The S&P 500 (^GSPC 0.61%) made a new record high earlier this year, cementing the bull market that began when the index bottomed in October 2022. As it continues to march higher, investors might be wondering if it's too late to buy.
Timing the market is next to impossible, but history shows time in the market is far more important when it comes to generating reliable returns. In fact, the S&P 500 has delivered a compound annual return of 10.3% since it was established in 1957, which means an investment of $1,000 back then would be worth over $761,355 today.
Buying an exchange-traded fund (ETF) is a great way to capture those gains in a diversified and secure manner. The Vanguard Group is one of the largest issuers of ETFs in the world, and it offers 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 $800 to buy one share of the Vanguard S&P 500 ETF (VOO 0.56%) and one share of the Vanguard S&P 500 Growth ETF (VOOG 1.01%).
NYSEMKT: VOO
Key Data Points
1. Vanguard S&P 500 ETF (VOO)
The objective of the VOO ETF is to simply track the performance of the S&P 500. It achieves this by holding a stake in all 500 companies in the index, with very similar weightings.
The S&P 500 is incredibly diversified, which makes it a great choice for investors of all experience levels. It's home to 11 different sectors, including information technology, healthcare, energy, financials, and real estate, so it covers a broad cross-section of the U.S. economy.
Companies have to meet strict criteria for admission into the S&P 500, which include having a minimum market capitalization of $18 billion, and a requirement that they must be profitable, so it automatically filters out high-risk stocks that can be prone to volatility.
The top five holdings in the VOO ETF (and the S&P 500) come from the information technology sector, because it hosts the world's largest technology companies:
|
Stock |
VOO ETF Portfolio Weighting |
|---|---|
|
1. Microsoft |
6.83% |
|
2. Apple |
5.83% |
|
3. Nvidia |
5.04% |
|
4. Amazon |
3.77% |
|
5. Alphabet Class A |
2.26% |
Data source: Vanguard. Portfolio weightings are accurate as of April 30, 2024 and are subject to change.
Those five companies have proven track records of success spanning decades, and they continue to lead the charge in new technology segments like artificial intelligence (AI). Microsoft is weaving AI into its entire product portfolio, thanks in part to its $10 billion investment into ChatGPT creator OpenAI last year. Apple also plans to bring AI capabilities to its 2.2 billion active devices worldwide, from the iPhone to the Mac line of computers.
But AI wouldn't be possible without Nvidia. It designs the industry's most powerful chips for the data center, which is where developers build, train, and deploy their AI models. Simply put, despite its diverse composition, the VOO ETF still gives investors exposure to the most exciting segments of the technology industry.
The VOO ETF is also popular for its cheap holding costs. It has an expense ratio of just 0.03%, which is deducted from the fund's total assets each year to cover staff, marketing, and general operational expenses. Vanguard says comparable funds in the industry charge 0.79% on average, which eats away at investors' returns over the long run.
Investors who want to track the performance of the S&P 500 index (which I outlined earlier) should look no further than the VOO ETF.
NYSEMKT: VOOG
Key Data Points
2. Vanguard S&P 500 Growth ETF (VOOG)
Investors who want the opportunity to earn a higher return by taking a little more risk should consider the VOOG ETF. It tracks the S&P 500 Growth Index, which exclusively holds 228 of the fastest-growing stocks from the S&P 500 index.
It selects those stocks based on their revenue growth, the ratio of their earnings change to their stock price, and their momentum. The same 11 S&P 500 sectors are represented in this index, but their weightings are very different. For example, information technology accounts for 29.2% of the S&P 500, but it accounts for 46.8% of the S&P 500 Growth Index. Why? Because tech companies tend to grow more quickly than their peers.
Therefore, unsurprisingly, the top five holdings in the VOOG ETF are exactly the same as those in the VOO ETF, but pay close attention to their weightings -- Microsoft, for example, represents 12.48% of the total value of VOOG, compared to just 6.83% for VOO.
|
Stock |
VOOG ETF Portfolio Weighting |
|---|---|
|
1. Microsoft |
12.48% |
|
2. Apple |
10.67% |
|
3. Nvidia |
9.21% |
|
4. Amazon |
6.90% |
|
5. Alphabet Class A |
4.14% |
Data source: Vanguard. Portfolio weightings are accurate as of April 30, 2024 and are subject to change.
The high weighting toward technology stocks is the source of VOOG's outperformance relative to VOO (which I'll quantify in a moment). Nvidia stock, for example, has soared 223% over the past year, so naturally the ETF that holds more Nvidia stock has produced higher returns.
There are a couple of caveats. First, if technologies like AI fail to live up to the hype, tech stocks might suffer a period of underperformance that will drag down the returns of the VOOG ETF, at least until its portfolio is rebalanced to reflect that new reality.
Second, VOOG has an expense ratio of 0.1%, which is slightly higher than that of the VOO ETF (but is still cheap relative to the industry), so investors will pay a premium for the opportunity to earn higher returns.
Over the past year, the VOOG ETF has delivered a gain of 26.6% compared to the 22.6% return in the VOO ETF. Since its inception in 2010, VOOG has delivered a compound annual return of 15.3%, compared to 14% for VOO. While that doesn't sound like much of an outperformance, the extra 1.3% compounded over the course of 14 years makes a substantial difference:
|
Starting Balance |
Compound Annual Return |
Balance After 14 Years |
|---|---|---|
|
$1,000 |
15.3% (VOOG) |
$7,338 |
|
$1,000 |
14% (VOO) |
$6,261 |
Calculations by author.
Therefore, there's no time like the present to buy this growth ETF. The longer investors hold onto it, the better their potential returns could be.
