversified ETF, Invesco S&P 500 Momentum ETF returned nearly 62%, or gained 60% just in price only. That would have turned your $10,000 investment a year ago to $16,008.
Amazingly, Invesco S&P 500 Momentum ETF doesn't own Super Micro Computer, yet. The largest holding in the ETF is Nvidia at more than 13% of the fund. Luckily, Nvidia is no slouch either, gaining more than 218% in a year's time. Nvidia is the third-best stock in the S&P 500 in the past year.
So why bother with ETFs if even the best one in today's market can't keep up with the top individual S&P 500 stock? It comes down to risk — a factor many investors are forgetting about.
Sizing Up The Risks
Super Micro Computer's supersized returns get all the attention. But its outsized risk gets overlooked in a bull market.
The stock's beta is 3.01, says S&P Global Market Intelligence. That means it's roughly three times more volatile than the S&P 500. That's great news in a bull market, as the stock's gains are all the more dramatic. But imagine losses magnified three times in a down market.
And that's where ETFs come in. The beta of Invesco S&P 500 Momentum ETF is just 0.96, says Morningstar Direct. That means the ETF is roughly equal in volatility with the S&P 500. That's largely due to its diversification across sectors.
Only about half of the ETF's holdings are in tech. Another 10% is in consumer discretionary and 9.6% in communication services. Keep in mind, too, the ETF yields 0.4% annually.
Lower risk is often a bonus with ETFs. All five of the top diversified ETF with valid betas are roughly equally volatile with the S&P 500. Not one of their betas tops 1.3, making them no more than 30% more volatile than the index.
"Stock picking involves swinging for the fences (like) in baseball hoping to hit a home run but often striking out. In contrast, investing in ETF focuses more on making contact and having a greater likelihood of getting on base safely," Rosenbluth said. "You will make outs but will have more success over the longer term."
What $10,000 In Top S&P 500 Stocks Is Worth Now
Based on one-year performance
| Company | Ticker | 1-year ch. | Value of $10,000 investment now |
|---|---|---|---|
| Super Micro Computer | 299.5% | $39,953 | |
| Vistra | 249.4% | $34,936 | |
| Nvidia | 218.0% | $31,801 | |
| Constellation Energy | 137.9% | $23,785 | |
| NRG Energy | 134.1% | $23,414 | |
| Micron Technology | 126.3% | $22,629 | |
| Arista Networks | 115.5% | $21,553 | |
| Broadcom | 107.8% | $20,783 | |
| Eli Lilly | 98.9% | $19,889 | |
| Western Digital | 98.4% | $19,839 |
