The stock market has trended upward almost in a straight line over the past six months. The S&P 500 (^GSPC +0.84%) gained 27% from its October 2023 low point, and the Nasdaq-100 technology index jumped 30%.
However, both indexes are currently in the midst of a sell-off, and have lost 4% and 3% from their recent record highs, respectively. History proves the stock market always recovers given enough time, so this dip will likely be a buying opportunity.
Rather than trying to pick winners and losers among thousands of available stocks, investors might be better off buying exchange-traded funds (ETFs) instead. They offer diverse exposure to the broader market by holding hundreds or even thousands of individual stocks, and they are managed by a team of professionals who adjust the portfolios as necessary.
The Vanguard Group is one of the largest issuers of ETFs in the world, and it manages several funds designed to track the performance of popular indexes like the S&P 500. Here's why investors sitting on idle cash might want to allocate $750 to buy one share of the Vanguard S&P 500 ETF (VOO +0.82%) and one share of the Vanguard Total Stock Market ETF (VTI +0.74%).
NYSEMKT: VOO
Key Data Points
1. Vanguard S&P 500 ETF (VOO)
The VOO ETF has a very simple objective: closely track the performance of the S&P 500 index. To achieve this, it holds a stake in all 500 companies in the index and maintains a very similar weighting.
It's a great choice for investors of all experience levels, because companies have to meet strict criteria to enter the S&P 500 -- so only the highest-quality names make the cut:
- A company must have a market capitalization of at least $18 billion.
- A company must be American, with at least 50% of its shares available for public trading.
- A company must be profitable -- the sum of its earnings per share over the past four quarters must be positive, and it must also report positive earnings in the most recent quarter.
The S&P 500 is also incredibly diversified, with 11 sectors represented. They include energy, financials, consumer discretionary, healthcare, and information technology, to name a few. Information technology has the highest weighting in the index at 29.6%, mainly because it includes the world's largest technology companies. In fact, the top five holdings in the VOO ETF (and the S&P 500) are:
|
Stock |
VOO ETF Portfolio Weighting |
|---|---|
|
1. Microsoft |
7.08% |
|
2. Apple |
5.63% |
|
3. Nvidia |
5.05% |
|
4. Amazon |
3.73% |
|
5. Meta Platforms |
2.42% |
Data source: The Vanguard Group. Portfolio weightings are accurate as of March 31, 2024, and are subject to change.
Those technology stocks are growing in importance with the onset of artificial intelligence (AI). Microsoft is a leader in the software side of that industry, thanks in part to its $10 billion investment in ChatGPT developer OpenAI last year. Nvidia, on the other hand, makes the most powerful data center chips for processing AI workloads, making it the industry's hardware leader.
Therefore, the VOO ETF can still give investors healthy exposure to exciting new technologies despite its diverse composition.
Vanguard ETFs are also popular for their cheap holding costs. The VOO ETF has an expense ratio of just 0.03%, which is the percentage of assets under management deducted from the fund each year to cover costs like staff, marketing, and general operations. Vanguard says comparable ETFs have an expense ratio of 0.79%, which can significantly reduce returns over the long-term.
The S&P 500 has delivered a compound annual return of 10.3% since it was established in 1957. Its average annual return over the last 10 years is an even stronger 13%, thanks in part to such a heavy weighting toward the tech sector. In any case, the VOO ETF is a great bet during the current stock market sell-off.
NYSEMKT: VTI
Key Data Points
2. Vanguard Total Stock Market ETF (VTI)
The VTI ETF is even more diversified than the VOO ETF because it holds a whopping 3,717 different stocks. Its objective is to track the performance of the CRSP U.S. Total Market Index, which was formulated to represent the entire U.S. equity market. In other words, it owns every large-, mid-, and small-cap stock listed on major U.S. exchanges.
The VTI ETF is heavily weighted toward the technology sector, which accounts for 32.1% of its portfolio composition. Its top five holdings are identical to those of the VOO ETF; however, the weighting of each name is smaller because VTI owns so many other stocks:
|
Stock |
VTI ETF Portfolio Weighting |
|---|---|
|
1. Microsoft |
6.12% |
|
2. Apple |
4.93% |
|
3. Nvidia |
4.20% |
|
4. Amazon |
3.30% |
|
5. Meta Platforms |
2.09% |
Data source: The Vanguard Group. Portfolio weightings are accurate as of March 31, 2024, and are subject to change.
But the bottom half of the VTI ETF might be of more interest to investors right now, because Wall Street analyst Tom Lee of Fundstrat Global Advisors is extremely bullish on small-cap stocks in 2024. He believes the U.S. Federal Reserve will cut interest rates later this year, and given smaller companies typically require more funding to fuel their growth, that will be a tailwind.
In fact, Lee thinks the small-cap Russell 2000 index could deliver a return of 50% in 2024. The VTI ETF can help investors capture that gain, while maintaining exposure to the bigger end of the market, especially the AI stocks I discussed earlier.
The VTI ETF has underperformed the S&P 500 over the long term, with a compound annual return of 8.6% since its inception in 2001. However, it could do far better in the medium term if analysts like Lee are correct about the smaller end of the market this year. Therefore, this ETF could be a great buy during the market sell-off.
