Where Will the Vanguard S&P 500 ETF Be in 20 Years? History Has Good and Bad News for Investors.

The Vanguard S&P 500 ETF (NYSEMKT: VOO) is one of the most popular ways to passively track the S&P 500 (SNPINDEX: ^GSPC). It was launched in 2010 as the ETF version of the Vanguard S&P 500 Index Fund (NASDAQMUTFUND: VFINX), which arrived in 1976.

John Bogle, Vanguard's founder, believed it was smarter to simply invest in the entire S&P 500 because most actively managed funds couldn't beat the market over the long term. He famously told investors, "Don't look for the needle in the haystack. Just buy the haystack."

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That's been a winning strategy so far. Including reinvested dividends, the S&P 500 has generated an average annual return of about 10% since its inception in 1957. It also rebalances its holdings every quarter, so you'll only stay invested in the country's top 500 companies.

But will VOO and other S&P 500 ETFs remain reliable investments over the next 20 years? Let's review the index's historical performance and upcoming challenges to decide.

The good news... and the bad news

Over the past 20 years, the S&P 500 has maintained an average annual return of more than 10% after accounting for reinvested dividends. That's impressive, since those two decades included the Great Recession (2007-2009), the COVID-19 Recession (2020), and the shock of the Federal Reserve's aggressive interest rate hikes (2022-2023).

That's great news for long-term investors who can tune out the near-term noise. But here's the bad news: the S&P 500 declined by 57% from Oct. 2007 to March 2009, 34% from Feb. to March 2020, and 25% from Jan. 2022 to Oct. 2022. Those steep drawdowns shook many investors out of the market. As the celebrated investor Peter Lynch once observed, "Everybody in the world is a long-term investor until the market goes down."

It takes a lot of discipline and patience to stick with VOO -- and take the contrarian view and buy more shares -- during those downturns. While past performance isn't a reliable indicator of future gains or losses, it's only a matter of time before the next market crash occurs.

Over the next 20 years, the S&P 500 could continue to grow at its historical annual rate of about 10.5% as the top companies stay in the index and the losers drop out. It will also likely maintain an annual yield of about 1.5%-2%. If it follows that growth trajectory with reinvested dividends, it could turn a $1,000 investment into about $7,366 over the next 20 years. But to hit that target, you'll need to ride out the volatility and have faith that the S&P 500 will always bounce back.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.