Putting money to work in the stock market is a smart choice for your financial future. Investors who think they need to start that journey with huge sums of capital are mistaken, though. Even investing a relatively small amount of money to start can put you on a path toward building wealth.
And there are a lot of ways to gain exposure to large swaths of the market, even with a limited bankroll, thanks to investment vehicles like exchange-traded funds. The Vanguard S&P 500 ETF (VOO +0.55%) is a particularly good choice. An investment of $1,000 in this ETF today could easily grow into a holding worth nearly $2,100 by 2030.
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Broad diversification at a low cost
The Vanguard S&P 500 ETF passively tracks the S&P 500 index. In other words, it owns a portfolio that includes shares of all of the index's components -- 500 of the largest companies trading on U.S. stock exchanges.
The beauty of buying this ETF is that it requires almost no effort on the part of investors. It gives them broad diversification in one easy package. There is no need to spend time poring over financial statements, listening to earnings calls, or trying to pick individual stocks. Investing in those 500 companies as a group is essentially a bet on the development and inventiveness of the American economy.
There are lots of active fund managers out there who charge their clients exorbitant fees for their expertise. Even so, the funds managed by most of these professionals underperform the broad market most of the time. In contrast, the fees charged by the Vanguard S&P 500 ETF are extremely low. Investors pay a tiny expense ratio of just 0.03% annually. So more of your money stays your money.
What the future might hold
Over the past five years, the Vanguard S&P 500 ETF has generated a total return of 106% (as of June 23). This would have turned a $1,000 investment made in late June 2020 into almost $2,100 today. Assuming the same rate of return happens between now and June 2030, investors would end up with the same result, which would be a great outcome. That return was much higher than the historical 10% annualized average of the S&P 500.
It's important to remember that the future is hard to predict. Investors should consider both the bear and bull cases for how the Vanguard S&P 500 ETF could perform.
The market, and thus the ETF, could certainly produce lower returns over the next five years than it did in the last five. One key argument supporting that bearish view is the market's valuation.
One popular metric that investors use to gauge the state of the market is the cyclically adjusted price-to-earnings ratio, aka, the CAPE ratio. As of June 23, it sat at 36.1, well above its trailing 20-year average. In fact, the CAPE ratio has only been higher at the start of this year, during the bull run in 2021, and during the dot-com bubble at the turn of the century.
Data shows that there is a strong inverse correlation between the starting CAPE ratio and the S&P 500's returns over the next 20 years. A higher CAPE ratio presages lower stock gains. That suggests some pessimism is warranted.
But there are also reasons to be bullish. Powerful trends such as the massive capital inflows into passive investing vehicles like the Vanguard S&P 500 ETF, the rise of dominant tech enterprises, ongoing economic growth, and central banks' accommodative fiscal and monetary policies have all contributed to the S&P 500's ascent. I believe these trends will continue indefinitely.
Also, many investors have been concerned about high stock valuations for a decade or more, yet the market has continued to march higher. Therefore, I tend to be on the optimistic side of the fence. I think there is a good chance that the Vanguard S&P 500 ETF's returns throughout the rest of this decade will resemble those of the past five years.
