3 Causes the Vanguard S&P 500 ETF Might Be Your Greatest Funding Proper Now

Most buyers hope to outperform the S&P 500 over the long term. However in keeping with SPIVA Scorecards, a whopping 89.5% of all professionally managed funds really underperformed the benchmark index over the previous 10 years. That is why Vanguard’s founder, John Bogle, who launched the primary public index fund for merely monitoring the S&P 500 in 1976, thought it was smarter to match the market as an alternative of making an attempt to beat it.

The S&P 500 has generated a mean annual return of about 10% since its inception in 1957. A $10,000 funding within the authentic Vanguard S&P 500 Index Fund (VFIAX -0.63%) with reinvested dividends could be value $2.23 million as we speak. However like different mutual funds, that index fund might solely be purchased or bought as soon as a day.

In 2010, Vanguard launched the exchange-traded fund (ETF) model, which may very well be actively traded like a inventory all through the day. A $10,000 funding in that Vanguard S&P 500 ETF (VOO 0.60%) on its first day with reinvested dividends could be value $79,400 as we speak.

Due to this fact, it makes quite a lot of sense to easily purchase VOO, set its dividends to be reinvested, and overlook about it as different buyers attempt to time and beat the market. However even after its newest tariff-induced pullback, the S&P 500 remains to be hovering close to its report highs and appears traditionally costly at 31 instances earnings — so it may not look like the perfect time to start out a brand new place in VOO.

But I feel it is nonetheless one of many smartest long-term investments for 3 easy causes.

1. Prompt diversification

The S&P 500 contains the five hundred largest U.S. firms. Its prime shares are Nvidia (7.95% of the fund’s holdings), Microsoft (6.73%), Apple (6.60%), and Amazon (3.72%). Data know-how shares account for 34.8% of the index’s holdings, whereas monetary, client discretionary, and communication providers shares additionally maintain double-digit percentages.

In different phrases, VOO offers its buyers immediate publicity to the entire prime U.S. shares which have a median market cap of $403.2 billion. That diversification makes it an amazing one-stop resolution for buyers who’re too busy to trace and analyze particular person shares.

2. Low charges

VOO is passively managed, which implies it mechanically tracks the S&P 500’s holdings with out an energetic fund supervisor. That is why it solely costs a tiny expense ratio of 0.03%, which implies you are solely paying $0.30 yearly for each $1,000 invested within the ETF.

In line with Vanguard, related ETFs cost a better common expense ratio of 0.74%. In the meantime, the typical hedge fund — which regularly struggles to outperform the S&P 500 over the long term — costs an expense ratio of 1.5% whereas charging a 20% “efficiency charge” on buyers’ complete earnings.

3. Greenback value averaging will clean out your returns

Within the 68 years since its inception, the S&P 500 has weathered 10 U.S. recessions. It is bounced again each time and soared to new heights. That is as a result of the S&P 500 is rebalanced 4 instances every year so as to add stronger shares and shed its weaker ones. Due to this fact, the index ought to preserve rising because the U.S. economic system retains rising.

When you’re reluctant to start out a brand new place in VOO because the S&P 500 trades at traditionally excessive valuations, then you may unfold out your funding over a number of years to clean out your returns with dollar-cost averaging. So, as an alternative of investing $10,000 in a single lump sum, you may break it up into 10 annual investments of $1,000 over the following 10 years.

By committing a set quantity to the ETF yearly, you will purchase extra shares when its value is decrease and fewer shares when its value is larger. That disciplined strategy will preserve you invested whereas decreasing its long-term volatility. So if you wish to get invested as we speak however do not know the place to start, the Vanguard S&P 500 ETF remains to be an amazing place to start out.

Leo Solar has positions in Amazon and Apple. The Motley Idiot has positions in and recommends Amazon, Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Idiot recommends the next choices: lengthy January 2026 $395 calls on Microsoft and quick January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure coverage.