Key Points
The S&P 500 has delivered an average annual return of more than 10% since its inception in 1957. Yet nearly 90% of all hedge funds underperformed the S&P 500 over the past ten years, according to SPIVA Scorecards, making it seem smarter to simply invest in the entire index.
That’s why John Bogle, the founder of the Vanguard Group, famously told investors: “Don’t look for the needle in the haystack. Just buy the haystack.” To accomplish that, Vanguard launched the first index fund, the Vanguard S&P 500 Index Fund (NASDAQMUTFUND: VFINX), in 1976. In 2000, it launched the exchange-traded fund (ETF) version — the Vanguard S&P 500 ETF (NYSEMKT: VOO) — which could be actively traded throughout the day.
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Instead of actively buying and selling stocks, those funds passively track the 500 largest U.S. companies. Since that index is rebalanced quarterly, weaker companies drop out as stronger ones are added. That’s why it’s difficult for actively managed funds to consistently beat the S&P 500 over the long term. So is VOO the smartest investment you can make today?
How does the Vanguard S&P 500 ETF (VOO) work?
The Vanguard S&P 500 ETF requires a minimum investment of $1 and charges a low expense ratio of 0.03%. By comparison, the typical mutual fund requires an average investment of $2,500, while hedge funds can require upfront investments of over $1 million. Actively managed mutual funds charge annual expense ratios of about 1%, while hedge funds charge 1%-2% annual expenses plus “performance fees” (a share of the fund’s total profits).
Since the S&P 500 beats most of those funds over the long term, it seems like a huge waste of money to pay those annual expenses and performance fees. By investing in the entire S&P 500, you get instant exposure to top stocks like Nvidia (NASDAQ: NVDA) (7.8% of its holdings), Apple (NASDAQ: AAPL) (6.5%), and Microsoft (NASDAQ: MSFT) (5.4%).
However, those top-tier Magnificent Seven stocks have also driven most of the S&P 500’s growth in recent years. The index itself is also historically expensive at 29 times earnings, so investors shouldn’t be too surprised if the market swoons over the next few months.
That said, short-term investors shouldn’t expect too much from VOO. But if you’re looking for something to buy, hold, and forget for the next few decades, VOO checks all the right boxes.
Should you buy stock in Vanguard S&P 500 ETF right now?
Before you buy stock in Vanguard S&P 500 ETF, consider this:
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Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF and is short shares of Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
