One of the best things to happen to stock investing, in my opinion, is the creation of exchange-traded funds (ETFs). Investing experts have long preached the importance of diversification. But before ETFs arrived on the scene, this would generally involve purchasing dozens of individual stocks, which could be time-consuming and discouraging.
Thanks to ETFs, this is no longer the case, and you can invest in dozens, hundreds, or even thousands of companies with a single purchase. This gives you a chance to easily achieve diversification. If you have $500 available to invest, one ETF can be the complete package: the Vanguard S&P 500 ETF (VOO 0.15%). It provides both growth opportunities and dividend income.
As close to a one-stop shop as you'll find
Much of the appeal of the Vanguard S&P 500 ETF is the fund's diversification. There are 11 major sectors in the U.S. stock market, and the Vanguard S&P 500 ETF contains companies from each one:
- Communication services: 9.1%
- Consumer discretionary: 10.3%
- Consumer staples: 6.2%
- Energy: 4.1%
- Financials: 13.1%
- Health care: 12.3%
- Industrials: 8.8%
- Information technology: 29.2%
- Materials: 2.4%
- Real estate: 2.2%
- Utilities: 2.3%
Perhaps more important than simply containing companies from all sectors is that the Vanguard S&P 500 ETF includes industry-leading companies from each sector. The S&P 500 tracks the largest 500 public companies in the U.S., so shares of the ETF provide exposure to some of the most influential across a variety of industries.
The importance and range of companies in the S&P 500 make an investment in an S&P 500 ETF akin to one in the U.S. economy. While there are no sure things, the U.S. economy has always been a solid choice for long-term investors.
An encouraging history of good long-term results
One of the golden rules in investing is not to make assumptions about future performance based on past performance. However, past performance can provide insight into a fund's potential. The Vanguard S&P 500 ETF (like the S&P 500 index in general) has a strong track record of providing good returns over the long haul.
Here's how the ETF has performed since its September 2010 inception. A one-time $500 investment at the ETF's inception would be worth over $3,100 today, accounting for dividends. That's not to say it will achieve exactly the same performance going forward, but a diversified fund like the Vanguard S&P 500 ETF has all the attributes it needs to provide long-term value.
Don't overlook the low fees of the ETF
It's one thing to have good returns, but it's also important that you keep as much of those returns to yourself as possible instead of paying them out in fees. The Vanguard S&P 500 ETF has one of the lowest expense ratios on the stock market.
With the Vanguard S&P 500 ETF's expense ratio of 0.03%, you'll only pay $0.15 per $500 invested. Compared to other ETFs (including S&P 500 ETFs), the Vanguard S&P 500 ETF provides a cost-effective way to cover lots of ground in the stock market.
Don't give too much weight to the ETF's current pricing
After a rewarding year thus far, the Vanguard S&P 500 ETF is flirting with its all-time high pricing. That's great news for current shareholders, but might be intimidating if you're looking to start a stake in the ETF. If you find yourself in that position and waiting for the "right" time to invest, remember: Trying to time the stock market is often counterproductive, because nobody can predict how it will move.
One approach could be using dollar-cost averaging to invest your $500. Instead of putting in $500 at once and risking a drop soon after, you could break down your $500 into increments -- $125 weekly over a month, $250 every other week, or whatever you prefer.
Dollar-cost averaging helps you avoid the temptation of trying to time the market. Instead, it encourages you to begin investing, which can sometimes be the hardest part.
