Americans have become increasingly interested in exchange-traded funds, which let investors diversify their investments over various sectors and companies instead of picking individual stocks to buy. For example, investors can choose energy-specific ETFs, artificial intelligence ETFs, and others that track stock market indices.

Last year, U.S. investors funneled more than $1 trillion into ETFs, beating record inflows set in 2021. But with so many options available, which one is the best option? I’m partial to the Vanguard S&P 500 ETF (VOO 0.61%), a passively managed fund that aims to track the performance of the S&P 500. Here’s why it’s a great place to put $1,000 right now.

Image source: Getty Images.

1. It’s a low-cost fund

Vanguard ETFs have some of the lowest fees in the industry. That’s good news because it means that you’ll keep more of your gains when the fund’s value increases rather than having them siphoned off by high management costs.

The Vanguard S&P 500 ETF charges an expense ratio of just 0.03%, which is low by even passively managed fund standards, with the average expense ratio being around 0.12%. This means that for every $10,000 you have invested in Vanguard’s S&P 500 ETF, you’ll pay just $3 annually, compared to $12 for the average fund.

This low expense ratio makes the Vanguard S&P 500 ETF one of the cheapest ways to track the market, and it’s one big reason why putting $1,000 toward the fund is a smart move. As the S&P 500 grows, you’ll be keeping far more gains from your initial investment than with other ETF alternatives.

2. The S&P 500’s returns are impressive over time

Some investors aim for market-beating returns, and there’s nothing wrong with that goal. But it’s important to remember that the S&P 500’s average historical annual return of about 10% (before inflation) is still a very good return on your investment.

You’re not guaranteed to see those results every year, of course, and you’ll certainly have some years where you’ll have losses if you stay invested long enough. But over time, the S&P 500 has consistently been a moneymaker for those who patiently keep their money in the market.

Consider that over the past five years, the S&P 500 has fluctuated as a result of a global pandemic, soaring inflation, rapid interest rate hikes, geopolitical turmoil, an artificial intelligence (AI) boom, and President Trump’s tariffs. That’s a lot of market influence packed into just five years, and yet the S&P 500 has gained nearly 90% since the start of 2020.

Past performance isn’t indicative of future returns, as they say, but I use this example to show that even when there’s a lot of uncertainty in the world, the market tends to rebound.

3. You don’t have to be a good stock picker

There are a lot of great companies to invest in, but it’s time-consuming to do the research necessary to find great stocks. And even after doing your due diligence before buying, you’ll likely spend some time keeping up with the company’s earnings reports, management changes, and macroeconomic forces that could influence its share price.

Or, you could skip all of that. You can still invest in great companies and know that you’re well-diversified among many sectors and trends by buying Vanguard’s S&P 500 ETF. Some people like doing their own research and enjoy keeping up with the stocks they own. I get it. But if you prefer not to, then buying an S&P 500 ETF is a great option.

For all of the reasons above, I have most of my investment portfolio in Vanguard’s S&P 500 ETF. I like knowing that most of my investment strategy doesn’t involve panicking whether I’ve tied too much money up into one stock or hoping that a long-term investment bet I’ve made eventually pays off. If you’re looking for that peace of mind — and some likely solid returns along the way — putting $1,000 into the Vanguard S&P 500 ETF is a fantastic option.

Exchange-traded funds (ETFs) are some of the best ways to invest in the stock market. They can provide almost instant diversification and are less risky than individual stocks. Some have themes that allow you to invest in specific sectors, industries, and trends.

The risk part is important for ETFs, especially now, when there is more uncertainty surrounding the stock market than usual. ETFs aren’t immune to market drops by any means, but since they contain many companies, a single company’s poor performance won’t throw off the whole investment.

If you want to add an ETF to your portfolio, the Vanguard S&P 500 Growth Index Fund ETF (VOOG 0.25%) could be a good addition if you have up to $1,000 available to invest. The ETF contains S&P 500 companies with above-average growth potential, possibly setting you up for market-beating gains.

