The S&P 500 index (^GSPC 0.74%) is made up of 500 companies from 11 different sectors of the economy, so it’s the most diversified of the major U.S. stock market indexes. It’s currently down 12.5% from its record high, placing it firmly in correction territory, amid simmering global trade tensions that were sparked by President Trump’s “Liberation Day” on April 2.
The president announced a sweeping 10% tariff on all imported goods from America’s trading partners, in addition to much higher “reciprocal tariffs” on goods from specific countries that have large trade surpluses with the U.S. The reciprocal tariffs have been paused for 90 days (except those on Chinese goods) pending negotiations, but investors are still concerned about a potential economic slowdown, hence the stock market sell-off.
But this isn’t the first time President Trump has ventured down this policy path, and history suggests the stock market is likely to recover in the long run. The Vanguard S&P 500 ETF (VOO 0.75%) is an exchange-traded fund (ETF) which directly tracks the performance of the S&P 500 — here’s why investors might want to buy it on the dip.
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A diversified, low-cost index fund suitable for most investors
Companies have to meet a strict criteria to gain entry into the S&P 500. For example, the sum of their earnings must be positive over the most recent four quarters, and they must have a market capitalization of at least $20.5 billion. But ticking all the boxes isn’t always enough, because inclusion is at the discretion of a special committee that meets once per quarter to rebalance the index.
Although 11 different economic sectors are represented in the S&P 500, the information technology sector alone makes up 29.3% of the total value of the index. It’s home to the world’s three largest companies: Apple, Microsoft, and Nvidia, which have a combined market capitalization of $8.3 trillion. They are likely to continue creating value for investors long into the future as they battle for leadership in different segments of the artificial intelligence (AI) boom.
The financial sector is the second-biggest component of the S&P 500, representing 14.7% of its total value. It includes investment banking giants like JPMorgan Chase and Goldman Sachs, in addition to Berkshire Hathaway, which is the $1 trillion holding company managed by legendary investor Warren Buffett.
Healthcare is the third-largest sector, with a 10.9% weighting, followed by consumer discretionary at 10.2%. The latter is home to giants like McDonald’s, Home Depot, Amazon, and Tesla.
Vanguard isn’t the only firm that offers an S&P 500 ETF — investors can also buy State Street’s SPDR S&P 500 ETF Trust, for example, which holds exactly the same stocks. But the Vanguard S&P 500 ETF is among the cheapest with an expense ratio of just 0.03%, which is much lower than the industry average of 0.75% (according to Vanguard).
That means a $10,000 investment would incur just $3 in fees each year, instead of $75 (on average) for competing funds, so investors get to pocket significantly more of their gains over the long run.
A stellar track record of performance
The S&P 500 might be down 12.5% from its all-time high right now, but history is proof that corrections are a normal part of the investing journey. According to Capital Group, declines of 10% or more happen once every two-and-a-half years (on average), so they are simply the price we pay for an opportunity to earn much higher returns over the long term compared to sitting on cash or other risk-free assets.
On that note, the S&P 500 has delivered a compound annual return of 10.3% since it was established in 1957, even after factoring in every sell-off, correction, and even bear market. The table below displays how much investors could earn over the long run by parking $10,000 in the index compared to holding cash:
|
Asset |
Compound Annual Return |
Balance After 10 Years |
Balance After 20 Years |
Balance After 30 Years |
|---|---|---|---|---|
|
S&P 500 |
10.3% |
$26,653 |
$71,041 |
$189,350 |
|
Cash |
4.5% |
$15,529 |
$24,117 |
$37,453 |
Calculations by author.
Past crashes in the S&P 500 were triggered by a variety of economic shocks. There was the dotcom internet crash in the early 2000s, followed by the Global Financial Crisis in 2008, and then the COVID-19 pandemic in 2020.
But back in 2018, President Trump imposed five sets of tariffs on America’s trading partners, covering around 12.6% of the country’s total imports. The move sparked fears of a global trade war which sent the S&P 500 plunging by as much as 19.8% that year, so investors who were around back then might be feeling a sense of déjà vu.
But over time, America’s trading partners came to the table for negotiations which led to fairer deals, and even exemptions from the levies in some cases. As a result, the S&P 500 bounced back with a vengeance in 2019, soaring by a whopping 31.5%. Since we know the Trump administration is currently trying to strike trade deals with Japan, Europe, and China, I wouldn’t be surprised if the worst of the decline in the S&P 500 is over.
As a result, the Vanguard S&P 500 ETF could be a great buy during the correction, especially for investors who plan to hold for the long term.
JPMorgan Chase is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, Goldman Sachs Group, Home Depot, JPMorgan Chase, Microsoft, Nvidia, Tesla, 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.
