The S&P 500 (SNPINDEX: ^GSPC) index soared 15% in the first half of 2024 with almost no volatility. It was practically a dream period for investors. But it has since plunged 8.5% from its all-time high, with most of that drop occurring in August alone on the back of a Japanese currency shock.
History suggests the S&P 500 always climbs to new highs given enough time, so corrections are typically a buying opportunity. However, picking which individual stocks to buy can be tricky, especially for investors who don't follow the market closely. Exchange-traded funds (ETFs) are a great alternative, because they can offer exposure to an entire index (like the S&P 500) or a specific segment of the market.
Vanguard is one of the largest ETF issuers in the world, and its products are popular for their very low cost. Here's why investors sitting on spare cash might want to allocate $800 to buy one share of the Vanguard S&P 500 ETF (NYSEMKT: VOO), and one share of the Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) during the recent market correction.
The objective of the Vanguard S&P 500 ETF is simple: Track the performance of the S&P 500 by owning the same 500 companies (503 stocks as some companies have dual class structures) and maintaining the same portfolio weightings as the index.
The S&P 500 has very strict criteria for entry, and only the highest-quality stocks make the cut. For example, companies must have a valuation of at least $18 billion to qualify for inclusion, and they must also be profitable during the most recent 12-month period.
Plus, since the S&P 500 is a market capitalization-weighted index, it has a high exposure to America's trillion-dollar tech giants, which are leaders in emerging industries like artificial intelligence (AI). In fact, the five largest holdings in the Vanguard ETF (and the S&P 500) account for 26.7% of the total value of its entire portfolio:
Stock | Vanguard ETF Portfolio Weighting |
|---|---|
1. Microsoft | 7.23% |
2. Nvidia | 6.61% |
3. Apple | 6.60% |
4. Amazon | 3.85% |
5. Meta Platforms | 2.40% |
Data source: Vanguard. Portfolio weightings are accurate as of June 30, 2024, and are subject to change.
Nvidia is perhaps the most reliant on the success of AI because it's the primary supplier of the data center chips required to develop the technology, and they represent most of the company's revenue. The other four companies in the above table are also investing heavily in AI, but they each have successful stand-alone businesses.
Amazon, for example, dominates both the e-commerce and cloud services industries. Meta Platforms, on the other hand, is home to globally dominant social networks like Facebook and Instagram.
Although the tech sector has a 32.5% weighting in the Vanguard ETF, 10 other sectors are also represented, including financials, healthcare, and consumer discretionary. That means it also includes stocks like pharmaceutical giant Eli Lilly, global investment bank JPMorgan Chase, and Visa. It even features Warren Buffett's Berkshire Hathaway investment conglomerate.
Vanguard ETFs are popular for their cheap holding costs. This one has an expense ratio of just 0.03%, which is the portion of the fund deducted each year to cover management costs. Vanguard says comparable funds are more than 20 times as expensive, with an average expense ratio of 0.78%. This eats away at returns over the long term.
The Vanguard ETF delivered a compound annual return of 14.5% since its inception in 2010, which aligns with the return in the S&P 500.
2. Vanguard S&P 500 Growth ETF
The Vanguard S&P 500 Growth ETF is a great option for investors willing to accept more volatility in exchange for an opportunity to earn even higher returns than the S&P 500. Its objective is to track the performance of the S&P 500 Growth index, which holds 231 of the best-performing growth stocks in the regular S&P 500, while disregarding the rest.
It selects those stocks based on their momentum, the sales growth of the underlying company, and the ratio of their earnings change to their stock price. Since most of the largest tech stocks fit those criteria perfectly, it's no surprise that the top five holdings in the Vanguard S&P 500 Growth ETF are identical to the S&P 500 ETF.
However, they account for 44.4% of its entire portfolio, which is a significantly higher weighting.
Stock | Vanguard Growth ETF Portfolio Weighting |
|---|---|
1. Microsoft | 12.56% |
2. Nvidia | 11.49% |
3. Apple | 11.48% |
4. Amazon | 4.51% |
5. Meta Platforms | 4.36% |
Data source: Vanguard. Portfolio weightings are accurate as of June 30, 2024, and are subject to change.
In fact, the tech sector as a whole has a 50.9% weighting in the Growth ETF. That does create some concentration risk. This means that if AI fails to live up to the hype, for example, stocks like Nvidia could suffer steep losses which will drag down the performance of the whole ETF.
The good news is that the S&P 500 Growth index rebalances every quarter, so it kicks out any underperforming stocks and replaces them with new ones that meet its criteria. Theoretically, that means it will always outperform the regular S&P 500 over the long term, because it weeds out the worst performers in the index.
In fact, the Vanguard Growth ETF delivered a compound annual return of 15.9% since its inception in 2010. While that's only 1.4% better than the S&P 500 each year, it makes a big difference in dollar terms thanks to the effects of compounding.
Balance In 2010 | Compound Annual Return | Balance In 2024 |
|---|---|---|
$10,000 | 15.9% (Growth ETF) | $78,916 |
$10,000 | 14.5% (S&P 500 ETF) | $66,569 |
Calculations by author.
The Growth ETF is slightly more costly to own, with an expense ratio of 0.1%, but it's still substantially cheaper than comparable funds in the industry, according to Vanguard.
Buying this ETF in the throes of a correction can be a great way to supercharge any portfolio, as long as investors take a long-term view.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, Vanguard S&P 500 ETF, and Visa. 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.
Stock Market Correction: 2 Unstoppable Vanguard ETFs to Buy With $800 During the S&P 500 Sell-Off was originally published by The Motley Fool