When investors think about passive investment strategies, particularly those related to exchange-traded funds (ETFs), Vanguard is likely the first company that comes to mind. This huge investment management firm had $11 trillion in assets under management as of July 31. It was founded 50 years ago in 1975, showcasing its long history of taking care of clients.
Vanguard currently offers hundreds of different investment vehicles for people to choose from. Among the sea of choices, here's what I believe is the smartest Vanguard ETF to buy with $500 right now.
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It's a good idea to bet on the U.S. economy
With $30 trillion in gross domestic product (GDP), the U.S. economy dominates on a global level. This has been the case for decades, and it could be the case for decades to come. It makes sense that investors might want to allocate capital with this in mind.
The Vanguard S&P 500 ETF (VOO +0.83%) is a smart choice. This popular ETF tracks the performance of the S&P 500, which includes the performance of 500 large and profitable businesses that have a significant U.S. presence. It's hard not to be bullish from a long-term perspective on American entrepreneurship, innovation, and ingenuity. This ETF will provide the right exposure.
Investors immediately get access to all sectors of the economy. It shouldn't be a surprise that information technology represents 35% of the Vanguard S&P 500 ETF. The monster success of companies like Nvidia, Microsoft, and Apple, the most valuable enterprises on earth, has resulted in them having a higher weighting. Recent trends suggest that advancements in areas like artificial intelligence and cloud computing will keep these companies at the top.
Investors in the Vanguard S&P 500 ETF will see their portfolios affected by these powerful technological trends. The good news is that you can skip trying to pick single winners, which can be a difficult task for those who aren't familiar with properly researching stocks.
On the other end of the spectrum in the Vanguard S&P 500 ETF, there are smaller weightings from sectors like materials and real estate. While these might not have huge growth potential, they are still vital to our overall economy.
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Key Data Points
What kind of return can investors expect?
Over the long term, the S&P 500 has averaged an annualized total return of about 10%, a figure that includes dividends. But in the past decade, investors have been rewarded with even better gains. Since October 2015, the closely watched benchmark has generated a total return of 290% (as of Oct. 20), translating to a stellar yearly gain of 14.6%. This means roughly a doubling of your capital every five years, which is a fantastic outcome.
These days, the S&P 500 is at a historically expensive level, based on the CAPE ratio. This supports the bearish perspective that returns will likely revert somewhere closer to their 10% long-term mean, or perhaps even come down much further than that in the years and decades ahead. If valuation is the only factor that's being considered, then this view makes sense.
However, I think investors should be more optimistic. It seems that the bears have been saying for a long time that the market is expensive. Even so, the S&P 500 has performed very well in the past five- and 10-year periods. Powerful broad tailwinds, like solid economic growth, historically low interest rates, the rise of booming tech enterprises, and more capital flowing to passive investments, can all keep lifting asset prices higher.
Taking $500 of your hard-earned savings and using it to buy the Vanguard S&P 500 ETF is a smart move. It's also worth mentioning that this ETF charges a very low expense ratio of 0.03%. Only $0.15 of that $500 investment will go to paying Vanguard. This allows investors to keep more of their money.
