Better Buy: Vanguard S&P 500 ETF or ARK Innovation ETF

There’s no shortage of options for funds to invest in. Whether they’re put together by market cap, sector, or social mission, there’s a fund for nearly everyone. Both the Vanguard S&P 500 ETF (NYSEMKT: VOO) and ARK Innovation ETF (NYSEMKT: ARKK) are viable options, but let’s look at which one might be the better buy right now.

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Vanguard S&P 500 ETF

The S&P 500 is an index of the500 largest U.S. companies. While several institutions offer S&P 500 index funds, the Vanguard S&P 500 ETF is one of the more popular. As of February 2022, the Vanguard S&P 500 ETF consists of just over 500 stocks, and the top 10 holdings make up 30.4% of the fund.

One of the better perks of investing in an S&P 500 fund is the access to instant diversification. Information technology (IT) companies make up 29.2% of the fund, but it includes companies spanning virtually any sector you can think of, including financials, industrials, real estate, utilities, and more.

ARK Innovation ETF

Cathie Wood is the founder and CEO of Ark Invest, an investment management firm that is gaining popularity by the day. Of all the exchange-traded funds (ETFs) that ARK Invest offers, ARK Innovation ETF is the largest with over $16.07 billion in net assets. The fund is actively managed and focuses on companies that developed products and services deemed “disruptive” in areas like fintech innovation, automation and robotics, artificial intelligence, and DNA technologies.

The top three holdings in the ARK Innovation ETF are Tesla, Zoom Video Communications, and Roku, and together, they make up 21.14% of the fund. IT and healthcare are by far the most represented sectors in the fund, making up 33.2% and 32.2%, respectively. One factor that separates the ARK Innovation ETF from the Vanguard S&P 500 ETF is that the Vanguard S&P 500 ETF only consists of U.S. companies, while the ARK Innovation ETF consists of North American, Western Europe, African, and Middle Eastern companies.

Choosing between Vanguard S&P 500 and ARK Innovation

If you’re choosing between the Vanguard S&P 500 ETF and ARK Innovation ETF, you’re probably better off going with the Vanguard S&P 500 ETF. To begin, it’s a more diversified fund, so you’re not relying so heavily on a couple of sectors to do well in order for your investment to do well. The ARK Innovation ETF is 65.4% IT and healthcare companies, so if those sectors fall on hard times, it will take a noticeable toll on your investment. The Vanguard ETF has companies from 11 sectors; ARK Innovation ETF consists of six sectors.

One of the main things you should also consider when deciding between funds is the expense ratios they charge. Expense ratios are charged as a percentage of your total investment, and if you’re not careful, you’ll be chipping away at your returns (or compounding your losses). The Vanguard S&P 500 ETF expense ratio is 0.03%, and ARK Innovation ETF is 0.75%. While a difference of less than 1% may not seem like much on paper, that can add up to thousands of dollars over the long run.

For example, let’s assume you invest $500 into both funds monthly, with each earning 10% annually. Here’s how your investments would pan out over the years:

Monthly Contribution
Annual Interest (minus fees)
Years
Account Value
$500
9.97%
20

$342,481

$500
9.97%
25

$587,426

$500
9.97%
30

$981,375

DATA SOURCE: AUTHOR CALCULATIONS

Monthly Contribution
Annual Interest (minus fees)
Years
Account Value
$500
9.25%
20

$315,708

$500
9.25%
25

$527,440

$500
9.25%
30

$856,969

DATA SOURCE: AUTHOR CALCULATIONS

Although the difference in fees is only 0.72%, in each instance, the difference is tens of thousands of dollars — a sizable amount. With its low cost and record of returning roughly 10% annually in the long run, long-term investors can’t go wrong with investing in the S&P 500.

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Stefon Walters owns Vanguard S&P 500 ETF. The Motley Fool owns and recommends Roku, Tesla, Vanguard S&P 500 ETF, and Zoom Video Communications. The Motley Fool has a disclosure policy.

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