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Do you own an S&P 500 ETF?
You must realize that you are way less diversified than you might think.
Let’s talk about an interesting S&P 500 alternative I heard about at Warren Buffett’s AGM.
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The S&P 500
The S&P 500 is the most popular index in the world.
It’s also incredibly popular with passive investors.
The three largest ETFs in the world all track the S&P 500:
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Together, they have more than $2 Trillion (!) in assets.
But when I was in Omaha last weekend, some concerns kept coming up again and again.
The S&P 500 Is Expensive
The price you pay matters.
“The price you pay for an investment determines its risk. The lower the price, the lower the risk and the higher the potential return.” - Seth Klarman, Margin of Safety
The S&P 500 index looks expensive today.
The Shiller P/E Ratio, also called the CAPE Ratio, compares a stock’s current price to its average inflation-adjusted earnings over the past 10 years.
Using 10 years of earnings helps smooth out short-term market ups and downs that can distort regular one-year P/E ratios.
Right now, it’s over 40.
It approaches the valuation we saw before the 2000s dot com crash.
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The S&P 500 doesn’t look like much of a bargain on a Forward P/E basis either.
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The S&P 500 Is Concentrated
Another concern that came up over and over is the concentration in the S&P 500 index.
Because it is weighted by market cap, the top 10 companies make up nearly 40% of the index.