How Should a Beginner Invest in Stocks? Start With This ETF. | The Motley Fool (2024)

When you're beginning your investing journey, one of the most important things you can do is keep it as simple as possible. Investing doesn't have to be complicated, especially when you're learning.

A great way to simplify is by investing in exchange-traded funds (ETFs), which are funds that trade on the stock market like individual stocks. If you're a beginner looking for the best way to invest in stocks, look no further than the Vanguard S&P 500 ETF (VOO 0.53%).

What is the S&P 500 index?

An index is a theoretical collection of stocks that are grouped together by specific criteria. The criteria can be related to size, industry, style, or other characteristics.

The S&P 500is an index that tracks the largest 500 stocks trading on the U.S. stock market by market cap. An S&P 500 ETF is a fund put together by different financial institutions to mirror the S&P 500. Since these ETFs mirror the same index, there is generally no tangible difference besides cost.

A lot of ground is covered in a single ETF

The Vanguard S&P 500 ETF is a great go-to because of its trifecta: diverse, low-cost, and proven historical results. For any investor, regardless of experience, diversification is important because it spreads out your risk. When a particular sector or company goes through a down period, you don't have to worry about it negatively affecting your entire portfolio.

The Vanguard S&P 500 ETF contains 505 holdings from all 11 major sectors (percentages are amount of ETF as of Jan. 1):

• Information technology: 29.5%
• Financials: 13.1%
• Healthcare: 12.8%
• Consumer discretionary: 10.3%
• Communication services: 8.9%
• Industrials: 8.6%
• Consumer staples: 6.1%
• Energy: 3.8%
• Real estate: 2.4%
• Materials: 2.3%
• Utilities: 2.2%

Being able to simultaneously invest in hundreds of companies with a single investment is a significant benefit -- especially for beginning investors. There's no need to spend lots of time researching hundreds of companies; just lean on the S&P 500, which does a good job representing the broader U.S. economy.

The Vanguard S&P 500 ETF has good historical results

Since its September 2009 inception, the Vanguard S&P 500 ETF has total returns of around 485% and averaged around 14% annual total returns. Below is how a $10,000 one-time investment at its inception would have fared:

VOO Total Return Level data by YCharts

Aside from the specific results, an important thing to pay attention to here for beginning investors is the importance of starting as soon as you can and riding out short-term fluctuations. Investing is a game of ups and downs, and volatility is an inevitable part of the stock market.

What matters is that good businesses held for the long term return good value, which the Vanguard S&P 500 ETF has shown it consistently does. Past results don't guarantee future performance, but the ETF's track record is reassuring.

Fees may seem minor, but they can be a major expense

There are numerous S&P 500 ETFs, but my preference for the Vanguard S&P 500 ETF has to do with its cheap expense ratio (fees charged as a percentage of your total investment). The Vanguard S&P 500 ETF's expense ratio is 0.03%, which equals $0.30 per $1,000 invested.

For comparison, the largest S&P 500 ETF by assets under management, the SPDR S&P 500 ETF Trust, has an expense ratio of 0.0945%. If you were to invest $6,000 annually ($500 monthly) into each ETF, here's how your investment values would stack up, accounting for the fees:

Calculations by author. Values rounded to the nearest hundred.

Expense ratios can often be overlooked because the difference doesn't seem like much on paper, but in practice, a slight difference in fees can add up to thousands of dollars.

The hardest part of investing for a lot of people is beginning, but time is an investor's best friend. Start early and don't feel you need to know a lot or have a lot of money to begin. You'll likely thank yourself down the road.