How Should a Beginner Invest in Stocks? Start With This ETF.

When I hear from people who don’t invest even though they have the financial means, the most common theme is that it is “too hard” or “too complicated.” That’s understandable — but it doesn’t have to be that way.

Investing doesn’t have to involve hours of research, poring through financial statements, or binging earnings calls like they’re your favorite podcasts. Those things are all beneficial, and some people enjoy the process. But many others simply don’t have the time.

Thankfully, most investors can reach their financial goals by investing in exchange-traded funds (ETFs) that give them exposure to many companies with a single or few investments. One ETF that can be the perfect option for beginning investors is the Vanguard S&P 500 ETF (VOO -0.13%).

One investment gives you exposure to the broader U.S. economy

Few investments are as effective as an investment in the S&P 500. If you don’t believe me, take it from famed investor Warren Buffett, who routinely touts index investing as the only strategy needed to grow wealth over time.

Part of the reason is the amount of ground a market index covers. The Vanguard S&P 500 ETF has companies representing all 11 major sectors, which are broad classifications that include industries within them. Here’s how the ETF was allocated as of Feb. 29:

  • Information technology: 29.8%
  • Financials: 13%
  • Healthcare: 12.5%
  • Consumer discretionary: 10.6%
  • Communication services: 8.9%
  • Industrials: 8.8%
  • Consumer staples: 6%
  • Energy: 3.7%
  • Materials: 2.3%
  • Real estate: 2.3%
  • Utilities: 2.1%

Since the ETF is weighted by market cap, the information technology sector accounts for an unusually large percentage of the fund — many big tech companies have seen their values skyrocket over the past year or so.

Still, the ETF does an excellent job covering ground across sectors and industries. That’s why an investment in the S&P 500 is considered an investment in the broader U.S. economy.

This diversification is important because it ensures that a downturn in a specific sector won’t be too harmful to your portfolio. If the information technology sector experiences a slump, your investment will feel the effects, but it won’t be too detrimental. Some sectors are cyclical by nature, so having other sectors that can pick up the slack is key to keeping your portfolio relatively stable.

Keep as much of your profit as possible

The Vanguard S&P 500 ETF isn’t the only one that tracks the index. However, I think it’s a great go-to because of its low fees (expense ratio) compared to other popular options, like the SPDR S&P 500 ETF Trust (SPY -0.19%). The SPDR S&P 500 ETF Trust is the most popular S&P 500 ETF by assets under management, but its expense ratio is more than three times higher than the Vanguard S&P 500 ETF’s 0.03%.

For perspective, if you invested $500 monthly and averaged 10% annual returns over 20 years, you’d pay just over $1,100 in fees with the Vanguard S&P 500 ETF. If the same thing happened while invested in the SPDR S&P 500 ETF Trust, you’d paid just over $3,600 in fees. What appears small on paper can make a big difference over time.

The historical returns prove the Vanguard S&P 500 ETF can be a wealth-builder

What matters most is that the Vanguard S&P 500 ETF has proven it can produce great results over the long run.

VOO Total Return Price Chart

VOO Total Return Price data by YCharts

Looking back at the Vanguard S&P 500 ETF’s performance over the years, a one-time $10,000 investment at its inception would be worth over $60,700 today, considering its total returns (which includes dividends).

You should never use past performances to guess or anticipate future performance in the stock market, but it does give insight into how effective an investment could be. Even with occasional slumps and down periods, the Vanguard S&P 500 ETF’s long-term results are impressive for a broad ETF.

That’s why your focus should be on investing consistently through thick and thin. You’ll likely be thanking yourself for it a decade or two down the road.

Stefon Walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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