Could S&P 500 ETFs alone fund your entire retirement plan?

Most investors have heard that investing in the S&P 500 is one of the best ways to create long-term wealth. It’s probably the default option in their workplace retirement plan. Even a lot of self-directed investors will put their money in the Vanguard S&P 500 ETF or the iShares Core S&P 500 ETF and call it a day. There’s a reason, after all, that these are the two largest ETFs in the world, with more than $1.6 trillion in assets combined.

The S&P 500 is many people’s only investment. That can create some problems because it leaves a whole slew of asset classes unrepresented. Including them can enhance growth opportunities, mitigate downside risk, or create a regular income stream. Without any of that to complement it, the high-tech concentration or the growth tilt of the index could mean too much volatility.

The S&P 500 is many people’s only investment. (iStock)

Key takeaways

• The S&P 500 has delivered a roughly 10% average annual return over the long term, making it a more than adequate core retirement holding.
• The top 10 holdings account for around 38% of the index. That makes it concentrated and heavily exposed to a handful of tech stocks.
• Holding just the S&P 500 means you’re excluding small caps, international stocks, fixed income, gold, and crypto. These asset classes offer important diversification benefits.
• An S&P 500 ETF is sufficient as a core portfolio holding, but retirement portfolios should have more balance.

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The case for owning only the S&P 500

It would be easy to look at the returns of the S&P 500 over the past 10 to 15 years and come to the conclusion that it’s the only investment you need. Thanks to its heavy concentration in the “Magnificent Seven” stocks, it has outperformed most sectors, styles, and themes over that time.

The S&P 500 includes many of the best companies the U.S. economy has to offer. (Spencer Platt/Getty Images)

But setting aside the performance numbers, the S&P 500 includes many of the best companies the U.S. economy has to offer. It owns companies such as Apple, Microsoft, Amazon, Walmart, JPMorgan Chase, ExxonMobil, Johnson & Johnson, and Visa. These companies produce billions of dollars in cash flow, generate huge revenues, and have been around for decades. They’re the cornerstones of the economy and will likely be around for many more decades.

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These are exactly the kinds of high-quality companies that can make a great portfolio.