When it comes to investing in the stock market for the long term, the most frictionless way to gain exposure is to buy an exchange-traded fund (ETF). The Vanguard S&P 500 ETF (NYSEMKT: VOO) is an excellent choice. Even the great Warren Buffett recommends this investment vehicle for most people.
It has an extremely low cost structure, charging an expense ratio of 0.03%. It also has a proven track record of compounding wealth. Betting on American companies has been a worthwhile endeavor.
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But don’t press the buy button just yet. History says you should know these three things before adding the Vanguard S&P 500 ETF to your portfolio in September.
Technology names have become a huge weighting
Even passive observers of the economy and markets fully understand just how dominant the technology sector has become, supported by the rise of the internet economy in recent decades. This shows up in the Vanguard S&P 500 ETF. The portfolio is representative of the U.S. economy, since it tracks the S&P 500 index.
The information technology sector accounts for 38% of the asset base, and the top 10 stocks in the ETF also make up 38% of the entire portfolio. This is one of the highest levels of concentration ever, rivaling the 1960s Nifty Fifty period, and it exceeds the dot-com era by a wide margin. In 2000, the top 10 companies represented 27% of the index, well below where we are today.
Investors who buy the Vanguard S&P 500 ETF are voting with their hard-earned savings that they’re bullish on the leading technology companies. The list includes names like Nvidia, Apple, Alphabet, Microsoft, and Amazon, a group that makes up the ETF’s top five holdings. All these businesses have tremendous exposure to artificial intelligence in unique ways, so you should be optimistic about its potential.
Recent returns have been above average
The past decade has been a boon for stock market investors. The S&P 500 index has generated a total return of 321% (as of Sept. 18). On an annualized basis, this translates to an outstanding total return of more than 15%.
From a historical perspective, though, this kind of performance is unusual. Since the S&P 500 index in its current form was created in 1957, it has posted an average annualized total return of 10%. Over a 10-year stretch, this type of gain would grow your starting capital by 159%, significantly lower than the appreciation seen in the last decade.
