If you’re looking for a safe way to bet on continued stock market gains, while still limiting downside risk, then you might want to take a look at the Vanguard S&P 500 exchange traded fund (ETF) (VOO) index fund. VOO is a popular and reputable fund based on a major market index.

VOO invests in stocks in the S&P 500 Index. The S&P 500 represents 500 of the largest U.S. companies. The goal of the ETF is to track the returns of the S&P 500 Index. The S&P 500 Index’s return is considered a gauge of overall U.S. stock returns.

Key Takeaways

  • VOO is a popular and reputable fund based on a major market index.
  • VOO is a highly liquid fund with high daily trading volumes.
  • The fund offers a 1.64% annual dividend yield and carries an expense ratio of just 0.03%.
  • Investors with a low risk tolerance, shorter time horizon, or preference for income investments may want to consider VOO.

There are several reasons why the Vanguard S&P 500 ETF is appealing for investors. One, it’s made up of large-cap stocks. This is important because large-cap stocks are bigger ships to turn if the market goes south. In total, the fund has over $100 billion in assets under management (AUM) ($172 billion AUM as of November 17, 2020). Additionally, many investors and traders will rush to these names if there is a market correction. VOO is a highly liquid fund with high daily trading volumes. One of the other reasons that VOO is very appealing for investors is that it offers a 1.64% annual dividend yield and carries an expense ratio of just 0.03%.

VOO has been around since Sept. 7, 2010. Unlike many exchange-traded funds (ETF), it has appreciated 268.21% since its inception. It’s also up 9.69% year to date. You might be wondering what has attributed to such an impressive and consistent performance. The answer to that question is incredibly simple.

Vanguard S&P 500 ETF Largest Holdings

More than one-third of VOO's assets are allocated to the tech sector.

  • Apple Inc.: 6.4%
  • Microsoft Corp.: 5.6%
  • Amazon.com Inc.: 4.8%
  • Alphabet Inc. 3.5%
  • Facebook Inc. 2.3%

Sector Breakdown

For a broader idea of what you’re getting when you invest (or trade) in Vanguard S&P 500 ETF, below is a breakdown of its biggest holdings by sector:

  • Information Technology: 27.5%
  • Healthcare: 14.10%
  • Consumer Discretionary: 11.06%
  • Communication Services: 11.10%
  • Financials: 9.80%

Dangerous Theories

Think back to the real estate boom of the mid-2000s. At that time, there was a common theory as to why real estate prices would appreciate forever. That theory: “They’re not building more land.” This meant that supply would be limited, which would increase demand. Only a few people saw the real estate crash coming, which related to loose lending practices.

Now think about today’s similar theory with U.S. stocks: “It’s the only place to put your money right now.” An added incentive for many investors is that if everyone sees U.S. equities as the only place to put their money, it will continue to drive up the prices of those equities. Do you see what’s happening here? What these investors are failing to realize is that this is becoming a crowded trade.

Valuable Dollars

Fortunately, if you’re confused as to what might happen next, then allocating some capital to the relatively safe Vanguard S&P 500 ETF isn’t a bad idea, especially considering the yield. If you’re more conservative, or if you’re concerned about the possibility of deflation and where the stock market might be headed once reality catches up to it, then you might want to consider moving the majority of your capital to cash. That might sound boring and a strategy that lacks opportunity, but that’s a common misconception. If deflation takes place and prices for goods and services decline while you’re sitting in cash, then the value of your dollars increase substantially. Therefore, it's a strategy to at least consider.

The Bottom Line

The year 2020 has been volatile, yet positive, for stocks. While VOO may not be the best option for long-term returns, investors with a low risk tolerance, shorter time horizon, or preference for income investments may want to consider VOO.

Dan Moskowitz doesn't own shares of VOO.