One thing I’ve learned throughout my life is that hindsight truly is 20/20. Ask anyone if they could go back in time and change a few decisions, and I’m almost certain they’d say yes. That doesn’t necessarily mean the original decision was bad, just that there was a better one to be made.
In my case, one decision I would change is where I invested my first $1,000. If I could have a redo, I’d put that $1,000 in the Vanguard S&P 500 ETF (VOO 1.56%).
What is the S&P 500?
The U.S. stock market has three main indexes: the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. Of those, the S&P 500 is hands down the most popular, largely because of the companies it tracks: the largest 500 public U.S. companies by market cap.
Unlike the 30-stock Dow Jones and tech-heavy Nasdaq Composite, the S&P 500 contains virtually all major companies from all sectors. Given the diversity and importance of the companies in this index, many investors treat it as a benchmark for the broader stock market. When someone refers to “the market,” they’re typically referring to the S&P 500.
In essence, an investment in the S&P 500 is an investment in the greater U.S. economy.
An investment in the S&P 500 could’ve saved me a lot of time
Looking back, I wish I had invested my first $1,000 in the Vanguard S&P 500 ETF because it’s essentially a one-stop shop for investors.
First, it provides instant diversification. While it doesn’t include small-cap or mid-cap stocks, the amount of ground it covers with large-cap stocks is extensive. Here’s how the ETF’s holdings are broken down by sector:
- Communication services: 8.90%
- Consumer discretionary: 10.70%
- Consumer staples: 6.60%
- Energy: 4.70%
- Financials: 12.70%
- Health care: 13.40%
- Industrials: 8.30%
- Information technology: 27.50%
- Materials: 2.40%
- Real estate: 2.40%
- Utilities: 2.40%
Rising tech valuations have caused the information technology sector to account for more of the fund than usual, but you can see a broad swath of industries are still represented in the holdings.
I knew diversification was important when I first began investing, but I tried achieving it by investing in many individual stocks. As an average investor who didn’t spend lots of time researching each company to really understand if an investment made sense, this wasn’t the most effective approach. Looking back, I could’ve made a single investment and had exposure to some of the greatest companies in the world.
The low cost shouldn’t be overlooked
One aspect of ETFs I also overlooked when I first began investing is their cost. The expense ratio is the percentage of your total investment in an ETF that fund managers collect annually. Although expense ratios may seem small on paper, the total cost can add up significantly with a long-term investment. The difference between tenths of a percent may not stand out, but it will matter over time.
For perspective, let’s imagine we have the Vanguard S&P 500 ETF, which has a 0.03% expense ratio, and another ETF with a 0.50% expense ratio. Here’s how the differences in total fees would roughly stack up if you invested $500 monthly into each ETF over 15 years with 8% average annual returns.
| Expense Ratio | Amount After 15 Years | Amount Paid in Fees |
|---|---|---|
| 0.03% | $162,533 | $380 |
| 0.50% | $156,710 | $6,203 |
Data source: Author calculations. Values rounded to the nearest hundred.
In this case, that difference of less than half a percent accounted for an extra $5,823 in fees, and that number only increases with time.
It’s hard to argue against the historical results
Diversification and low cost aside, I’d choose an S&P 500 ETF because its strong track record is undeniable. Over the long run, the S&P 500 has returned around 10% annually, enough to build substantial wealth. To add to our above example, $500 monthly investments averaging 10% annual returns over 25 years would add up to over $590,000 (excluding fees).
Past results don’t guarantee future performance, but the long-term trajectory of the S&P 500 is something investors can have confidence in.
Of course, many individual companies will prove to have much better returns than the S&P 500, but remember, hindsight is 20/20. Just as there are companies that outperform the index, there are many that underperform it too. The S&P 500 provides a great risk-reward balance that’s hard to beat as a new investor.
