The S&P 500 is trading at a record high, driven by the technology sector, but it’s not too late to buy for the long term.
THE S&P 500 (^GSPC 0.55%) The fund represents 500 companies (with 503 stocks) and includes stocks from all 11 sectors of the U.S. economy, giving it some relative diversity. Technology stocks make up about 30% of its weighting, giving investors broad exposure to some fast-growing stocks, including those related to artificial intelligence (AI).
The S&P 500 Index hit a new record high in January 2024, confirming the start of a bull market that began when the index bottomed in late 2022. Since then, it has continued to rise, with a gain of nearly 18% so far in 2024.
Even with all these gains, it’s not too late to buy, as the odds favor some level of growth in any given year for the S&P 500. Since 1919, the index has been positive on an annual basis about three out of four years since its existence. This suggests that those who can invest in the market as a whole have a good chance of making money. Exchange-traded funds (ETFs) offer an easy way to capture these gains, and even surpass them in some cases.
Vanguard issues some of the most affordable ETFs in the world. Here’s why investors with $900 in spare cash to invest might want to use it to take advantage of this latest bull market and buy a share of the company. Vanguard S&P 500 Exchange Traded Fund (FLIGHT 0.62%) and a share of the Vanguard S&P 500 Growth Exchange Traded Fund (FLIGHT 0.58%).
1. Vanguard S&P 500 Exchange Traded Fund
The Vanguard S&P 500 ETF has a very simple goal: to track the performance of the S&P 500 index by holding the same stocks and maintaining the same sector weightings. It is incredibly cheap for investors, with an expense ratio of just 0.03% (the portion of the fund deducted each year to cover management fees).
In dollar terms, that means a $10,000 investment in the ETF would incur annual fees of just $3. Comparable funds offered by its competitors are 26 times more expensive, with an average expense ratio of 0.78%, which can negatively impact long-term returns, according to Vanguard.
As I mentioned earlier, technology is the largest of the 11 sectors in the S&P 500, with a weighting of 30.6%. In fact, all five of the largest stocks in the index (and the Vanguard ETF) are in the technology sector:
|
Action |
Vanguard ETF Portfolio Weighting |
|---|---|
|
1. Microsoft |
6.95% |
|
2. Apple |
6.29% |
|
3. Nvidia |
6.10% |
|
4. Amazon |
3.63% |
|
5. Meta-platforms |
2.31% |
Data source: Vanguard. Portfolio weights are accurate as of May 31, 2024 and are subject to change.
These five companies have jumped into the AI race. Last year, Microsoft agreed to invest $10 billion in ChatGPT creator OpenAI and used the startup’s technology to create its own virtual assistant called Copilot. Apple has also partnered with OpenAI to develop its Apple Intelligence software, which will launch later this year alongside the iOS 18 operating system.
Nvidia designs the semiconductors that make AI possible. Its graphics processing units (GPUs) for data centers are the hottest commodity in Silicon Valley, with tech giants and startups alike buying up as many as they can get their hands on.
Outside of technology, the financial sector is the second largest in the S&P 500, with a weighting of 12.8%. It includes investment banks like JPMorgan Chase and consumer banks like Bank of AmericaThe healthcare sector comes next with a weighting of 12%, followed by the consumer discretionary sector with 9.8%.
Since its inception in 2010, the Vanguard ETF has generated a compound annual return of 14.5% (in line with the S&P 500). However, that’s higher than the index’s long-term average annual return, which dates back to 1957, of 10.4%, largely due to the rise of high-growth technology stocks over the past decade.
Above-average returns could continue for the foreseeable future thanks to technologies like AI, but investors should expect gains to return to 10% per year over the long term.
2. Vanguard S&P 500 Growth ETF
Investors willing to accept a little more risk for the potential to earn higher returns might consider the Vanguard S&P 500 Growth ETF. Its goal is to mimic the S&P 500 Growth index, which contains only the best-performing stocks in the S&P 500 and excludes the rest. These stocks are selected based on factors such as the momentum and sales growth of the underlying companies.
The ETF currently holds 229 stocks from the same 11 sectors as the S&P 500, but the weightings are very different. For example, technology represents 48.6% of the S&P 500 Growth Index, because that is where most of the momentum and revenue growth is currently coming from.
As a result, the ETF has the same top five stocks as the S&P 500, except they each have a much larger weighting:
|
Action |
Vanguard Growth ETF Portfolio Weighting |
|---|---|
|
1. Microsoft |
12.51% |
|
2. Apple |
11.32% |
|
3. Nvidia |
10.98% |
|
4. Amazon |
6.54% |
|
5. Meta-platforms |
4.16% |
Data source: Vanguard. Portfolio weights are accurate as of May 31, 2024 and are subject to change.
The Vanguard S&P 500 Growth exchange-traded fund has an expense ratio of 0.1%. While this is slightly higher than the S&P 500 exchange-traded fund, it is still well below the industry average for similar funds, which is 0.95% (according to Vanguard).
Additionally, the fund has generated a compound annual return of 16.2% since its inception in 2010. While that’s only 1.7 percentage points higher per year than the typical S&P 500 ETF, the effects are significant in dollar terms thanks to the magic of compounding:
|
Starting balance (2010) |
Compound annual return |
Review after 14 years |
|---|---|---|
|
$10,000 |
16.2% (Growth ETF) |
$81,824 |
|
$10,000 |
14.5% (S&P 500 ETF) |
$66,569 |
Author’s calculations.
The S&P 500 Growth ETF is rebalanced once a quarter, meaning that the worst-performing stocks are removed and replaced with the best-performing stocks in the S&P 500. Therefore, the fund should always outperform the S&P 500 over the long term (in theory).
The fund is likely to suffer larger losses in the near term, however, because of its heavy exposure to the tech sector. If AI fails to live up to expectations, for example, stocks like Microsoft and Nvidia could suffer sharp declines. That could cause the ETF to fall more severely than the S&P 500, at least until the next rebalancing.
Investors should always keep this risk in mind. But as long as technology continues to drive the market, the Vanguard S&P 500 Growth ETF should provide excellent long-term returns.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, former chief market development officer and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Bank of America, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.