Exchange-traded funds (ETF) track all sorts of sectors, from oil to utilities, and technology to healthcare. They are designed to be bought and sold during the trading day, which gives you the ability to liquidate capital when you wish. Investors can also use tools like market and limit orders, stop losses and more to micromanage capital.
There is also a category of ETFs called index ETFs. These can be uniquely valuable to investors who want to make a play on a basket of equities. One of the most attractive is also one of the best known, the S&P 500 ETF, which has the potential to 2x your money.
The Vanguard S&P 500 ETF
One of the best index ETF choices is the Vanguard S&P 500 ETF. Let’s talk about why that is and explore in a little more detail the strategy behind this index ETF that is so popular with rank and file traders, as well as market icons like Warren Buffett.
First off, the S&P 500 is a unique index in and of itself. It comprises the most successful companies in America, and moreover it removes those that don’t make the grade. As such, the S&P 500 is an index that promotes competition, meaning investors are always exposed to best-in-class companies.
That’s one reason why Warren Buffett has stated, upon his passing, that his heirs and beneficiaries should not hold his beloved Berkshire Hathaway, but instead the S&P 500 index.
S&P 500 Returns
Over the past couple of years, the S&P 500 has generated returns north of 20%, which admittedly is anomalous.
It’s relatively hard to exceed a stable five percent a year with managed accounts let alone generate returns of over 20% per year, and closer to 10% annualized over the past few decades are truly stellar.
Indeed it highlights the danger of trusting active managers to oversee your capital; they often try and fail to time the market well. History shows that, paradoxically, by accepting it’s hard to beat the market, you can rival the returns of the market, which in turn beats most money managers.
The irony is that by simply generating market returns, you beat most people, because not everyone is invested in the stock market at all times. It goes to the old saying, the rich sell, but the wealthy never do, meaning truly wealthy individuals often hold assets forever.
Index ETF Investing Vs Equities
Investors of individual equities are often used to looking at earnings-per-share, or EPS, which is reported quarterly. But with an index fund, you’re not looking at this type of metric because your play is based on many different companies and their collective profits and growth trajectories.
So instead of trying to pinpoint the future EPS of a company, which can be either positive or negative according to many different factors, the index investor has a higher-level birds-eye view and philosophy as he or she approaches the market.
Macro trends are more important, such as:
- Is the Federal Reserve keeping rates low or hiking them (which will act as a headwind to companies who will pay more in interest charges).
- Are unemployment rates and job losses rising?
- Is inflation rising or falling?
- Are supply chain constraints going to hamper the sales of international conglomerates?
Doubling Money With the Vanguard S&P 500 ETF
So how can you potentially 2x your money by investing into the S&P 500. Here’s one approach:
Invest an initial amount, say $2,000 and then supplement it with smaller amounts every month of the year.
At the end of the year, you can have $4,400 plus a 10 percent gain, or $4,840.
Over time, the sum of the compounded smaller contributions adds up so that over the course of a decade, your investment principal can – based on historical returns – double in value.
The key to the strategy is patience and consistency. It’s hard but if you think you might struggle with consider this: when Warren Buffett bought Coca Cola, it had a reasonable dividend but nothing particularly remarkable. Today however his cost basis (after factoring in all the splits of KO shares) is closer to $3 per share, while Coca Cola now pays a dividend annually of approximately $1.50. Translation: Buffett earns about a 50% annually on his original principal invested. Now that’s hard to beat!
It goes to show the power of holding long-term. On year 1 or 2, the returns Buffett saw were not stellar but over time they became astronomical on that single investment.
More on Vanguard S&P 500 ETF
There is no guarantee what the S&P 500 is going to do in a year. As Malkiel explained in his famous random walk on Wall Street publication, it’s challenging to know from one day to the next what will happen, but slow and steady investing wins the race.
What you can do is continue to rebalance and realign a portfolio, to beat inflation and avoid big losses. Also, if you have invested early, you can wait out a bad market and look for returning yields as a market cycle improves.
All of this can be extremely helpful when you are putting together a portfolio that is truly diversified and thus protected from certain kinds of risk. It doesn’t “make you money overnight,” but this time-tested approach does deliver returns over time if history is any predictor. Which fund is best? Look at Vanguard’s S&P 500 ETF as a tradable, solid proxy for the index itself.