For retail investors and traders, exchange-traded funds — or ETFs — can prove to be a great alternative to traditional stock market investments.
Not only are ETFs simple to invest in and manage, ETFs can also generate an impressive return with very little investment or effort involved. This is to some extent because exchange traded funds give investors the chance to buy a whole group of stocks (and sometimes bonds) in one single transaction.
One of the most notable exchange-traded funds is the Vanguard S&P 500 ETF, also known as VOO. Investing in VOO allows investors to have financial stake in stocks in the S&P 500 Index, which represents 500 of the largest U.S. companies on the stock market.
Considering the massive run up in the stock market over the past decade, is it too late to buy VOO?
What Are VOO’s Most Heavily Weighted Stocks?
To begin with, it’s worth judging the VOO based on its most heavily weighted stocks.
Each one of these five companies is considered a titan of the stock market, and the five of them combined under the umbrella of VOO makes this ETF quite a robust security. After all, these are what’s known as Big Tech’s Big Five — the biggest and most prestigious companies in tech.
The significant weight which Alphabet, Amazon, Apple, Facebook, and Microsoft carry within this portfolio means that, more than all the other stocks underneath the VOO umbrella, these five — and each’s individual performance on the stock market — will make the biggest difference on the ETF’s overall returns.
What Sectors Are Most Represented in VOO?
Beyond giving significant weight to Big Tech’s Big Five, VOO also gives investors the chance to have stake in each of the 11 stock market sectors:
- energy,
- consumer discretionary,
- materials,
- consumer staples,
- industrials,
- information technology,
- utilities,
- communication services,
- healthcare,
- real estate, and
- financials
Tech stocks account for 24% of the VOO’s weighting in total, with financial services coming in second at 14%, healthcare stocks coming in third at 13%, and consumer discretionary in fourth at 12%. With these three combined, that equals over 60% of VOO’s weight in all.
While healthcare, financial services, and tech stocks are self-explanatory, the inclusion of consumer discretionary is worth underlining.
This means that VOO includes stocks from the appliance, car, and entertainment industries, among other highly profitable nonessential goods and services.
Historical Highs in the Market
Of course, while these weights have remarkable significance on the performance of VOO, it’s also indicative of the health of the stock market overall — Because the index is considered a gauge of the overall stock market’s returns, VOO’s returns depends on the health of the stock market itself.
With this in mind, let’s look at some of VOO’s most historical highs. Over the last five years of VOO’s price per share alone is remarkable.
VOO traded for $196 in October of 2016 and has since risen to just over $415 by Q4 of 2021. In other words, VOO has more than doubled returns in half a decade.
Throughout those five years, VOO hit highs in January of 2018, September of 2018, May of 2019, July of 2019, and February of 2020.
Historical Lows in the Market
However, just because VOO is reaching historical highs right now doesn’t mean that those highs will last forever.
While VOO’s price reflects the success of the stock market at large as of late, it’s just as capable of dipping extremely low if the market were to do the same. Look no further than what happened between February and March 2020 by way of example.
VOO sat at a price of $310 on Valentine’s Day 2020, then, when the COVID-19 pandemic began to ravage the world (and the stock market) over the course of the next month, VOO had dropped to $210.
While it has since recovered, periods of poor performance in the stock market — take something akin to what happened in 1973-1974, for example — will continue to directly impact VOO’s returns.
How Inflation Impacts the Stock Market & VOO
By and large, inflation is typically looked at as a bad thing — especially on the stock market. When it comes to a company’s shares, inflation raises rates which, in turn, cuts into a company’s profits.
When this happens, the company raises prices and wages, which only cuts into profits even more. This directly and negatively impacts a company’s stock price.
ETFs are somewhat less likely to be damaged by the effects of inflation. This is because the ETF is more diversified than any given stock so while some stocks suffer, others benefit from inflation.
For some, the rise in interest rates has the potential to drive up profit margins. An example is large financial companies which are typically included as part of an ETF’s many sectors.
VOO’s weighting consists of 14% financial services stocks, which bodes well for the ETF against inflation.
VOO’s Growth Over the Last 10 Years
VOO has grown quite steadily over the past 10 years. If you invested $1,000 into VOO in October of 2011, it would now be worth over $4,600 — a return of over 360%. That’s around 16.5% annualized, on average.
Looking forward to the next five years, experts predict to see VOO’s earnings growth increase nearly 75% by October 2026.
This is what’s so often alluring about ETFs: investors can bank on them as long-term investments that might not bring them immediate returns, but will pay off substantially for them over the course of a couple of decades or more. It’s why so many often include them in retirement portfolios.
VOO Risk Factors
ETFs in general are considered to be lower-risk investments (when compared to single stock investments), which applies to VOO, as well.
Given the ETF’s low cost and high diversification, VOO and other ETFs are not viewed as particularly risky investments. However, there are still some risks involved with VOO that are worth mentioning.
For instance, trading ETFs like stocks can hurt your portfolio as trading costs begin to add up if you’re not with a low-commission broker. This is why it’s best to buy and hold onto ETFs like VOO and not try to match market trends by buying and selling the hottest ETFs at any given moment.
Beyond this, some ETFs also carry the risk of tax implications and the potential for lack of price discovery — this could occur if a large number of investors held ETFs but did not trade the stocks that actually make up the ETFs. It’s important to remember that ETFs like VOO are still largely low-risk, but no investment is risk-free.
The Bottom Line: Is It Too Late To Buy VOO?
Looking at how the VOO ETF has performed over the past decade and judging by what stocks VOO consists of, it seems safe to say that it’s not too late to buy VOO — especially if you plan to invest in VOO and hold it for many decades to come.
VOO’s weight, its low risk, and its array of sectors have the makings of a great addition to any portfolio so long as the investor is willing to treat it as a long-term investment and doesn’t simply try to buy and sell it like a stock.
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