The Smartest Vanguard ETF to Buy With $500 Right Now

Investing can be complicated. There are many metrics and terms to learn, and opinions on individual stocks can vary. For newcomers, figuring out where to start can be challenging.

Nonetheless, stock investing is one of the most effective ways to build wealth over time. Rather than attempting to create a portfolio of individual stocks, a practical approach for novice investors is to buy an exchange-traded fund (ETF). ETFs provide immediate diversification, taking the worry out of deciding when to buy or sell individual stocks.

When searching for appealing ETFs, Vanguard is a top choice. Known for its index funds and low fees, Vanguard provides investors with cost-effective options. Low fees are important for long-term investment success, and Vanguard consistently offers some of the lowest expense ratios.

Keep It Simple

For beginners, sticking to simplicity is advisable. One of the best ETFs for new investors is the Vanguard S&P 500 ETF (VOO). This ETF serves as an excellent core holding for investors of any experience level. It tracks the S&P 500, which comprises approximately 500 of the largest U.S. companies.

Both the index and the ETF are market-weighted, meaning that larger companies have a greater impact on the portfolio's performance. This feature has contributed to the S&P 500's robust performance over the years. Successful companies continue to grow and represent a larger share of the index, while struggling companies gradually decrease their influence or are removed.

This is a different strategy than what many investors follow, as they often reduce their stakes in successful stocks and increase holdings in underperforming ones. In contrast, the S&P 500 allows top-performing stocks to grow, which drives the index's strong returns. A J.P. Morgan study highlighted how challenging it can be to select individual stocks; it found that 40% of stocks in the Russell 3000, representing the 3,000 largest U.S. companies, experienced catastrophic losses (defined as a decline of 70% or more) between 1980 and 2020. Additionally, two-thirds of individual stocks underperformed the Russell 3000 during that period, indicating that the overall gains can be attributed to a few significant outperformers.

The Vanguard S&P 500 ETF's long-term success is evident in its average annual return of 13.3% as of the end of November, with a cumulative return of 249%. This means an investment of $500 in the ETF ten years ago would now be worth approximately $1,744.

Investing Near All-Time Highs

Many investors may hesitate to invest in the Vanguard S&P 500 ETF given that the market has been performing well. However, research from J.P. Morgan suggests that investing in an S&P fund on days when it reaches all-time highs yields returns as good as or better than investing on any random day. According to their findings, from 1988 to 2020, investing in an S&P fund on days when it hit an all-time high produced a one-year return of 14.6%, compared to 11.7% on random days. Notably, since 1950, the S&P 500 has reached new highs on about 7% of all trading days, making this a common occurrence.

Furthermore, the S&P 500 is poised for its second consecutive year of returning 20% or more. This has only happened eight times since 1950, and in six of those instances, the market rose the following year, with an average return of 12% during those years.

Considering that bull markets can endure for an extended period—averaging around 5.5 years since 1950—and with the current bull market recently marking its two-year anniversary in October, there is potential for continued growth.

For new investors seeking a solid investment opportunity, the Vanguard S&P 500 ETF is an excellent choice. Seasoned investors will also find it a valuable addition to their portfolios, and I have personally invested in the ETF recently.

JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

investing, ETF, Vanguard