If you're reading this, it likely means you're taking one of the more important steps when it comes to investing: Being curious enough to look into it. The second, arguably most crucial, step is actually beginning your investment journey. Unfortunately, the latter is where many people freeze up because they feel like they're not ready.
Many people think it takes dedicating huge amounts of time to studying companies and industries to be a "good" investor, but that couldn't be further from the truth. Could that help in certain situations? Absolutely. Is it needed to make money in the stock? Not even remotely.
One of the best things someone can do, regardless of their investing experience, is invest in exchange-traded funds (ETFs). ETFs are funds that contain many different companies in a single investment and trade on the stock market like a traditional stock. For beginning investors interested in investing in an ETF, the Vanguard S&P 500 ETF (VOO -0.57%) is a great option to consider.
When in doubt, let the U.S. economy lead the way for you
The S&P 500 is the stock market's most followed and important index. In the S&P 500's case, it tracks the 500 largest public U.S. companies. Companies within the S&P 500 are some of the most influential in the world and help drive much of the U.S. economy's growth and stability. That's why an investment in the S&P 500 is often viewed as an investment in the broader U.S. economy.
While the S&P 500 itself is an index, different financial institutions put together their own S&P 500 funds that mirror the index -- which is where this Vanguard ETF comes into the picture. Famed investor Warren Buffett once said, "The trick is not to pick the right company, the trick is to essentially buy all the big companies through the S&P 500." This has worked well for millions of investors over time.
The ETF's historical results are encouraging
There are many reasons to invest in the ETF, but the most important is that it has been proven to work. Since the ETF was created in September 2010, it has returned around 548% (including dividends), meaning a $1,000 investment at that time would be worth over $6,400 today.
VOO Total Return Level data by YCharts.
One of the cardinal rules in investing is to not use past performance to predict future performance. However, for the sake of illustration and to show how worthwhile the ETF can be, let's assume it continues to average 13% returns over the next 20 years.
If you were to invest $500 monthly and average those returns, you'd have over $485,000 while having only personally invested $120,000 in that time. That's a testament to the S&P 500 and the power of compound earnings.
You'll be investing in some of the world's best companies
This ETF contains some of the world's most influential companies, and you'll get access to them all with a single investment. The ETF is market cap-weighted, so larger companies account for more of the fund than smaller companies. Here are the ETF's top 10 holdings and how much of the fund they make up (as of June 30):
- Microsoft: 7.23%
- Nvidia: 6.60%
- Apple: 6.61%
- Alphabet (both share classes): 4.28%
- Amazon: 3.85%
- Meta Platforms: 2.40%
- Berkshire Hathaway (Class B): 1.60%
- Eli Lilly: 1.57%
- Broadcom: 1.52%
Since most of the world's largest companies today are technology-oriented, the ETF leans heavily that way (32.5% of the ETF), but it still manages to contain top companies from every major sector in the U.S. economy.
The ETF's low fees ensure you keep more money in your pocket
The ETF's expense ratio is 0.03%, meaning you'll pay just $0.30 annually per $1,000 you have invested. That's one of the lowest fees you'll see from an ETF, and it can save you thousands over time compared to more expensive ETFs.
For perspective, let's go back to our earlier example, where you average 13% annual returns over 20 years. Here's how your investments would stack up based on different expense ratios:
| Expense Ratio | Amount Paid in Fees | Investment Balance After 20 Years |
|---|---|---|
| 0.03% | $1,700 | $483,900 |
| 0.50% | $27,500 | $458,100 |
| 0.75% | $40,600 | $445,000 |
Calculations by author. Figures rounded down to the nearest hundred.
Expense ratios can often seem small on paper and may not have tangible effects when your investment total is low. However, as time goes on and your investment balance (hopefully) increases, these fees can really add up.
Consistently investing in a low-cost ETF like this one takes much of the thinking out of investing and still puts you in a position to build wealth over time. It's a win-win.
