It’s not been a great start to 2022. After what was generally a good 2021 for stocks, worries about rising interest rates and now a dangerous geopolitical situation has sent shivers through global stock markets. Over in the US, the flagship S&P 500 index has seen a fall of around 9% year to date, compared to an increase of over 25% last year. However, here’s why I think that Vanguard S&P 500 ETF (LSE: VUSA) is still one of the best exchange-traded funds (ETFs) to invest in right now.
Selecting an ETF for my own portfolio
There are a lot of choices when it comes to S&P 500 funds, offered by most if not all of the large investment companies. The largest one listed in the UK is iShares Core S&P 500 UCITS ETF with a size of over £40bn. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.
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For my own portfolio I’ve chosen VUSA, as this seems to sit in the middle in terms of size ($38bn) and costs (0.07%). It also pays a dividend, which is currently 1.12%.
Tracking the flagship US index means the ETF contains all 500 companies, which 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 and spans a variety of sectors such as technology, retailers, and banking.
One downside is that the ETF 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.
Why VUSA is still one of my top picks
As the famous saying goes, ‘It’s tough to make predictions, especially about the future’ and I think this is particularly apt for 2022. No one can say for sure the course of inflation, interest rates, or the Russia-Ukraine conflict.
Stocks go up and down and it’s possible that over the next few months some of the companies in this ETF might take a hit. However, over the long run 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.
The S&P 500 has been around for decades, has proved enormously resilient and has averaged around 10% returns per year since 1957. Though there are no guarantees, I’m hopeful in the future we might see similar long-term performance. If so, this fund will see a good return.
This is why Vanguard S&P 500 ETF is one of my top ETF picks to stay on course during turbulent times. I’m happy to continue to include it among my holdings as part of a balanced portfolio.