The Best Vanguard ETF to Invest $500 in Right Now

Investing can often feel overwhelming due to the multitude of metrics and jargon involved, and differing opinions on individual stocks can add to the confusion. For beginners, selecting the right investment path may seem daunting.

Despite the complications, investing in stocks has consistently been one of the most effective methods for building wealth over time. A practical approach for new investors is to consider exchange-traded funds (ETFs) rather than trying to manage a portfolio of individual stocks. ETFs provide instant diversification, helping investors avoid the stress of timing their stock purchases and sales.

Vanguard is widely recognized as a strong provider of ETFs, known for its index funds and low fees. These fees can significantly impact investment returns over time, and Vanguard typically maintains some of the lowest expense ratios in the industry.

Keep it Simple

For those just starting their investing journey, a good guideline is to keep things straightforward. One of the top ETFs to consider is the Vanguard S&P 500 ETF (VOO). This ETF acts as an excellent foundational holding, suitable for investors of all experience levels. It mirrors the performance of the S&P 500 index, which comprises approximately 500 of the largest publicly traded companies in the U.S.

The Vanguard S&P 500 ETF and the index follow a market-weighted approach. This means that larger companies have a greater impact on the portfolio. This method has contributed significantly to the S&P 500's successful track record. As businesses thrive, they represent a larger share of the index, while less successful companies gradually decline or get removed.

Many investors take the opposite route, often reducing their stakes in winning stocks while continuing to invest more in underperforming ones. The S&P 500 allows for its successful companies to grow even more, providing what are known as "megawinners," which play a vital role in generating strong returns for the index. A study by J.P. Morgan revealed that in the Russell 3000 index— which tracks the 3,000 largest U.S. companies—40% faced what it termed catastrophic losses between 1980 and 2020, defined as declines of 70% or more from which they never bounced back. Additionally, two-thirds of individual stocks fell short of the Russell 3000’s performance during the same time, illustrating how much index gains often stem from a handful of outperforming stocks.

The Vanguard S&P 500 ETF showcases the long-term potential of a broadly diversified market index. As of November, the ETF has recorded an average annual return of 13.3%, resulting in a cumulative return of 249%. For instance, if you had invested $500 in the ETF a decade ago, you would have approximately $1,744 today.

Investing Near All-Time Highs

Currently, it is apparent that the market has been experiencing significant growth, which may cause some hesitance to invest in the Vanguard S&P 500 ETF at this moment.

However, research from J.P. Morgan indicates that purchasing an S&P fund on days when it reaches all-time highs has provided returns equal to or better than buying on random days. Between 1988 and 2020, those who invested in an S&P fund on record high days enjoyed an average return of 14.6% one year later, compared to 11.7% on random days. Notably, the S&P 500 has achieved new highs on around 7% of trading days since 1950, making such instances rather routine.

Moreover, the S&P is on track for its second consecutive year of returns exceeding 20%. This has happened eight times since 1950, with the market continuing to rise the following year in six instances. The average gain during those years was approximately 12%.

Historically, bull markets tend to endure for a considerable duration, averaging about 5.5 years since 1950. The current bull market marked its two-year anniversary in October, signaling that there may still be time left for growth, based on past trends.

Therefore, the Vanguard S&P 500 ETF stands out as a solid choice for new investors looking to allocate funds. It’s also a valuable asset for experienced investors, underscoring its reputation as a strong investment option.

Investing, ETFs, Vanguard