VOOG data by YCharts.

The sweet spot between stability and growth

With over 200 growth companies from the S&P 500, this ETF can offer you the best of both worlds. On one end, it takes being one of the 500 largest U.S. companies on the market to be in the S&P 500, so all the companies are well established with more financial stability than most younger growth stocks.

Of course, not all S&P 500 companies are created equal, and exceptions exist. But for the most part, these companies have proven business models and resources to help weather economic ups and downs (and trust me, there will be ups and downs along the way).

On the other end, the growth focus exposes investors to top companies that are expanding and have a lot more opportunities ahead of them.

As the tech sector goes, so does this ETF

This ETF is more tech-leaning than the already tech-heavy standard S&P 500. That’s not necessarily a bad thing because the tech sector has been the most rewarding over the past decade or two, but it does mean that you should be prepared for the ETF to be heavily influenced by the happenings of the tech sector.

VOOG data by YCharts

Here is how the ETF is broken down by sector:

Source: Vanguard. Percentages as of Feb. 28.

If more investors begin seeking out value and dividends during this time, the ETF could lag behind a bit in the near term, but the long-term potential remains strong.

This ETF relies heavily on the Magnificent Seven stocks

With the large representation of the tech sector and the ETF weighted by market cap, it’s no surprise that many of its top holdings are Magnificent Seven companies, which generally have some of the highest valuations on the market.

Source: Vanguard. Percentages as of Feb. 28. N/A indicates a stock isn’t in the opposite ETF’s top 10 holdings.

It may not be ideal for the Magnificent Seven companies to make up close to 45% of the ETF, but those have been some of the fastest-growing companies in the S&P 500, even with their size. The Magnificent Seven have artificial intelligence (AI) advancements, cloud-computing growth, electric vehicles (EVs), and other innovations that can continue their momentum.

The other two companies in the top 10 aren’t part of the Magnificent Seven but also have good growth opportunities. Broadcom is a key semiconductor player that’s become more important over the past couple of years, and Eli Lilly is one of the leading innovators in the healthcare sector.

That’s not a bad handful of companies to have leading the way.

History is on investors’ side with this ETF

Since it was created in September 2010, this ETF has outperformed the S&P 500 by a decent amount.

VOOG data by YCharts.

I wouldn’t bank on the ETF averaging 14% annual returns long term, but for the sake of illustration, let’s assume it averages 12% annually (the S&P 500 average since this ETF’s inception).

In this case, a $1,000 investment could triple to over $3,000 in 10 years and grow almost tenfold to over $9,500 in 20 years (accounting for the ETF’s 0.07% expense ratio).

Down periods in the market don’t usually bode well for growth stocks in the short term, but that could work out in your favor over the long haul as prices drop. You likely won’t regret your investment some years from now.

For years, Vanguard was at the leading edge of the mutual fund industry, with a heavy focus on index mutual funds, though it also offered a large selection of actively managed funds.

When exchange-traded funds (ETFs) were introduced, Vanguard quickly started to offer index-focused ETFs, which makes complete sense. However, there are often overlapping offerings in the company’s mix.

One of the most interesting is in the dividend growth camp, with the Vanguard Dividend Appreciation Index ETF (VIG 0.93%) clearly overlapping with the niche of the Vanguard Dividend Growth Fund (VDIGX 0.86%). Which is better?

The difference between an ETF and a mutual fund

Mutual funds are far older than exchange-traded funds. They are an easy way for individual investors to pool their money and hire professional money managers. This helps to keep the costs down for each individual investor and allows for material diversification in the portfolio that might not be possible otherwise.

Vanguard offers both index-based mutual funds and actively managed ones, where human beings make all of the day-to-day decisions.

Image source: Getty Images.

The one big caveat here is that a mutual fund can only be bought at the end of the trading day. This is because the net asset value (NAV) of the fund has to be calculated to determine the proper price.

