There’s a hidden risk investors should consider right now.
The Vanguard S&P 500 ETF (VOO +0.06%) is one of the most popular ETFs out there, and for good reason. It has a proven track record of consistent growth, helping investors build life-changing wealth over time.
But with the market experiencing some volatility in recent weeks, is it still a smart buy right now? In most cases, yes. But there’s a hidden risk many investors may not realize.
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Why the S&P 500 ETF is still a strong investment
The Vanguard S&P 500 ETF tracks the S&P 500 Index (^GSPC +0.05%), which has an incredibly strong long-term track record. It’s not only survived every recession and bear market it’s ever faced, but it’s managed to earn positive total returns, too.
In fact, analysts from Crestmont Research examined the S&P 500’s 20-year rolling total returns and found that every single period was positive overall. This means that if you had invested in an S&P 500-tracking fund at any point in history, you’d have earned positive total returns by holding it for 20 years.
Part of the reason why the S&P 500 is so consistent is that it encompasses the 500 largest and strongest U.S. stocks. It’s a high bar to be included in this index, and many of these companies are industry leaders with decades of proven success.
It’s also possible to build substantial wealth with this investment. Since 1957, the S&P 500 has earned an average annual return of around 10%. At that rate, $200 per month could transform into around $395,000 after 30 years.
One hidden risk to consider
The Vanguard S&P 500 ETF is a market-cap-weighted fund, meaning stocks with a higher market cap will make up a larger proportion of the portfolio. This isn’t necessarily a bad thing. However, as tech companies grow at breakneck speed, these stocks are making up an increasingly large share of the S&P 500.
Tech stocks currently make up more than 34% of the Vanguard S&P 500. Nvidia alone accounts for close to 8% of the fund, with Apple and Microsoft not far behind, rounding out the top three holdings.
Of course, tech stocks can also be lucrative, and this tilt toward tech is a big part of the reason why the Vanguard S&P 500 ETF has surged in recent years. But if you’re choosing this investment because you’re seeking safety and stability, you could face more volatility than expected if the tech sector is hit hard in a potential downturn.
Over many years, the S&P 500 ETF is very likely to see positive long-term returns. But its heavy tech focus could lead to greater short-term volatility, which is a factor to consider before you buy.