Although the stock market tends to go up over the long term, there are always down periods along the way, including the recent bear market that began in 2022. Luckily, brighter days should eventually be on the way. If you have $1,000 to invest before the next stock market rally, I’d use it to cover a lot of ground with S&P 500 and Russell 2000 exchange-traded funds (ETFs).
Those may not be “flashy” options that rile investors up, but they’re effective — and that’s what truly matters.
The most important index in the stock market
The S&P 500 is an index that tracks the 500 largest public U.S. companies by market cap. Because of the companies within it and the sectors they span, the S&P 500 has become the benchmark for the U.S. stock market. When people refer to the “stock market’s performance” broadly, they’re usually referring to the S&P 500.
The S&P 500 is market cap-weighted, so seven of the top 10 holdings are tech companies, but it’s still more diversified than the tech-heavy Nasdaq Composite and 30-stock Dow Jones Industrial Average. It contains companies from all 11 major sectors:
- Communication Services: 8.3%
- Consumer Discretionary: 9.9%
- Consumer Staples: 7.4%
- Energy: 4.7%
- Financials: 13.1%
- Health Care: 14.4%
- Industrials: 8.4%
- Information Technology: 25.8%
- Materials: 2.6%
- Real Estate: 2.5%
- Utilities: 2.9%
Few investments check as many boxes at once as the S&P 500. Its diversification across sectors makes investing in it an investment in the broader U.S. economy. This is particularly true because it contains virtually all industry leaders and blue chip stocks.
There isn’t much tangible difference between S&P 500 ETFs outside of cost, so my go-to option is the Vanguard S&P 500 ETF (NYSEMKT: VOO) because of its low 0.03% expense ratio ($0.30 per $1,000 invested).
Don’t forget about the smaller companies
The Russell 2000 index tracks the smallest 2,000 companies in the Russell 3000. It serves as the benchmark for small-cap stocks, similar to how the S&P 500 works for large-cap stocks.
Although they can often be overlooked, there are a lot of benefits to investing in small-cap stocks. Small-cap stocks (those with a market cap of between $300 million and $2 billion) have a lot more room to grow than larger companies. It’s easier to grow from $500 million to $1 billion in value than it is to grow from $100 billion to $200 billion.
With this high growth potential comes a chance for high stock price growth, but it’s a risk-reward trade-off. Small-cap companies are often more volatile and vulnerable to economic conditions than large-cap companies, leading to more stock price swings, though no stock is immune to volatility.
Similar to the Vanguard S&P 500 ETF, my go-to would be the Vanguard Russell 2000 ETF (NASDAQ: VTWO) because of its low cost (an expense ratio of 0.10%).
The Vanguard Russell 2000 ETF also has its own diversification benefits. Since it contains over 1,900 companies, it’s not as reliant on large global corporations as on smaller, more domestic companies.
A bet on the U.S. economy is a good bet
I’d go with S&P 500 and Russell 2000 ETFs before the next rally because it’s essentially betting on the rebound of the U.S. economy with the best of both worlds. You get the relative stability of large-cap companies and the growth potential of small-cap companies.
You can’t predict if individual companies will survive economic storms (especially small-cap), but you can be fairly certain that broad indexes like the S&P 500 and Russell 2000 will. They always have, and there’s no real reason to believe this time will be different. It may not be next week, next month, or even next year, but the next rally will eventually happen.
The one thing you want to make sure of is that you’re invested before it does. Remember: Time in the market beats timing the market.
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