When it comes to the stock market, one clear benchmark gets most of the attention. That makes sense, given that it represents about 80% of the entire value of U.S. equities.
I'm talking about the S&P 500 index. It has historically been a superb tool to build wealth. And investors can gain exposure through exchange-traded funds (ETF).
Here's the best one to buy with $500 right now.
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Concentrated diversification
As the name suggests, the S&P 500 contains 500 or so large and profitable companies that trade on U.S. stock exchanges. Buying the Vanguard S&P 500 ETF (VOO 1.19%), which currently has $1.5 trillion in assets under management, is a smart way to get access. Investors are basically putting their money behind the belief that the American economy will continue growing in the future.
All sectors are represented. At one end of the spectrum, there are materials and real estate, which account for a tiny share of the portfolio.
On the other side, there's the information technology sector. Companies that operate in related industries have generally registered strong growth in the past decade. Technology is clearly a significant contributor to the U.S. economy these days.
It should come as no surprise that the "Magnificent Seven" stocks make up 35% of the Vanguard S&P 500 ETF combined. There might be hundreds of businesses in this investment vehicle, but there is heavy concentration at the top. That setup isn't necessarily a bad thing. It's just critical that investors take the time to understand what they own. You should be bullish on tech-driven trends, such as artificial intelligence, if you buy this ETF.
NYSEMKT: VOO
Key Data Points
The best investors think in terms of decades
Owning the Vanguard S&P 500 ETF is a hassle-free approach. What's more, the low expense ratio of 0.03% makes for an extremely compelling proposition. Investors will keep more of their money over time.
Performance is another area of focus. In the past decade, this ETF has generated a total return of 343% (as of Feb. 9). This gain would've turned a starting $10,000 into more than $44,000 today. This is much better than the S&P 500's long-term historical average of 10%.
It's impossible to predict what the future will bring. The bears will point to the stock market's expensive valuation as a signal that returns going forward won't resemble the recent past.
There are also bulls who believe the good times will continue. Instead of trying to take a stance, investors should focus on allocating capital with a time horizon that spans decades. The market should reward these folks.
