Editor’s Note: This article was updated to correct its expense ratio’s dollar cost.
The Vanguard S&P 500 ETF (NYSEARCA:VOO) is a good pick if you are not interested in making money by picking individual stocks. Basically, picking an extremely low-cost exchange-traded fund (ETF) like VOO stock is the next best thing. This ETF essentially tracks the market.
Of course, there are very distinct advantages to picking individual stocks. The chief advantage? Higher-than-market returns. In fact, you could probably pick the top ten stocks held within the VOO ETF and do just as well — if not better. Given that you can now buy stocks online for free with no commissions, you would actually be slightly better off.
However, the advantage of buying VOO stock is that you do not have to pick any particular name. This is the theory of diversification. By owning many stocks in an ETF, you don’t have to worry about stock selection at all.
VOO Stock and the Advantages of a Market Index Fund
As Warren Buffett pointed out in his 1996 annual meeting, “diversification is a protection against ignorance.” Buffett wasn’t being pejorative. If you don’t know how to analyze businesses, then diversification is fine.
That is the chief benefit of owning VOO stock. It covers all the 500 stocks in the S&P 500. Its annual cost is only 3 basis points or 0.03%. This means that, for every $10,000 you invest, Vanguard charges approximate fees of about $3. And it takes that money out in its daily calculation of Net Asset Value (NAV), so you actually don’t see it coming out of your account.
When it comes to VOO, the return you make will be equal to the general return of the stock market. For example, over the past year (as of Mar. 3), VOO was up 25.18%. Year-to-date (YTD), it was up 3.39%. And over the past five years, it was up 94.24%. That represents an average annual compound return of 14.2% annually.
Plus, there is more — the ETF pays quarterly dividends. It’s current annual forward dividend yield is 1.60%. This is slightly lower than the average yield over the past five years.
Therefore, including dividends, an investor could have more than doubled his money owning VOO stock. Obviously, there is no guarantee this will continue. But it is a good advertisement for owning the stock today.
What to Do with VOO
One of the most practical things that a novice investor can do with the stock market is put away a set amount of money out of each paycheck in an ETF like VOO stock. Over time, the market gains will likely outperform or be higher in value than the actual investment in the fund.
This is what happens during bull markets. However, during bear markets, the investor needs to be steadfast and keep up with the investments. This will serve to lower the average cost of the investment in the long run.
In other words, this is the type of investment that works well for the long haul. Each year, the fund will announce any long-term and short-term capital gains that you have to declare on your taxes. This can occur from takeovers, new additions, deletions from the fund and spin-offs, et cetera. One way to avoid this is to keep the investment in a tax-free account, like an IRA or 401-K.
Lastly, the dividend income is paid in cash. This can accumulate or you can use the cash to buy more shares on a reinvestment basis. Or, you can use the cash to help pay any taxes on the account each year.
So, here is the bottom line: buy VOO stock if you want to diversify your investment holdings and do not want to pick individual stocks. This is the next best thing to simply buying the top ten stocks in the fund.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in the securities mentioned in this article.