It's easy to complicate investing. We often think we must time the market and pick the right stocks to succeed. Many investors get caught up in the idea that they need to beat the market. Unfortunately, that approach can often have the opposite effect, as unnecessary complexity can lead to underperformance.
A simple investing strategy can often produce the best result for most people. One tried-and-true investment approach is investing a set amount each month into an exchange-traded fund (ETF) that tracks the S&P 500 index, like the Vanguard S&P 500 ETF (VOO +0.82%). Over the last 30 years, the average annual return of an S&P 500 index fund is 10.7%. At that rate, investing $300 a month into an ETF like this would grow into $1 million in about 32 years.
NYSEMKT: VOO
Key Data Points
The top 500 stocks in one simple ETF
The Vanguard S&P 500 ETF is the third-largest ETF by assets under management (AUM), at nearly $480 billion. The fund has a simple aim of closely tracking the returns of the S&P 500 index, which represents the 500 largest companies in the country. That broad market index provides diversification across all stock market sectors. Check out the breakdown:
- Information technology: 32.5% of the fund's holdings
- Financials: 12.4%
- Healthcare: 11.7%
- Consumer discretionary: 10%
- Communication services: 9.3%
- Industrials: 8.1%
- Consumer staples: 5.8%
- Energy: 3.6%
- Utilities: 2.3%
- Materials: 2.2%
- Real estate: 2.1%
Meanwhile, the fund's top holdings are a who's who of leading companies. Notable names in its top 10 holdings include Microsoft, Nvidia, Apple, Amazon, and Alphabet.
The Vanguard S&P 500 ETF benefits from long-term growth in the U.S. economy. As the economy expands, the large companies that comprise this fund should grow their earnings. They can use their growing earnings to increase shareholder value through capital investments, acquisitions, share repurchases, dividend payments, and debt reduction.
Larger companies also tend to be less risky than smaller ones. They typically have stronger balance sheets and are already profitable. Because of that, they're more likely to produce positive returns for investors over the long term since they can more easily navigate economic downturns.
Low costs drive nearly matching returns
The Vanguard S&P 500 ETF provides easy access to the country's top 500 stocks for a very reasonable cost. The fund has a 0.03% ETF expense ratio. That means for every $1,000 you invest in the fund, you'd pay only $0.30 in management fees each year. That's much lower than most other funds. For example, the largest S&P 500 ETF, SPDR S&P 500 ETF Trust, has a more than 0.09% ETF expense ratio, triple that of this fund.
Meanwhile, the average expense ratio of similar funds is even higher at 0.78%. A big reason for its lower costs is that investors in Vanguard's funds own the company, enabling it to pass on savings to fund investors instead of paying out profits to shareholders.
The fund's low costs have enabled it to nearly match the S&P 500's returns over the long term:
|
Fund |
1-Year |
3-Year |
5-Year |
10-Year |
Since inception (9/7/2010) |
|---|---|---|---|---|---|
|
Vanguard S&P 500 ETF |
22.09% |
9.54% |
14.95% |
13.11% |
14.51% |
|
S&P 500 index |
22.15% |
9.60% |
15.00% |
13.15% |
14.55% |
Data source: Vanguard.
As that table showcases, this ETF has delivered returns closely mirroring the S&P 500 over the years, with a very slight underperformance due to its modest expense ratio. Given that its costs will likely stay low since Vanguard remains owned by fund investors, it should continue delivering returns that closely follow the S&P 500. Because of that, if the past is any indication of the future, a steady monthly investment in this fund could grow into a much larger nest egg over the long term.
A simple and enriching strategy
Investing some money into the Vanguard S&P 500 ETF each month is a very simple investment strategy. However, it could be very rewarding, given its ability to match the S&P 500's solid returns over the years. So, if you're not in a rush to get rich (and want to make sure you get there eventually), this ETF is the simple way to go.
