Every seasoned investor knows the Vanguard S&P 500 ETF (VOO +0.33%) tracks America's 500 largest companies, given that it tracks the benchmark S&P 500 index. What's less obvious is that owning it today means significant exposure to the artificial intelligence (AI) theme.
Thanks to the AI juggernaut, the Vanguard S&P 500 ETF has delivered a total return -- including dividends -- of 15.7% in 2025 through Oct. 21. That being said, the index isn't cheap. The S&P 500's forward price-to-earnings ratio sits around 23, above its 25-year average, and the cyclically adjusted price-to-earnings (CAPE) ratio has climbed to approximately 40.2 as of early October.
Is the Vanguard S&P 500 ETF a buy right now? Let's take a closer look at its valuation, growth vectors, and risks to find out.
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The accidental AI fund
The S&P 500 no longer resembles the balanced industrial index of decades past. Technology stocks now make up roughly one-third of the index, with recent estimates near 34% as of late 2025. Add AI-heavy names from communication services and consumer discretionary, and recent estimates show the top 10 stocks now account for approximately 40% of the benchmark -- a concentration that would make many sector-specific ETFs jealous.
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Key Data Points
That concentration isn't a flaw; it's the point. Market-cap weighting mirrors where U.S. corporations generate the bulk of their profits. Today's fund has effectively a cap-weighted AI and megacap growth tilt. Nvidia commands roughly 7.9% of the index, Microsoft approximately 6.7%, Apple about 6.6%, Amazon around 3.7%, Meta Platforms at 2.8%, and Alphabet's combined classes total approximately 4.5%.
These companies didn't reach trillion-dollar status by luck. They dominate because they control the infrastructure behind AI, cloud computing, and next-generation consumer tech. The fund delivers exposure to all of that innovation for a microscopic 0.03% expense ratio -- about $3 a year for every $10,000 invested.
By contrast, many active funds charge 10 to 20 times more and still fail to beat the index. That cost advantage, combined with automatic exposure to America's most profitable companies, is what makes the Vanguard S&P 500 ETF's simplicity so powerful.
The valuation reality
Valuations remain elevated. A forward P/E around 23 exceeds the 25-year average, and a CAPE ratio near 40.2 sits well above the historical mean of 17.3, but still below the all-time peak of 44.2 reached in December 1999.
The counterargument is that today's megacap tech giants generate cash flows and margins that justify higher valuations than traditional industrial companies. Still, premium prices demand premium patience.
A 20% to 30% drawdown at these valuations isn't just possible based on history -- it's plausible during the next recession or market panic. The question isn't whether volatility will arrive, but whether you can stomach it long enough to capture the recovery.
Is the Vanguard S&P 500 a buy?
Despite these headwinds, the Vanguard S&P 500 ETF remains compelling for specific investors. Long-term savers using dollar-cost averaging can actually benefit from volatility, accumulating shares when corrections arrive. At these multiples, dollar-cost averaging is a practical discipline that diversifies entry points while keeping costs near zero. Tax-conscious investors appreciate the ETF's structural efficiency -- minimal capital gains distributions mean you control when to realize taxes.
For those worried about valuations but wanting exposure, consider blending strategies. Worried about concentration? Pair the Vanguard S&P 500 ETF with the Invesco S&P 500 Equal Weight ETF, which charges a 0.20% expense ratio to even out weights and reduce the megacap tilt. Then add global ballast with the Vanguard Total International Stock ETF at a 0.05% expense ratio for broad ex-U.S. exposure when American multiples compress.
