Is Now a Better Time to Invest in the S&P 500 or Entire Stock Market?

In almost every scenario, the everyday investor is better off with a diversified portfolio and letting time do the work. Luckily, having a diversified portfolio doesn't have to mean investing in dozens or hundreds of individual stocks. It can be done with just one exchange-traded fund (ETF).

There are two ETFs that I consider true one-stop shops: the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the Vanguard Total Stock Market ETF (NYSEMKT: VTI). They have key things in common, but also enough differences to warrant picking one or the other. So, if you're debating between the two, which one is the go-to right now?

Image source: Getty Images.

The case for choosing VOO

VOO consists of 505 of the largest American companies on the market. Larger companies account for more of VOO, so although it has companies from every sector, it has a high concentration of tech stocks at the top. All 10 of its top holdings are tech stocks, making up 39.2% of the ETF. Here is its full makeup by sector:

• Information Technology (Tech): 38.6%
  
• Financials: 11.3%
  
• Communication Services: 10.4%
  
• Consumer Discretionary: 9.7%
  
• Healthcare: 8.3%
  
• Industrials: 8.3%
  
• Consumer Staples: 4.6%
  
• Energy: 3.1%
  
• Utilities: 2.1%
  
• Materials: 1.8%
  
• Real Estate: 1.8%

Right now, choosing VOO means banking on the continued growth of mega-cap tech companies (like the "Magnificent Seven" stocks) and the ongoing AI boom.

The case for choosing VTI

VTI holds 3,484 stocks from all industries and sizes. It contains all 505 stocks in VOO, as well as small-cap and mid-cap stocks excluded from the S&P 500. VTI is also weighted by size, so despite holding nearly 3,000 more stocks, its top holdings are similar to VOO, though just slightly less concentrated. The top 10 holdings are exactly the same, but they "only" account for 34.6% of VTI.

Data source: Vanguard. Percentages as of May 31.

Investing in VTI is doing away with trying to figure out which sector or company sizes will perform well and simply betting on the growth of the U.S. stock market. It will undoubtedly go as the tech sector does -- it accounts for 42.3% of the ETF -- but that isn't just big tech stocks; that includes tech stocks of all sizes.

The exact percentages fluctuate, but as it stands, close to a fifth of VTI is in small-cap and mid-cap stocks.

Should you invest in VOO or VTI right now?

Right now, I would go with the S&P 500 because of its concentration of large companies. The diversification of VTI is beneficial and welcomed, but I believe that large-cap stocks will continue outperforming smaller companies in the near future.

Smaller companies generally perform well when the economy is in its early stages of recovery or when interest rates are falling (many rely heavily on debt), but neither of those is the case right now. The economy is expanding (although dealing with inflation), and most signs are pointing to the Federal Reserve raising interest rates later this year.

Both those things work against smaller companies, which I think puts VOO in a better position to outperform VTI, though their returns are likely to be comparable. Because of the overlap between the two, it's best to choose one or the other, instead of investing in both.

Stefon Walters has positions in Apple, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Broadcom, Meta Platforms, Micron Technology, Microsoft, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.