Among the range of index funds tracking the S&P 500 exchange is the Vanguard S&P 500 ETF (NYSEARCA:VOO). The VOO ETF is perhaps one of the most sought-after exchange-traded funds tracking this group of the largest 500 U.S. companies. One of the reasons it’s so popular is the fund’s microscopic 0.03% expense ratio.
Having highly-diversified (and inexpensive) exposure to a wide range of stocks certainly makes sense for most passive investors. However, the recent price action in the market has been volatile, to say the least. Today, the VOO ETF is down nearly 3% at the time of writing as investors continue to sell equities.
There are a number of reasons for this. Bond yields have continued to surge higher, with the 10-year U.S. Treasury yield climbing 19 basis points today alone to 3.35%. This incredible move higher in yields dramatically increased the discount rate used to value stocks. This means all stocks across the board tend to become cheaper in a rapidly rising rate environment like this.
Additionally, this rapid move higher in near-term rates has caused the two- to 10-year spread to turn negative today. In layman’s terms, this is called a yield curve inversion. Typically, yield curve inversions precede recessions by 12 to 24 months. That said, this is the second such inversion seen since April. Thus, the threat of a recession appears to have increased substantially of late.
Let’s dive into what this means for this ETF in particular.
Is It Time to Buy the VOO ETF, Or Sit on the Sidelines?
The idea of buying low and selling high sounds great in theory. However, when equity valuations are dropping as dramatically as they have been, buying on the way down can be much more difficult than it sounds.
No one likes catching a falling knife, and it’s unclear where the bottom is on this market. While passive index funds provide excellent diversification to a wide range of companies, if the entire market is in free fall, diversification doesn’t really matter. Indeed, in times like these, many a stock-picker tends to be made, at least in the search for outperformers.
I think the VOO ETF does provide solid passive exposure which most investors should take advantage of. This level of diversification for a fee of only 0.03% makes sense. Buying the dip has proven to be a successful strategy over the past decade, and if that continues, perhaps now is the time to be buying some VOO.
However, depending on each individual investor’s time horizon, it may make sense to wait this volatility out. The market could take time to bottom, and there’s no rush for investors with a decade or two time horizon.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
