Motley Fool: Index Funds in ETF Form — For the Win

If you don’t have the time, interest or skills to research and invest in individual stocks, consider index funds, which track various stock (or bond) indexes and generally sport low annual fees. Over the 15 years ending in December 2019, the S&P 500 index of 500 of America’s largest companies outperformed fully 90% of U.S. large-cap stock mutual funds.

Exchange-traded funds, or ETFs, make index-fund investing extra easy. They trade like stocks, and you can buy as few or as many shares as you want through your brokerage. Here are a few promising ones with low fees:

• The SPDR S&P 500 ETF (SPY) tracks the S&P 500 itself.

• The Invesco QQQ Trust ETF (QQQ) tracks the Nasdaq 100, so it invests in the 100 largest mostly nonfinancial companies in the world; these include technology giants such as Apple, Microsoft, Amazon, Facebook and Google parent company Alphabet.

• The Vanguard Total Stock Market ETF (VTI) tracks an index of more than 3,500 stocks, with small, medium and large companies included.

• The SPDR Portfolio S&P 500 Growth ETF (SPYG) tracks the S&P 500 Growth Index, featuring S&P 500 companies with the best growth characteristics based on sales growth, price-to-earnings ratio and momentum.

Consider parking at least some (and perhaps many) of your long-term dollars in index funds.

Ask the Fool

Q: Are the best stocks to look for the ones with high dividend yields and low P/E ratios? – B.W., Toledo, Ohio

A: Not necessarily. Remember that a dividend yield is the result of dividing the annual dividend amount by the current stock price, so if the stock plunges, the yield will soar. Looking for solid yields of, say, 2% to 4% (or even more) is fine, but do extra research before grabbing an ultrahigh yield. It’s also good to seek out dividends that are being increased regularly and significantly over time.

Many great and growing companies don’t pay dividends, though, so don’t write off nonpayers. (Current nonpayers include Warren Buffett’s Berkshire Hathaway, Amazon.com, Netflix, PayPal, Facebook, and Google parent Alphabet.)

As for the price-to-earnings (P/E) ratio: While a low P/E suggests a better value than a high one, remember that P/Es vary by company and industry (and that companies with no current earnings will have no P/E).

Do some digging and compare a company’s recent P/E ratio with its five-year average to see if it’s now relatively high or low. Compare it with peers in its industry, too. The “forward” P/E ratio, based on the coming year’s expected earnings instead of the past year’s earnings, is also good to check out. You can research companies at sites such as Fool.com, Morningstar.com, and Finance.Yahoo.com – and look at many more numbers than just the yield and P/E ratio.

Q: What does it mean if investors are “long” on a stock? – F.H., Scottsdale, Arizona

A: It means they’ve bought shares, expecting them to rise in value – as opposed to shorting a stock, where they’d aim to profit if its price fell.

My smartest investment

My smartest investment was buying shares of Facebook when they were only at $19 apiece, in 2012. – H.H., online

The Fool responds: You did well – the stock never spent much time near such a low price. Here’s hoping that you’ve hung on since then, as the shares were recently trading above $280 apiece, having risen nearly 1,400%. That’s enough to turn a $1,000 investment (of about 52 shares) into a stake worth almost $15,000. It’s a terrific gain, but what matters most at this point is where the stock is headed from here.

If you think the shares are very overvalued, you no longer have confidence in management, or you don’t expect the company to grow robustly, consider selling. (You might sell all your shares – or compromise and just sell some.)

If you’re still a long-term believer and you expect the company to be much bigger in the future, with revenue, earnings and user numbers continuing to grow, hang on.

Bulls today see great potential for the company, given Facebook’s 1.8 billion daily active users, and they’re impressed with its Instagram business as well.

Bears worry about advertisers boycotting Facebook due to its handling of political content, and wonder whether many users will depart. Do your research and thinking, and make your own call.