Thanks to its heavy concentration in tech and the "Magnificent Seven" stocks, the S&P 500 has become a quality growth engine for investors. With the artificial intelligence (AI) boom still in the early innings and the long-term potential huge, it's not unreasonable to think that the S&P 500 could be a growth leader for years to come.
That's what makes the Vanguard S&P 500 ETF (VOO +0.01%) such a solid choice right now. Investors get the outsize growth and tech exposure. They still maintain exposure to the rest of the U.S. economy in case market leadership shifts along the way. And with an expense ratio of just 0.03%, it costs next to nothing to own.
When it comes to risk-adjusted return potential, few options hold up as well as this Vanguard ETF.
Image source: Getty Images.
Why the Vanguard S&P 500 ETF works so well for investors
As a quick refresher, the Vanguard S&P 500 ETF owns 500 of the largest U.S. companies and weights them by market cap. The biggest holdings are Nvidia, Apple, Microsoft, Amazon, and Broadcom. All are companies with big exposure and big investment in the AI trade.
While that heavy concentration at the top is some cause for concern, it also gives shareholders easy access to the most innovative and influential businesses in the world. These are companies that have committed tens, if not hundreds, of billions of dollars into artificial intelligence development. We've seen solid early returns from these investments, but the lion's share of its return on investment (ROI) may not come for years. That means there's plenty of explosive growth potential left in these companies and, by extension, the S&P 500.
Because of its market cap weighting methodology, the S&P 500 is also a self-working momentum trade. As stocks outperform, their weight in the S&P 500 becomes larger and vice versa. The more successful companies earn greater influence in the index, helping to keep investors' portfolios in line with what's working.
NYSEMKT: VOO
Key Data Points
The S&P 500 is more than just the Magnificent Seven
While tech stocks have gotten most of the attention over the past few years, it's important to remember that the S&P 500 is much more than just a narrow group of stocks.
Outside of tech, the next largest sector holdings for the Vanguard S&P 500 ETF are financials (13%), communication services (10.7%), consumer discretionary (10.4%), healthcare (9.8%), and industrials (8%). That's an incredibly diverse cross-section of the U.S. economy that covers growth sectors, economically sensitive areas of the economy, and defensive themes.
That's important as the U.S. stock market shows signs of broadening and tech begins to step back. Funds, such as the Vanguard Information Technology ETF (VGT +0.11%) or the Invesco QQQ Trust (QQQ 0.01%), are either mostly or entirely invested in tech stocks. Therefore, they'd be heavily exposed to any kind of slowdown or valuation contraction in that area of the market.
The Vanguard S&P 500 ETF is more spread out. If there's an economic acceleration, that tends to benefit cyclicals, such as financials and industrials, a little more. If the economy slows, you've got defensive stalwarts, such as healthcare and consumer staples, to provide a cushion. Plus, the presence of mid-caps in the bottom half of the index provides a strong measure of long-term growth potential whenever the market finally rotates away from megacaps.
You don't have to pick and choose winners. The sector diversity helps to smooth out the ride.
VOO is a proven winner
The Vanguard S&P 500 ETF is obviously not immune to downside risk, but there are benefits to its current construction. It's got the tech overweight to access many of the biggest winners so far in the AI boom. The index is still supported by strong fundamentals and a growing economy. And it's got ample exposure elsewhere should conditions change.
All of that adds up to a strong long-term ETF that's built for almost any portfolio.
