Key insights
- The article highlights concentration risks within the Vanguard S&P 500 ETF (VOO), particularly its heavy reliance on the 'Magnificent Seven' and the technology sector. While acknowledging historical long-term returns of the S&P 500, it cautions investors about the potential impact of a tech rally pause and the importance of staying invested to realize those returns. The concentration risk poses a slight bearish signal.
The Vanguard S&P 500 ETF (VOO 0.41%) is the largest exchange-traded fund (ETF) in the world, managing more than $910 million. At its recent pace of net inflows, it's possible that it could hit the $1 trillion mark within the next year. It has also helped millions of investors grow their portfolios through its exposure to the biggest companies in the United States.
Most people are already somewhat familiar with the S&P 500, but that doesn't mean you should just throw your money at it. As is the case with any investment, you should know what you're buying and understand the factors that could affect it.
I touched on the Magnificent Seven stock exposure above, but the concentration issue doesn't stop there. The fund's top 20 holdings account for nearly half of the portfolio. Tech is one-third of the index. Communication services is 10% of the S&P 500, but almost all of that comes from just Meta and Alphabet.
That concentration means a lot of the index is being influenced by just a handful of stocks and sectors. That could become a problem if you believe the tech rally of the past few years is due for a pause.
Many investors focus too much on short-term volatility and neglect the long-term upside potential of U.S. stocks. Over the past 100 years, the S&P 500 has had to deal with the Great Depression, the stagflation of the '70s, Black Monday in 1987, the tech bubble, the financial crisis, and the COVID-19 pandemic. Through all of this, the index is still at all-time highs and has delivered an average annual return of roughly 10% over the past century.
Short-term volatility is part of the price of admission when investing in equities. The stock market is still the greatest long-term wealth creation tool available to investors.
Here's the one factor that may affect your portfolio's long-term performance more than any market volatility event. That 10% average annual return figure I mentioned earlier? It's dependent on you staying invested throughout. If you buy or sell at any point along the way, your returns could be drastically different.
For most investors, that's a huge negative. When volatility increases and stocks start going down, many folks decide to sell. What they usually end up doing is selling low, buying high when they eventually decide to get back in, and missing out on any post-dip rally. That can be a big source of returns that investors are missing out on if they try to time the market.
Bottom line: Assuming that your timeframe and goals are unchanged, buy-and-hold is the way to go.
While the Vanguard S&P 500 ETF is a great stand-alone fund, it's not complete. Among the things it's not invested in:
You may not necessarily want or need all those asset classes in your portfolio, but it's probably advisable to have some of them. For all its long-term success, the S&P 500 is just a segment of the market. It's not the entire market, and it should be treated as such.
None of this is meant to take away from the Vanguard S&P 500 ETF as a fantastic investment option for most investors. But it's always wise to know the positives and negatives of everything you own.