In the world of investing, nothing is as tried and true as index fund investing. Investing in an index mutual fund or ETF is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund and the ability to "buy the market" with one ticker or fund. Most of the money tied to index funds tracks the broad S&P 500; $77 billion alone is located in iShares S&P 500 Index (NYSE:IVV) and the SPDRS S&P 500 (NYSE: SPY). The index is comprised of 500 of the largest stocks listed in the U.S. plus a few international ones. The index includes stocks across all sectors of the economy has a weighted average market capitalization of approximately $80 billion.

IN PICTURES: Learn To Invest In 10 Steps

The Lost Decade
For over 200 years of recorded stock market data, no decade had such a poor performance as the 2000s. Since the end of 1999, stocks on the New York Stock Exchange have lost an average of 0.5% a year during this decade, squeaking past the 0.2% decline stocks suffered during the Depression years of the 1930s. The S&P 500 finished nearly 37% down during 2008's major crisis, and regained about 23% in 2009. Almost every asset class from gold to U.S Treasury bonds has performed better. While the broad stock measure has started to regain some of its former glory, index investors are perplexed as to what the future holds.

Some S&P Alternatives
Index investors need not fret. While the SPDR and the iShares funds are two of the most popular ways to play the S&P, there are other opportunities. And these S&P clones have beaten the standard index by more than a few percentage points in the past year, while following the same basket of stocks. The trick is how the ETFs weight the indexes constituents.

The Rydex S&P Equal Weight (NYSE: RSP) holds all 500 stocks in the index, but weights them equally as opposed to market cap. Each stock is given a 0.20% weighting in the fund. This causes RSP's top 10 holdings to account for 2.5% of total holdings. SPY's 10 biggest allotments are about 20%. Setting each stock on the same footing, the index prevents overweighting overvalued stocks and underweight undervalued ones. For the year ending 2009, RSP achieved a return of 45%.

Smaller ETF provider RevenueShares uses top-line revenue instead of market cap to determine the index's weighting. The RevenueShares Large Cap (NYSE: RWL) stresses companies with a low price-to-sales ratio and underweights those with higher numbers. Wal-Mart (NYSE: WMT) takes precedence in the fund as the top holding. RWL outperformed the S&P by nearly 7% percentage points in 2009.

At its very basic, a buy-write or covered call strategy is where the investor buys a stock or a basket of stocks and writes call options that cover the stock position. The advantage is that the option premium cushions the downside in the event of a falling stock price. PowerShares S&P 500 Buy Write ETF (NYSE: PBP) makes using such an approach easy for investors. Since the fund's inception, it has outperformed the broad index by 4%.

Bottom Line
Index investing is a great strategy for building a portfolio. While the broad S&P 500 has performed dismally in the last decade, applying a different methodology to the underlying basket of companies is proving profitable. Investors may want to think about adding these "alternative" S&P ETFs to their portfolios as a hedge or replacing their index allocations all together. (To learn more, see our Index Investing Tutorial.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  2. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  3. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  4. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  5. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center