February 25, 2024

If There’s 1 Must-Have Investment in Your Portfolio, It’s This ETF

There are countless investing strategies and approaches that a person can take. What works for one person may not work for the next, so having a variety of effective strategies to try is crucial.

That said, some investments have stood the test of time and proven they can be effective for investors of all types. One of those investments is an S&P 500 exchange-traded fund (ETF) that holds shares of all 500 stocks in that index. One of the best S&P 500 ETFs, and one I’d recommend for any investor, is the Vanguard S&P 500 ETF (VOO 0.57%).

A bet on the S&P 500 is a bet on the U.S. economy

The S&P 500 is an index that tracks the largest 500 stocks traded on the U.S. stock market. It contains a lot of industry leaders, blue chip corporations, and some of the world’s most influential companies. That’s largely why an investment in the S&P 500 can be akin to an investment in the broader U.S. economy.

As an investor, there aren’t many safer long-term bets than one on the U.S. economy. It has its fair share of hiccups and down periods, but the U.S. economy has shown resilience over the long haul.

The stocks in the Vanguard S&P 500 ETF cover a lot of grounds. The ETF contains companies from all 11 major sectors:

  • Information technology: 28.9% of the holdings
  • Financials: 12.9%
  • Healthcare: 12.6%
  • Consumer discretionary: 10.9%
  • Industrials: 8.8%
  • Communication services: 8.6%
  • Consumer staples: 6.2%
  • Energy: 3.9%
  • Real estate: 2.5%
  • Materials: 2.4%
  • Utilities: 2.3%

The ETF’s holdings are weighted by market cap, so megacap tech stocks lead the way, but it still does a good job of having representation from across the business spectrum. The ETF’s top seven companies are the “Magnificent Seven” tech stocks, accounting for almost 28% of the fund. Those stocks did very well in 2023, helping power the overall market and having a big impact on this ETF.

Don’t underestimate the power of a low-cost ETF

Since S&P 500 ETFs mirror the same index, there isn’t a tangible difference between them outside of cost. The Vanguard S&P 500 ETF’s expense ratio is 0.03%, one of the lowest you’ll find from any ETF on the market. Another popular S&P 500 ETF, the SPDR S&P 500 ETF Trust, has a 0.0945% expense ratio. Cathie Wood’s flagship fund, the Ark Innovation ETF — with an “investment theme” of “disruptive innovation” — has a 0.75% expense ratio.

Although these differences may seem small on paper, they can add up to noticeable amounts over time. For perspective, let’s imagine you’re investing $500 monthly into an ETF that averages 10% annual returns. Here is how your investment values would differ based on expense ratio and years invested:

Years Invested Value of Investment With 0.03% Expense Ratio Value of Investment With 0.0945% Expense Ratio Value of Investment With 0.75% Expense Ratio
10 $95,500 $95,200 $92,300
20 $342,500 $340,000 $315,700
30 $981,400 $969,500 $857,000

Calculations by author. Values rounded to the nearest hundred.

Proven results that can help investors build wealth

Being broad and diverse checks off one of the key investment boxes, but it doesn’t mean much without results to match it. Plenty of broad and diverse ETFs have had lackluster returns through the years. However,, the Vanguard S&P 500 ETF has shown it can be a wealth-building investment.

Since its September 2010 inception, the ETF has averaged around 12% annual returns and 14% total returns. Past results don’t guarantee future performance, but if we assume the ETF will average 11% annual returns going forward, here’s how much $500 monthly investments ($6,000 per year) into the ETF could net investors after fees:

Years Invested Ending Value
10 $100,200
15 $205,900
20 $383,900
25 $683,400
30 $1.18 million

Calculations by author. Values rounded to the nearest hundred.

You likely won’t see the S&P 500’s value doubling in a year, as we’ve seen with some individual stocks, but the Vanguard S&P 500 ETF can be (and has been) a great tool to build wealth throughout a lifetime.

Even a small amount invested consistently into the Vanguard S&P 500 should pay off in a big way down the road.

Stefon Walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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