Index ETFs, which track stock-market indexes, have gained in popularity because of their low fees and the perception that many active managers are unable to keep up with their benchmarks. Also, many ETFs have built-in diversification, which is another one of the tenets of successful long-term investing. But when it comes to getting the full benefits of dollar-cost averaging, index ETFs may not always be the best option.
The weightings of the various 10 industry sectors in the S&P 500 can change quite a bit over time. For instance, the weighting for the information-technology sector was 12.3 percent at the end of 1997. By the end of 1999, that weighting had increased to 29.2 percent. And by year-end 2002 the weighting had fallen almost all the way back to just 14.3 percent!
If you were an investor using the SPDR S&P 500 ETF to dollar-cost average at the end of each year, over 29 percent of your 1999 contribution would have gone into a sector that was clearly, in hindsight, in bubble territory. Conversely, when information-tech stocks got cheap again in 2002, only a little over 14 percent of your yearly contribution would have gone into that sector. To me, this seems like the opposite of dollar-cost averaging. The whole point of dollar-cost averaging is to buy more of an investment when it is cheap and less of an investment when it is expensive.