Key Points
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The Vanguard S&P 500 ETF gives you exposure to a wide range of large-cap stocks.
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The fund’s value can rise and fall with general market swings.
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Though the S&P 500 encompasses many companies, it may not be as diverse as you think.
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If you’re looking for a simple way to invest in the stock market, the Vanguard S&P 500 ETF (NYSEMKT: VOO) is hard to ignore. You’ll often hear that it’s one of the easiest ways to build a diverse portfolio, since it simply tracks the S&P 500 index.
When you buy shares of the fund, you’re investing in roughly 500 of the largest publicly traded companies in the United States. That includes household names across various industries, giving you instant diversification without having to research and buy dozens of individual stocks yourself.
But is the Vanguard S&P 500 ETF a “safe” investment? Not exactly.
Like any investment tied to the stock market, the Vanguard S&P 500 ETF comes with risks that you should understand before making it a core part of your portfolio.
Get ready for market swings
One of the biggest misconceptions about the Vanguard S&P 500 ETF is that owning hundreds of companies makes it immune to market downturns. That’s just not true.
Because the fund tracks the S&P 500, its performance rises and falls with the broader U.S. stock market. During bear markets or periods of economic uncertainty, it’s not unusual for the fund to lose significant value. If that’s the sort of thing that might mess with your head as an investor and cause you to sell in a panic, you may want to reconsider.
It’s not as diverse as you might think
Because the S&P 500 comprises such a wide range of companies, you’d think you’d be all set on the diversification front with the Vanguard S&P 500 ETF. But you should know that a large percentage of the fund’s value is concentrated in a relatively small group of mega-cap tech companies.
This means that if the tech sector experiences a prolonged downturn, it could have an outsize effect on the fund’s value — more so than what a downturn across another market segment might cause.
It’s best suited for long-term investors
If you’re looking to build wealth over time, then the Vanguard S&P 500 ETF could be a good place to invest your retirement savings. If you have a shorter investment window or are extremely risk-averse, then you may want to choose a large-cap value ETF that may be less likely to experience intense swings.
Even if you’re willing to take on the risk that comes with investing in the S&P 500, the Vanguard S&P 500 ETF shouldn’t be the only asset in your portfolio. Rather, you should aim for a well-rounded mix that includes other assets and asset classes, like bonds or even cash.
The Vanguard S&P 500 ETF is often touted as a no-brainer choice for investors looking to build long-term wealth without doing a ton of legwork. But as great as it is, that doesn’t make it risk-free. It’s important to know what you’re getting into if you’re planning to build your portfolio around this particular fund.
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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
