When it comes to tracking the performance of the broader market, many investors turn to an S&P 500 index fund or exchange-traded fund (ETF). This investment tool has long been considered one of the best ways to gain exposure to the U.S. stock market. However, an alternative ETF, the Invesco S&P 500 GARP ETF (NYSEMKT: SPGP), offers a more targeted approach to investing in the S&P 500, with the potential for higher returns. In this article, we’ll explore why shifting from a traditional S&P 500 index tracker to the Invesco S&P 500 GARP ETF could be a smarter long-term decision for some investors.
The S&P 500 Index: A Benchmark for Market Performance
The S&P 500 index has become the gold standard for tracking the performance of the U.S. stock market. Established in 1957, this index tracks the performance of 500 large-cap U.S. companies across a diverse range of sectors. One of the key reasons the S&P 500 is so widely followed is that it is weighted by market capitalization (market cap), meaning the largest companies have the greatest impact on the index’s performance.
This weighting method makes the S&P 500 a more accurate representation of the overall U.S. economy than older indices like the Dow Jones Industrial Average, which are based on stock price rather than market cap. The S&P 500 is also far more diversified, as it includes 500 companies compared to the Dow’s 30. Over time, the S&P 500 has delivered strong performance, making it a popular choice for long-term investors who want broad market exposure.
What Makes the Invesco S&P 500 GARP ETF Different?
While the S&P 500 index provides broad exposure to the U.S. stock market, the Invesco S&P 500 GARP ETF takes a more selective approach. The ETF tracks the S&P 500 GARP Index, which starts with the same 500 companies in the S&P 500 and then screens them to identify growth-at-a-reasonable-price (GARP) stocks. The result is a more focused ETF with around 75 of the highest-performing stocks from the original S&P 500.
The GARP Screening Process
The process of selecting stocks for the S&P 500 GARP Index begins by evaluating the growth potential of each company based on earnings per share (EPS) and sales per share growth over the past three years. The companies with the highest growth scores then make it to the next stage of the selection process. This focus on growth and value—rather than just diversification—sets the GARP ETF apart from the broader S&P 500 index, which includes companies of all growth stages.
In short, the Invesco S&P 500 GARP ETF is designed to invest in companies with strong growth potential but at a reasonable price, making it an attractive option for investors seeking higher returns without the risk of overpaying for stocks.
Performance of the Invesco S&P 500 GARP ETF
One of the most compelling reasons to consider the Invesco S&P 500 GARP ETF is its performance track record. Over the long term, the ETF has outperformed the broader S&P 500 index in terms of both share price appreciation and total return (which includes dividends reinvested).
The ETF’s approach of targeting growth stocks at a reasonable price allows it to capture the upside potential of high-growth companies while avoiding the risks of overvalued stocks. This strategy has helped the Invesco S&P 500 GARP ETF deliver superior returns compared to traditional S&P 500 index trackers, making it an attractive option for long-term investors looking to maximize their portfolios’ growth potential.
Comparison with the S&P 500 Index
To illustrate the difference in performance, let’s take a closer look at the Invesco S&P 500 GARP ETF’s total return compared to the performance of a standard S&P 500 index ETF like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). Over the past several years, the Invesco S&P 500 GARP ETF has consistently outpaced the S&P 500 index in terms of total return.
This performance difference is largely due to the ETF’s focus on high-growth, well-priced stocks, which tend to perform better than the broader market during periods of economic expansion. Additionally, by narrowing the selection to the top-performing stocks, the GARP ETF aims to reduce the risk associated with underperforming companies that can drag down the overall performance of an index fund like the S&P 500.
Why the Invesco S&P 500 GARP ETF Is a Smart Long-Term Investment
There are several reasons why investors may want to consider the Invesco S&P 500 GARP ETF as a long-term investment option:
- Growth Potential: The GARP strategy focuses on identifying companies with strong growth prospects that are priced reasonably. This means the ETF is more likely to outperform the broader market in bull markets while providing some downside protection during market corrections.
- Reduced Risk: By selecting only the best growth stocks, the Invesco S&P 500 GARP ETF avoids the risk of holding underperforming companies. This approach helps mitigate the volatility that often affects traditional index funds, which hold a broader range of stocks.
- Outperformance Track Record: As mentioned earlier, the Invesco S&P 500 GARP ETF has historically outperformed the S&P 500 index, making it an attractive option for investors looking to outperform the market over the long term.
- Diversification with a Focus on Quality: The ETF still maintains some level of diversification by holding around 75 stocks, but it focuses on quality over quantity, which can lead to better returns over time.
Conclusion
While traditional S&P 500 index trackers remain a popular choice for investors seeking broad exposure to the U.S. stock market, the Invesco S&P 500 GARP ETF offers a more nuanced, targeted approach that could provide better long-term returns. By focusing on growth stocks with reasonable valuations, the GARP ETF combines the benefits of growth investing with the discipline of value investing, offering investors the best of both worlds.
If you’re looking for a way to gain exposure to the U.S. stock market with the potential for superior returns, the Invesco S&P 500 GARP ETF may be a smarter choice than a standard S&P 500 index fund.
For latest Business and Finance News, subscribe to Globalfinserve, Click here.