Regardless of short-term valuation or economic growth concerns, the S&P 500 remains one of the best long-term wealth creation tools.
The Vanguard S&P 500 ETF (VOO +0.71%) is the biggest ETF in the world and for good reason. It provides simple, easy, and ultra-cheap exposure to all the biggest companies in the U.S. stock market. For anyone who wants to keep investing simple, avoid the temptation of stock picking, and just “own the market,” this ETF does a great job.
But over-concentration has become a concern. For more than a decade, the index’s allocation to tech stocks has continued to grow. Today, the sector accounts for 33% of the S&P 500 (^GSPC +0.69%), one of the largest single-sector allocations for the index in decades. Much of that is invested in the “Magnificent Seven” stocks, a handful of mega-cap names that have become very influential (and profitable) over the years.
But short-term concerns aside, owning the S&P 500 and this Vanguard ETF still makes a lot of sense from a long-term wealth-building perspective.
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What the Vanguard S&P 500 ETF owns and why that matters
The tech heaviness of the S&P 500 is already well documented. The rest of the index is fairly growth-tilted too, but there are meaningful exposures elsewhere.
The current largest sector allocations are Technology (33%), Communication Services (11%), Consumer Discretionary (10%), Healthcare (9%), and Industrials (9%).
Barring a crash in the tech sector, the S&P 500 will be heavily influenced by that group and the Magnificent Seven stocks for the foreseeable future. That could be worrisome in the short term if valuation concerns and a momentum slowdown come to pass.
Vanguard S&P 500 ETF
Today’s Change
(0.71%) $4.49
Current Price
$634.02
Key Data Points
Day’s Range
$627.03 – $634.58
52wk Range
$442.80 – $641.81
Volume
7.5M
Over the long term, however, this is still an advantageous sector allocation. Most of the growth and development in the U.S. economy will come from these areas of the market. The initial boom period in the artificial intelligence (AI) revolution may be nearing an end, but AI adoption is still in the early innings. That’s a trend you still want exposure to if your holding period is decades.
Outside of the tech overweight at the top, the rest of the index is pretty balanced. You have four major sectors in that 9% to 11% allocation range. And those represent a nice mix of growth, cyclical, and defensive areas of the market. Long-term investors should seek to have exposure to many areas of the U.S. economy. Owning the Vanguard S&P 500 ETF is still one of the best ways to do that.
The economic backdrop still favors large caps
There’s still value in owning small caps to some degree in a diversified portfolio. But it has been clear over time that the better earnings growth and quality profile come from larger companies.
Currently, about 40% of companies in the Russell 2000 index are unprofitable. In the S&P 500, that number is in the single digits.
More speculative companies can help juice returns in the short term. Long-term wealth creation, however, will be driven by earnings. That consideration makes the S&P 500 a solid long-term holding regardless of short-term valuation concerns.