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ETF Specialist

Taking Stock of the S&P 500 Index

We review the S&P 500 Index fund options and discuss why the market may not be as overvalued as the CAPE suggests.

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Since 2005, equity investors have put nearly $1 trillion into passive mutual funds and exchange-traded funds while pulling $300 billion out of active funds. Although the Dow Jones Industrial Average may be older and more widely cited, the S&P 500 Index's market-cap weighting makes it closer to the ideal "market portfolio" envisioned in the efficient-market hypothesis. The S&P 500 has become the most popular index that mutual funds and ETFs track. There are 54 distinct mutual funds indexed to the S&P 500 and three ETFs. Of these, only a handful can justify their existence.

An S&P 500 Index fund can serve as an effective building block for exposure to United States equities. The index contains with 500 of the largest publicly listed U.S. companies. And for the most part, it has lived up to the expectations of the efficient-market hypothesis, proving to be extremely difficult for active managers to beat consistently after fees. 

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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.