The S&P 500 has been soaring, heading for a 25% increase this year, and that's prompted a lot of investors to think about how they might get in on this action. After all, if you invest in the S&P 500, you're taking positions in the top companies driving today's economy. That's a great way to set yourself up for an investing win. On top of that, the S&P 500 has shown its strength over time, generating an annualized average return of more than 10% since its debut as a 500-company index. So long-term investors have benefited by betting on the benchmark.
Of course, it's pretty difficult and expensive to buy all 500 stocks in the index -- but you don't have to do that to access all of these exciting players across industries. Instead, you can pick up shares of an exchange-traded fund (ETF) that will do the job for you. A great, low-cost example is the Vanguard S&P 500 ETF (NYSEMKT: VOO), a fund that tracks the performance of the benchmark. Here's the ultimate guide to investing in this ETF for maximum returns.
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An easy investment
Let's start off by taking a quick look at ETF investing in general. These funds make easy investments for you for two reasons. First, they trade daily throughout trading sessions just like a stock -- and you can buy them as you would a stock. So, the logistics of buying or selling is easy and familiar for stocks investors. Second, they offer you immediate access to a vast number of stocks -- so you gain instant diversification across one particular industry in the case of a themed ETF, like biotech for example, or diversification across the entire stock market if you choose a product like the Vanguard S&P 500 ETF.
One point that separates ETFs from stocks is management fees, as expressed through the expense ratio. These generally are minimal but be sure to choose an ETF with an expense ratio of less than 1% in order to maximize your potential for gains over time.
Now, let's consider the Vanguard S&P 500 ETF. With an expense ratio of only 0.03%, it fits our cost criteria. The fund invests in S&P 500 companies to mimic the composition of the index and therefore deliver the same performance. Today, the most heavily weighted industry in the index and the ETF is information technology, with a weighting of more than 31%, and top holdings in the ETF include Apple, Nvidia, and Microsoft, each with weightings of more than 6%.
But the ETF includes 10 other industries, so by investing, you're gaining exposure to a wide variety of sectors and companies. And the great thing about such an ETF is it evolves with its environment -- if one day another industry drives more growth than technology, the S&P 500 and the ETF will reflect this. So, by investing in the Vanguard ETF, you'll always be invested in the major companies of the times.
Investing regularly over time
So, how should you invest in this ETF to maximize returns? I favor investing regularly in it over time to benefit from the magic of compounding. Let's consider an example, with the idea that the S&P 500 will continue its historic trend of annualized 10% gains. If you make an initial investment of $1,000 in the Vanguard ETF, then add $300 to it monthly for 35 years, the total value of your investment at the end of the period would be more than $1 million.
Even a shorter-term investment could be compelling: Using the same amounts of money over 20 years could bring your investment to more than $200,000.
To maximize your returns, it's a great idea to invest monthly in this ETF for a time period and at an investment level that suits your budget and strategy. And at the same time, be on the lookout for quality stocks to add to your portfolio -- those in industries you understand well and that offer solid long-term prospects. This combination of regular investment in an excellent S&P 500 ETF and wise stock picking could help you grow wealth over time -- and minimize risk along the way thanks to your broad investment across the country's strongest companies.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