It isn’t a difficult process, simply requiring that the value of the portfolio be divided by the number of shares outstanding. However, that can’t happen during the trading day because the values of each individual portfolio holding are constantly changing.

Exchange-traded funds address this problem in a unique way. Large shareholders of an ETF can be paid in kind by an ETF’s sponsor, effectively receiving all of the underlying stocks. That creates an arbitrage opportunity if the ETF’s price diverges too far from the value of the portfolio. And, thus, ETFs can trade all day and trade very close to their NAVs.

Although there are now actively managed ETFs, the core of the ETF world is index-based products where the portfolios don’t change randomly. In fact, most index ETFs have very strict rules around portfolio construction and maintenance. That makes it easier for the structure to work.

With that background, which is better? The answer is probably “It depends,” but a look at two Vanguard products with similar goals but very different managers provides some interesting food for thought.

Two dividend growth options at Vanguard

The Vanguard Dividend Appreciation Index ETF and Vanguard Dividend Growth Fund both seek to invest in stocks that increase their dividends over time. As the chart below highlights, over the long term, these two products have tracked fairly closely. But over the past year or so, performance has diverged a little bit, giving the ETF the edge.

VIG Total Return Level data by YCharts.

The Vanguard Dividend Appreciation Index ETF tracks the S&P U.S. Dividend Growers Index. To get into that index, a company must increase its dividend annually for a decade. From that list, it excludes the highest-yielding 25%, which is an effort to remove stocks that may be facing financial difficulties that would lead to a dividend cut.

The stocks are market-cap weighted, so the largest companies have the biggest impact on performance. That’s basically the entire screening process.

The Vanguard Dividend Growth Fund is far more eclectic, with active human managers overseeing its stock holdings. The overarching theme, according to Vanguard: “The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time.” After that, its management can do just about whatever it wants regarding which stocks to pick and what weighting to give each stock. This leads to a different portfolio compared to the Dividend Appreciation Index ETF.

For starters, the Vanguard Dividend Growth Fund holds just over 40 stocks versus the ETF’s 330 or so. But the ETF has a far more concentrated portfolio when you look at sector diversification, with technology accounting for around 25% of the portfolio. The mutual fund’s tech exposure is about 16%, while it has chosen to put more emphasis on healthcare stocks, which stand at nearly 20% of assets, representing its largest sector exposure. The ETF’s healthcare exposure is 14% or so, making it the third largest segment of the portfolio.

XLK Total Return Level data by YCharts.

The top three industry categories (tech, financials, and healthcare) make up just over 60% of the ETF’s portfolio. The top three sectors in Vanguard Dividend Growth Fund (healthcare, industrials, and tech) account for about half of its portfolio.

All of this may seem like mere nuance, but it is actually important, when you also consider that only five of the top 10 holdings in each of these investment vehicles are the same. The humans are clearly making very different decisions. That currently means a tilt away from the giant technology stocks that have driven the market higher and toward healthcare, which has not been performing nearly as well.

There’s no way to know exactly what those in charge of the actively managed mutual fund are thinking here, but it could be an attempt to lower risk or to shift toward a sector that they believe presents more value. Given the ETF’s index-based structure, it can’t make shifts like that.

And that’s the biggest selling point for the mutual fund, since the ETF can’t make changes to its portfolio at all until it rebalances it once a year. It always has to track the index, while the actively managed mutual fund can adjust on the fly to changing market conditions.

If the next bear market is driven by a technology free fall, the human touch will become pretty handy. There are two reasons for this, as the mutual fund is not only choosing to be less exposed to technology, but it is also cherry-picking tech stocks in a way that the ETF can’t. For example, if three technology stocks pass the ETF’s screening process, it has to buy them all. The mutual fund can select the one that it believes has the best risk/reward balance.

XLK Total Return Level data by YCharts.

There is no clear-cut winner

Index funds have proved to be very successful relative to actively managed funds over long periods of time. However, the similarity in the performance of the Vanguard Dividend Appreciation Index ETF and the Vanguard Dividend Growth Fund up until the last few years suggests that indexes aren’t the be-all and end-all for every investment approach.

