The Vanguard ETF That Could Set You Up for Life if You Buy It in April
Key Points
It's usually the simplest buy-and-hold strategies that do the best job of creating long-term wealth.
A number of funds and strategies could be used for this, but the S&P 500 remains one of the most straightforward options.
The Vanguard S&P 500 ETF (VOO) can set you up for long-term financial independence by doing a few simple things.
- 10 stocks we like better than Vanguard S&P 500 ETF ›
Despite its volatility and occasional bear markets, the U.S. stock market remains one of the best long-term wealth-creation tools for everyday investors. It represents the potential, growth, and possibilities of the global economy in a way that nothing else really does.
What's interesting is that it often rewards those who do the least with it. By investing regularly and letting long-term compounding do its thing without trying to time the market, people turn modest monthly contributions into millions of dollars down the road.
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One of the best ways to accomplish this is by using the Vanguard S&P 500 ETF (NYSEMKT: VOO). By investing in hundreds of U.S. economic leaders, investors participate in the growth of the world's most successful businesses.
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Key takeaways
- Investing in the S&P 500 means investing in the largest and most successful U.S. companies.
- Instead of trying to pick individual winners, investing in the S&P 500 is essentially buying the entire U.S. economy.
- With an expense ratio of just 0.03%, the Vanguard S&P 500 ETF is among the cheapest ways to invest in the index.
- Bear-market pullbacks can result in drawdowns of 30% or more, but a long-term buy-and-hold approach has still rewarded investors.
The S&P 500 is still your best long-term bet
If your investing time horizon is several years, if not decades, investing in healthy, durable, and successful companies is never a bad strategy. That's what makes investing in the Vanguard S&P 500 ETF such a smart choice.
It targets 500 of the largest companies across the entire economic landscape, including tech, healthcare, energy, and consumer goods. That gives investors a great cross-section of sectors, themes, economic cycles, and volatility profiles. This diversification helps mitigate risks from any individual company or group and supports the pursuit of broad, long-term capital growth.
The S&P 500 has roughly one-third of its index in tech stocks right now, which creates a short-term imbalance. But this allocation also emphasizes what the U.S. economy currently is and where it's heading.
VOO vs. VUG: Which one fits your goals?
A lot of investors would choose the Vanguard Growth ETF (NYSEMKT: VUG) for this purpose instead of the Vanguard S&P 500 ETF. Let's put the two side by side to see how they compare.
| Metric | VOO | VUG |
|---|---|---|
| Strategy | Large-cap core | Large-cap growth |
| Number of holdings | 504 | 151 |
| Expense ratio | 0.03% | 0.03% |
| 10-year compound annual growth rate (CAGR) | 14.4% | 16.4% |
| Tech allocation | 33% | 65% |
| Dividend yield | 1.2% | 0.4% |
| Standard deviation of daily returns (10Y) | 1.13% | 1.35% |
| Best for | Core long-term holding | Higher growth, higher potential |
The Vanguard Growth ETF is definitely the option with higher volatility, higher return potential, and higher drawdown risk. Over the past decade and beyond that, growth stocks have rewarded investors with better returns, but they require a bit of an iron stomach to stick with them.
Given the extra volatility, investors are more likely to panic and sell them if they fall too far. This is a possibility with the S&P 500, too, but the broader diversification tends to help with that a bit.
I think the Vanguard S&P 500 works the best. It's simply a good, diversified mix of the entire U.S. economy without any tilts. If you simply give it time and let it grow over the course of years, it could set you up financially for life.
Should you buy stock in Vanguard S&P 500 ETF right now?
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Growth ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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