A stock market crash is a sharp drop in prices in a short amount of time. Fortunately, they’re infrequent. Unfortunately, they’re also inevitable.
The stock market has already had a bumpy start to the year and in case the markets take a turn for the worse, I’m now thinking about how I can make the most of it with this Vanguard exchange traded fund (ETF).
Vanguard S&P 500 ETF
For my own portfolio, during a downturn, I would choose Vanguard S&P 500 ETF (LSE: VUSA). Out of all the S&P 500 ETF options in the market, this sits in the middle in terms of size ($37bn) and management costs (0.07%).
This fund includes all the companies from the index, which are some of the strongest and most stable corporations in the US. It contains 500 large companies that are selected by a committee. Firms must have a big enough market cap, have at least 10% of shares outstanding and meet liquidity and profitability requirements.
It includes big-name companies such as Microsoft, Apple and Amazon. In terms of industries, the index includes a variety of sectors such as technology, retailers and banking.
One downside is that the index only includes companies from the US. It’s true that many of these firms derive some of their earnings from outside of that country, but this percentage has been falling over time.
Another issue with buying the S&P 500 is that I limit my returns to those of the index. I could be wrong, but by picking individual stocks I might be able to outperform it.
However, this ETF allows me to invest in 500 companies by holding a single share. For me, it’s a low-cost way of diversifying massively across companies and sectors. I’m happy to forgo the possibility of a higher return from investing in individual companies for the ease of this diversification.
Performance and reasoning
In 2021 the share price of this ETF increased by around 30%. However, year to date it’s been a different story. At the time of writing, the fund is down around 5%. That said, it’s already bounced up from its four-month low and is possibly set for a further rise.
If there’s a stock market crash, while some of these companies might take a hit in the short term, they’re very likely to recover. This is because of the S&P 500’s selection criteria. In essence, they must be fundamentally solid with a long history of earning positive average returns.
Indeed, the US index has averaged around 10% returns per year since 1957 and though nothing is certain, I’m hopeful that even after a brief interlude during a market decline, we might see a similar performance.
Also, this fund pays a dividend, which means that even if the share price declines, I’m still earning a return.
All things considered, I believe the ETF could be a strong investment for my portfolio. Even in the case of a stock market crash.
