Investors should be aware of some hidden risks right now.
The Vanguard S&P 500 ETF (VOO +0.06%) is quite popular for good reasons. Its history of steady growth contributes significantly to wealth-building over time.
But with the market seeing some fluctuations in recent weeks, does it remain a smart investment choice? Generally, yes. Yet, there are some hidden risks that many investors might not be fully aware of.
Why the S&P 500 ETF remains a powerful investment
The Vanguard S&P 500 ETF tracks an exceptionally strong benchmark. It has consistently weathered recessions and bear markets while providing positive total returns.
Analysts at Crestmont Research have looked into two decades of rolling total returns for the S&P 500 and discovered that every single period was overall positive. This suggests that if you had invested in an S&P 500-linked fund at any point in history, holding it for 20 years would have yielded a positive outcome.
One of the reasons the S&P 500 is quite stable is due to its inclusion of the 500 largest and most influential U.S. companies. The criteria for being part of this index is stringent, as many of these firms are industry leaders with a lengthy history.
Additionally, significant wealth can be generated through this investment. Historically, since 1957, the S&P 500 has averaged around 10% annual returns. So, investing $200 a month could potentially grow to approximately $395,000 over three decades.
One hidden risk to consider
The Vanguard S&P 500 ETF uses a market-capitalization weighted approach, leading to a majority of your portfolio being comprised of higher market cap stocks. While this has its benefits, the swift growth of tech companies means they are increasingly dominating the S&P 500.
Tech stocks now make up over 34% of the Vanguard S&P 500. Notably, Nvidia alone represents nearly 8% of the fund, with Apple and Microsoft also being key players in the top three holdings.
Tech stocks can bring substantial returns, and this technology focus is a key reason for the Vanguard S&P 500 ETF’s substantial growth in recent years. However, if you’re investing with the expectation of stability and safety, you might encounter more fluctuations than anticipated if the tech sector faces a downturn during a potential recession.
While the S&P 500 ETF holds a good chance of delivering positive long-term returns, its current emphasis on technology could result in increased short-term volatility—an important consideration before you decide to invest.