And while the last few years have leaned in the ETF’s favor, the mutual fund is clearly making a choice to limit its exposure to the very sector that is driving the ETF higher.

You’ll pay more for the human touch: The mutual fund’s expense ratio is 0.29% versus an expense ratio of 0.05% for the ETF. But that cost may be worth the price if you appreciate the value of letting your managers adjust to market conditions as they crop up. Even if that can leave them out of step with the market over the short term.

Everyone would love to make a million dollars through investing — and there are various ways to set yourself off on the right path. One way is to invest in a broad range of quality stocks and hold on to them for the long term. Though this is something all of us can do, it requires some time and effort.

Now, what if I told you that with just one investing move, you could invest in 500 of today’s top stocks? This is one time when something that sounds too good to be true actually is true: By buying shares of an exchange-traded fund (ETF) that tracks the S&P 500 (^GSPC -0.43%), you gain exposure to the biggest companies driving today’s economy.

A popular low-cost one to try is the Vanguard S&P 500 ETF (VOO -0.42%). But will this Vanguard ETF make you a millionaire? Let’s find out.

Image source: Getty Images.

Immediate exposure to many stocks

First, let’s talk a little bit about ETFs. These assets allow you to invest in many stocks at once according to a particular theme — this could be by industry, such as biotech, or investment style, like value or growth. ETFs also are a great way to gain exposure to the performance of a major benchmark, such as the S&P 500. In this case, the fund mimics the composition of that index in order to track its performance, meaning that when the S&P 500 advanced 23% last year, so did the ETFs tracking it.

VOO data by YCharts

So, by investing in an ETF, you gain immediate diversification across a theme, or in the case of an S&P 500 ETF, diversification beyond one industry or theme.

And the great thing about ETFs is they trade daily on the market just like stocks, meaning you can buy or sell them just as you would a stock. The one main difference to be aware of is ETFs come with management fees, as expressed by an expense ratio — you’ll want to choose an ETF with an expense ratio of less than 1% in order to preserve your gains over time. The Vanguard S&P 500 ETF fits the bill, with an expense ratio of only 0.03%.

Investing in 11 different industries

Now, let’s talk specifically about the Vanguard S&P 500 ETF. Today, this fund, like the index it tracks, is heavily exposed to technology — an industry that’s soared in recent times thanks to investor interest in areas like artificial intelligence (AI) and quantum computing.

Information technology is the most heavily weighted sector in the index and fund at more than 32%. But, as mentioned, investing in such an ETF allows you to diversify, and here, we have exposure to a total of 11 industries.

Another positive point is the index, and therefore the Vanguard fund too, are flexible. The index rebalances periodically to reflect the most relevant companies and sectors of the times, and the Vanguard fund must copy these additions and deletions.

All of this ensures that you as an investor always are exposed to the top companies of the moment. For example, last year, the S&P 500 invited Palantir Technologies, an AI-driven software company that’s seen earnings soar, to join — and the Vanguard ETF added the shares.

Could this investment be worth millions?

So, it’s clear that an investment in the Vanguard S&P 500 ETF is a smart move — but could it make you a millionaire? Let’s do some quick math. The S&P 500 has generated an annual average return of 10% over time. If we imagine this continues and we invest $1,000 in the Vanguard ETF today, then add $300 a month to it for 35 years, the total value of our investment could top $1 million.

This shows it is possible to reach $1 million by investing in the Vanguard S&P 500 over time — but should you do it? I wouldn’t put all of my eggs in one basket and invest only in one stock or one ETF — even an ETF that tracks a solid benchmark. You’re much more likely to score a victory by buying a variety of quality stocks and ETFs and holding on over time than sticking to just one.

But, as part of a diversified portfolio, the Vanguard S&P 500 ETF makes a fantastic investment — and one that clearly could help you roar ahead on the road to wealth.