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If you're starting from ground zero and have decided to begin investing for the future, congratulations! You've already made the best choice possible for securing your financial future. But now it's time to face the second most important choice: what to actually invest your money in.
When building the foundation of a new portfolio, it's important to focus on a couple of things: broad, diversified stock market coverage and low costs. It's too early to focus on individual sectors and themes. You want to instead establish the core that will allow you to accumulate long-term wealth.
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For this goal, I like the Schwab U.S. Broad Market ETF (NYSEMKT: SCHB). It's not the S&P 500 (SNPINDEX: ^GSPC), but think of it as the S&P 500-plus. That's because it targets the entire U.S. stock market, not just the largest companies you're already familiar with.
The Schwab U.S. Broad Market ETF tracks the Dow Jones U.S. Broad Stock Market Index. It's designed to track most U.S. publicly traded stocks, nearly 2,500 in all, across all sizes. That includes large-cap, mid-cap, and small-cap companies, providing more comprehensive coverage than the 500 stocks tracked by the S&P 500.
Smaller companies have the potential to be more volatile in the short term, but they also carry above-average return potential in exchange for that added risk. They also tend to have a different sector composition (less tech, more healthcare and financials) that adds to the diversification benefits. That breadth is the biggest selling point. It's not necessarily about chasing returns. It's about participating in the growth of the U.S. economy as a whole.
With an expense ratio of just 0.03%, it's one of the cheapest ways to capture this exposure.
In reality, the performance of the Schwab U.S. Broad Market ETF probably won't look a whole lot different than that of the S&P 500. There's approximately 86% overlap between the top holdings, which means correlation will be very high. Large caps are still the overwhelming foundation of the fund. It just adds modest exposure to non-S&P 500 companies to enhance overall coverage.
When building a portfolio foundation, either will work well. But the smaller-company market can look very different from the broader large-cap market. It's influenced by economic factors differently and it generally performs somewhat differently in different market environments. That's why it's important to include them. And a lot of them will turn into large caps over time.
Your decision to invest is one of the most important you'll make. By choosing the Schwab U.S. Broad Market ETF, you're setting yourself up for a lifetime of long-term growth.
Before you buy stock in Schwab Strategic Trust - Schwab U.s. Broad Market ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Schwab Strategic Trust - Schwab U.s. Broad Market ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $348,060!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,067,492!*
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This Is the 1 Low-Cost ETF I'd Recommend to Anyone Starting From Zero Right Now was originally published by The Motley Fool
