One of the biggest misconceptions about investing is the amount of effort and time required to do it successfully. In some cases, it pays to dedicate a lot of time and energy to selecting the right stocks. However, for most people, this isn't necessary, and good returns can be accomplished via exchange-traded funds (ETFs).
Investing in ETFs allows investors to achieve instant diversification in many cases, removes much of the guesswork from investing, and reduces the risk associated with investing in individual stocks. No need to listen to earnings calls, read financial statements, or tune into every headline. Simply invest in the ETF and let multiple companies do the work.
There are thousands of ETFs on the stock market, but there's one ETF in particular that I'd invest $1,000 (or any amount) in without thinking twice: The Vanguard S&P 500 ETF (VOO +0.82%).
Why go with an S&P 500 ETF?
The Vanguard S&P 500 ETF mirrors the S&P 500 (^GSPC +0.84%) index, which tracks the 500 largest American companies on the stock market.
The S&P 500 and the U.S. economy aren't directly tied, but the size and importance of these companies to the U.S. economy make the S&P 500 a broad representation of that economy. According to S&P Global, S&P 500 companies accounted for around 80% of the available U.S. market cap.
Image source: Getty Images.
There are multiple S&P 500 ETFs to choose from, but I prefer the Vanguard ETF because of its low 0.03% expense ratio. For perspective, the more popular SPDR S&P 500 ETF Trust has an expense ratio that's more than three times higher, at 0.0945%. The difference may seem small, but it could easily add up to hundreds or thousands of dollars over time.
Combine that low cost with instant diversification and exposure to some of the world's top blue chip stocks, and it's a trifecta worth having in your portfolio.
The S&P 500 has become tech-heavy but covers a lot of ground
This ETF is weighted by market cap, so larger companies account for more of it than smaller companies. As a result, mega-cap tech stocks ($200 billion or more) and the information technology (tech) sector as a whole make up a larger portion of the ETF than they did in previous years.
This concentration has reduced some of the ETF's diversification, but it still manages to cover ground in all 11 major sectors:
- Information Technology: 31.7% of the ETF
- Financials: 14.2%
- Consumer Discretionary: 10.7%
- Health Care: 9.6%
- Communication Services: 9.6%
- Industrials: 8.7%
- Consumer Staples: 5.9%
- Energy: 3%
- Utilities: 2.5%
- Real Estate: 2.1%
- Materials: 2%
The tech sector has easily been the best-performing over the past decade, so it has worked out in investors' favor. Still, it's something to keep an eye on as you potentially invest in other stocks or ETFs, because you don't want to become too reliant on the tech sector's success.
A $1,000 investment could go a long way over time
If we assume (with the emphasis on "assume") that this ETF continues to average 12% annual returns, here's how much a one-time $1,000 investment could grow to in different years.
| Years | Investment Value |
|---|---|
| 15 | $5,400 |
| 20 | $9,500 |
| 25 | $16,880 |
| 30 | $29,700 |
| 35 | $52,300 |
Table by author. Values rounded down to the nearest hundred and taking into account the ETF's expense ratio.
Ideally, you'd continue to make investments in the ETF to help compound your returns. Again, assuming 12% annual returns, here's how much your investment could grow to with a one-time $1,000 investment and monthly $100 investments.
| Years | Investment Value |
|---|---|
| 15 | $50,000 |
| 20 | $95,700 |
| 25 | $176,100 |
| 30 | $317,600 |
| 35 | $566,600 |
Table by author. Values rounded down to the nearest hundred and taking into account the ETF's expense ratio.
It's never wise to use past performance to predict future performance, but this shows how this ETF (and the S&P 500 in general) has historically been a great way for the average investor to build wealth over time. It's one investment that can be the staple of many people's portfolios.
