Got $1,000 to Invest in Stocks? Put It in This ETF | The Motley Fool (2024)

The creation of exchange-traded funds (ETFs) was one of the best things to happen to stock investing. With a single investment in an ETF, investors can cover a lot of ground that would have otherwise taken hundreds or thousands of individual investments. ETFs are convenient and effective, to say the least.

If you're interested in investing in an ETF and have $1,000 that you can spare to invest -- meaning you already have an emergency fund saved and have paid down any high-interest debt -- the Vanguard S&P 500 ETF (VOO -0.06%) is a great option.

What is the S&P 500?

The stock market has different benchmarks -- essentially, sets of stocks grouped together for tracking and comparison purposes. The S&P 500is arguably the most important benchmark in the entire stock market, tracking 500 of the largest public U.S. companies by market capitalization.

The U.S. stock market and the economy aren't synonymous, but they are closely related. That's why an investment in the S&P 500 is generally seen as an investment in the broader U.S. economy. There are no guarantees in investing, and past performance doesn't guarantee anything about future performance, but an investment in the U.S. economy is one of the safer long-term bets you can make.

Since its inception in September 2010, the Vanguard S&P 500 ETF has averaged around 14% in annual total returns (including dividends). Here's roughly how much a single $1,000 investment at that time would be worth today (as of April 8):

VOO Total Return Price data by YCharts

You can't beat the Vanguard S&P 500 ETF's low cost

While the S&P 500 is an index, numerous financial institutions put together their own S&P 500 ETFs. Though they are all extremely similar (as they are designed to track the same index), I prefer the Vanguard S&P 500 ETF mainly because of its low cost. It has a 0.03% expense ratio, which works out to total annual fees of $0.30 per $1,000 invested.

For perspective on why that matters so much, let's compare it to the SPDR S&P 500 ETF, which has a 0.0945% expense ratio. If you had invested $1,000 monthly and averaged 10% annual returns, you would have over $687,000 after 20 years. Had you made those investments in the SPDR S&P 500 ETF, you would've paid $7,400 in fees; by comparison, had you invested in the Vanguard S&P 500 ETF, it would have cost you around $2,400 -- making it far cheaper.

Let some of the world's top companies lead the way for you

One of the S&P 500's best characteristics has historically been its diversification. It contains top companies from all 11 sectors of the market. Admittedly, though, the Vanguard S&P 500 ETF and similar funds have become more concentrated than some investors would like to see. The ETF is market cap-weighted, so larger companies account for larger fractions of its portfolio, and thanks to the recent AI-fueled surge and other tech sector growth trends, top tech companies now dominate it.

Source: Vanguard. Percentages as of Feb. 29.

Those top-five holdings account for almost a quarter of the fund's value, and the top 10 are almost a third. That doesn't scream diversification for a 500-company ETF, but you can rarely go wrong with having some of the world's best companies lead the way for you. The worst-performing stock out of the ETF's top-five holdings over the past five years was Amazon -- and its stock price doubled in that time.

With a $1,000 investment in the Vanguard S&P 500 ETF, investors can be sure they're getting exposure to some of the most successful companies globally. Many emerging technologies and innovations from these companies should help the ETF maintain its momentum over the long haul.