3 Things Every Vanguard S&P 500 ETF Investor Needs to Know Today
Key Points
The Vanguard S&P 500 ETF provides easy exposure to the largest companies in the U.S.
In the past decade, performance has been driven by tech dominance, passive capital flows, and currency debasement.
Future returns are obviously unknown, but investors are better off adopting a mindset of long-term bullishness.
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It has never been easier to invest in the stock market, thanks in large part to the plethora of exchange-traded funds (ETFs) that are out there. Perhaps none get as much attention as the Vanguard S&P 500 ETF (NYSEMKT: VOO). Combined with its other share classes, it has $1.5 trillion in total assets (as of March 9), which shows you the gargantuan amount of capital that is allocated to this strategy.
If you're considering putting some money to work, it's best to pause and deliberate. Here are three things every Vanguard S&P 500 ETF investor needs to know today.
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What do you own?
This one seems obvious. However, investors should take the time to understand what exactly they'd be owning. Understanding portfolio composition is critical, as you want to be familiar with where your money is going.
It shouldn't be a surprise that the Vanguard S&P 500 ETF tracks the performance of the S&P 500 index. Investors immediately gain exposure to 500 or so large and profitable companies that trade on U.S. stock exchanges. At a high level, you are making a bet that the American economy will continue to dominate. This has historically been a smart view to have.
Knowing the sector breakdowns is also quite valuable. Given how the economy has shifted in the past 15 years, the information technology sector commands a notable 33.4% share of the ETF's asset base. It's impossible to avoid these kinds of businesses.
Investors bullish on artificial intelligence (AI), however, are in the right place. Leaders of the AI race, like Nvidia, Microsoft, Amazon, Alphabet, and Meta Platforms, have significant representation in this ETF.
Other notable sectors are financials, communication services, and consumer discretionary. They combined to make up 34.3% of the Vanguard S&P 500 ETF.
How has it performed in the past?
When investors are considering where to park their capital for the long term, performance is undeniably a primary concern. In the past decade, the Vanguard S&P 500 ETF has produced a total return of 302% (as of March 9), which includes the dividend payouts. On an annualized basis, the total return is 15%. This is considerably higher than the S&P 500's historical average of 10%.
It's almost impossible to complain about that performance. This argument is supported by the cost of adopting this investment strategy. The Vanguard S&P 500 ETF charges a tiny expense ratio of 0.03%. Only $3 is paid to Vanguard in the first year of a hypothetical $10,000 capital sum. This is particularly attractive relative to the many high-priced and poorly performing active funds out there.
Over the trailing decade, the stock market has benefited from powerful tailwinds. As mentioned, the economic backdrop has been propelled by the rise of technology enterprises that show no signs of slowing down. Some of these companies deserve their valuations, as they possess network effects, have massive user bases, generate robust free cash flows, and aren't finished growing.
Fresh capital has been introduced to the market via the rise of passive investment flows, which is precisely what the Vanguard S&P 500 ETF is. This adds more demand to equities, supporting higher prices over time.
Another trend that might be overlooked is ongoing currency debasement. The U.S. dollar has lost 27% of its purchasing power in the past 10 years, driven by surging money supply and sovereign debt. Seeking adequate returns, that money can flow into the stock market.
How will it perform in the future?
What matters for prospective investors, of course, is what the future will bring. There are valid concerns about the stock market's elevated valuation right now, driven by fears of an AI bubble. This can discourage investors from putting money to work.
While no one has any idea what the Vanguard S&P 500 ETF's performance will be over the next 10 years, I don't think it's ever a bad idea to always be bullish about the long term. In my opinion, the previously mentioned tailwinds of tech dominance, passive money flows, and currency debasement will continue. Investors who buy this ETF will benefit.
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Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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