3 Reasons the Vanguard S&P 500 ETF Could Be Your Best Investment Right Now

Most investors hope to outperform the S&P 500 over the long run. But according to SPIVA Scorecards, a whopping 89.5% of all professionally managed funds actually underperformed the benchmark index over the past 10 years. That’s why Vanguard’s founder, John Bogle, who launched the first public index fund for simply tracking the S&P 500 in 1976, thought it was smarter to match the market instead of trying to beat it.

The S&P 500 has generated an average annual return of about 10% since its inception in 1957. A $10,000 investment in the original Vanguard S&P 500 Index Fund (VFIAX -0.63%) with reinvested dividends would be worth $2.23 million today. But like other mutual funds, that index fund could only be bought or sold once a day.

In 2010, Vanguard launched the exchange-traded fund (ETF) version, which could be actively traded like a stock throughout the day. A $10,000 investment in that Vanguard S&P 500 ETF (VOO 0.60%) on its first day with reinvested dividends would be worth $79,400 today.

Therefore, it makes a lot of sense to simply buy VOO, set its dividends to be reinvested, and forget about it as other investors try to time and beat the market. But even after its latest tariff-induced pullback, the S&P 500 is still hovering near its record highs and looks historically expensive at 31 times earnings — so it might not seem like the best time to start a new position in VOO.

Yet I think it’s still one of the smartest long-term investments for three simple reasons.

1. Instant diversification

The S&P 500 includes the 500 largest U.S. companies. Its top stocks are Nvidia (7.95% of the fund’s holdings), Microsoft (6.73%), Apple (6.60%), and Amazon (3.72%). Information technology stocks account for 34.8% of the index’s holdings, while financial, consumer discretionary, and communication services stocks also hold double-digit percentages.

In other words, VOO gives its investors instant exposure to all of the top U.S. stocks that have a median market cap of $403.2 billion. That diversification makes it a great one-stop solution for investors who are too busy to track and analyze individual stocks.

2. Low fees

VOO is passively managed, which means it automatically tracks the S&P 500’s holdings without an active fund manager. That’s why it only charges a tiny expense ratio of 0.03%, which means you’re only paying $0.30 annually for every $1,000 invested in the ETF.

According to Vanguard, similar ETFs charge a higher average expense ratio of 0.74%. Meanwhile, the average hedge fund — which often struggles to outperform the S&P 500 over the long run — charges an expense ratio of 1.5% while charging a 20% “performance fee” on investors’ total profits.

3. Dollar cost averaging will smooth out your returns

In the 68 years since its inception, the S&P 500 has weathered 10 U.S. recessions. It’s bounced back every time and soared to new heights. That’s because the S&P 500 is rebalanced four times each year to add stronger stocks and shed its weaker ones. Therefore, the index should keep rising as the U.S. economy keeps growing.

If you’re reluctant to start a new position in VOO as the S&P 500 trades at historically high valuations, then you can spread out your investment over several years to smooth out your returns with dollar-cost averaging. So, instead of investing $10,000 in one lump sum, you can break it up into 10 annual investments of $1,000 over the next 10 years.

By committing a fixed amount to the ETF every year, you’ll buy more shares when its price is lower and fewer shares when its price is higher. That disciplined approach will keep you invested while reducing its long-term volatility. So if you want to get invested today but don’t know where to begin, the Vanguard S&P 500 ETF is still a great place to start.