Vanguard is one of the most reputable firms on Wall Street. The large asset management company, founded in 1975, had $10 trillion in assets under management as of year-end 2024. It has many different products, including exchange-traded funds (ETFs) that offer investors numerous options at very low costs to gain exposure to the stock market.
If you're looking to invest $1,000, there are many ETFs to choose from. Here's what I believe is the smartest one to buy.
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Putting money behind the S&P 500
The smartest Vanguard ETF investors should pick is the Vanguard S&P 500 ETF (VOO 1.24%). It has $1.5 trillion in total assets, indicating just how massive it is and how much capital it has attracted. It tracks the performance of the S&P 500 index, which contains 500 of the largest public companies in the U.S.
The S&P 500 is the most closely followed benchmark for investors to assess how the overall stock market is performing domestically. All sectors of the economy are represented. Essentially, buying the Vanguard S&P 500 ETF means that investors are optimistic about ongoing inventiveness and growth of the U.S. economy. That's probably a smart point of view to have.
Although there are hundreds of stocks in the ETF, investors must be aware of the concentration. The information technology sector has the highest weighting, at 36.1%. Dominant companies like Nvidia, Apple, Microsoft, and Amazon combined make up 26% of the entire ETF.
Nonetheless, investors gain by not having to spend time researching individual businesses, listening to earnings calls, or analyzing financial statements in an effort to pick winning stocks. Diversification is the benefit of owning the Vanguard S&P 500 ETF. And it's a hassle-free strategy to manage your money, freeing up time for other activities. This is an often-overlooked characteristic of going the passive route.
This ETF's performance speaks for itself
Knowing what you own should be a top priority for investors. It's also important to be aware of historical performance. In the past decade, the Vanguard S&P 500 ETF has generated a total return of 296% (as of Dec. 10). This would have turned a starting $1,000 investment into nearly $4,000 today. It's difficult to argue with such a stellar result.
Even better, investors aren't losing an arm and a leg to achieve this type of performance. The Vanguard S&P 500 ETF carries an ultra-low expense ratio of 0.03%. For every $1,000 invested, only $0.30 gets paid to Vanguard, which covers its operating expenses.
This compares quite favorably to many actively managed funds. They usually charge fees, whether management, performance, or both, that end up being significantly higher than what the Vanguard S&P 500 ETF charges. However, the managers of these active funds have a poor track record, with an alarmingly large percentage of them underperforming the S&P 500 over long-term time horizons.
NYSEMKT: VOO
Key Data Points
It's important to set the right expectations
Over its entire history, the S&P 500 has generated an annualized return of about 10%. So, what we've seen in the past decade is above this long-term trend. The bears today argue that the index's return going forward will be disappointing, especially since the S&P 500's CAPE ratio is at 39.4, one of its highest levels ever.
That argument makes sense, as higher starting valuations can certainly be a hindrance to achieving adequate returns. But it's been a concern for a very long time now, yet the market continues to march higher. This perspective might lead investors to want to wait for a meaningful pullback before buying the Vanguard S&P 500 ETF. This would be a mistake, in my view, as timing the market is a losing game. Investors are better off putting their money to work early on and letting compounding work its magic over time.
