The Vanguard S&P 500 ETF (NYSEMKT: VOO) is often touted as one of the best money-making investments you can make, especially for investors who lack the time for, or interest in, picking their own stocks. But if you're investing your savings here thinking it's going to offer you market-beating returns, you could be disappointed.
This exchange-traded fund (ETF) is never going to beat the market because it wasn't designed to. It's an index fund, meant to mimic the performance of an index — in this case, the S&P 500. But that doesn't mean it can't still make you a fortune.
Index funds can still make you rich
Index funds are composed of the same stocks as the index they track. The S&P 500 contains the 500 largest companies in the U.S., so S&P 500 index funds contain stocks in those 500 companies. The idea is that when the companies in the index do well, everyone invested in funds tracking that index will also make money.
Over the past 30 years, the S&P 500 index has had a compound average growth rate of almost 11%. S&P 500 index funds may not deliver identical returns to the index itself, but they'll come pretty close. And that can still make you a lot of money. If you invested $10,000 in the Vanguard S&P 500 ETF at the start of 2011, your balance would have grown to nearly $41,000 by the end of April 2021.
Another great thing about the Vanguard S&P 500 ETF is that its expense ratio is only 0.03%. Expense ratios are annual fees you pay the fund managers. Because there's so little work involved in maintaining an index fund that sees low turnover, it's cheap to own. For every $1,000 you invest in the Vanguard S&P 500 ETF, you only pay $0.30.
That's quite a bit cheaper than what some actively managed mutual funds and ETFs charge. Actively managed funds contain stocks chosen by investors who are trying to beat the market. When they're successful, actively managed funds can provide better returns than index funds. But they're usually not successful.
In 2008, Warren Buffett put up a challenge for the hedge fund industry, offering $1 million to any hedge fund that believed it could best an S&P 500 index fund over 10 years. Protégé Partners, LLC took up the challenge — and lost by a mile.
Part of the issue is that actively managed funds' high fees eat into their profits. So in order to be a better investment than index funds, actively managed funds can't just beat the market. They have to beat it by a large enough margin that investors still earn a better return even after the fund fees are taken out. It's difficult to do, which is why index funds are usually the safer bet for most people.
Is the Vanguard S&P 500 ETF right for you?
Only you can decide if the Vanguard S&P 500 ETF is a good fit for your portfolio, but if you're interested in an investment you can set and forget, S&P 500 index funds are one of your best options. The diversification they provide, along with their strong performance over time and their low fees, make them well suited to beginning and experienced investors alike.
The Vanguard S&P 500 ETF isn't the only fund that tracks the S&P 500 index, though it is one of the most popular. But if you're unsure if it's the right one for you, compare it with a few other options, like the iShares Core S&P 500 ETF or the SPDR S&P 500 ETF Trust. They're all pretty similar, but there are some minor distinctions, like expense ratios, that could sway you one way or the other.
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Kailey Hagen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.