VOO ETF: Is Now A Good Time To Buy Or Sell?
The Vanguard 500 Index Fund ETF (NYSEARCA:VOO) is one of the best ways for investors to get exposure to the S&P 500, and in turn, the S&P 500 is one of the best ways for investors to get exposure to the stock market. Although there are many macro concerns today and the S&P 500 recently entered a bear market, I continue to believe that investors who hold VOO and buy more slowly over time will see very positive long-term returns. I also believe that VOO is somewhat undervalued today.
Most investors are probably already familiar with VOO and are more interested in whether now is a good time to buy or sell the S&P 500, but for posterity, I’ll briefly compare VOO with other similar options.
There are many ETFs for investors to choose from these days. The most popular ones as measured by assets under management are passively managed and track diversified indexes of large-cap stocks like the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100.
Among these three indexes, the S&P 500 is the most popular because it’s the most diversified across sectors, has a sensible market capitalization-based weighting, and has a good mix of both growth and value stocks. That makes it a good option for many types of investors, especially those who don’t have the time or expertise to pick their own stocks. Popular financial figures like Warren Buffett and Burton Malkiel recommend that most retail investors allocate the majority of their stock portfolio to an S&P 500 ETF rather than dealing with the high risk/high reward nature of picking individual stocks.
There are three main ETFs that track the S&P 500 index: SPY (run by State Street), IVV (run by BlackRock), and VOO (run by Vanguard). Of the three, SPY has the most assets under management and liquidity, while VOO has the least. However, SPY charges a 0.09% expense ratio, while VOO and IVV recently dropped to 0.03%. Thus, for long-term retail investors who don’t need high liquidity or options, IVV and VOO are both good choices.
Timing The Market
Assuming you want to own an S&P 500 ETF like VOO, the next question is whether now is a good time to buy, hold, or sell.
The most tried-and-true approach to timing the market is simply not to do it. Instead, investors can simply dollar cost average into VOO when they have some spare cash that they won’t need to spend for years. Historically, those who DCA have always made money in the S&P 500, although unlucky investors who buy while the market is going down might take a few years to see positive returns.
If you’re buying VOO, it’s probably because you don’t want to deal with the risk and time commitment associated with individual stocks. So, why not take the same approach to timing the market? That is, reduce risk by buying slowly over time, rather than introducing additional risk and stress by trying to guess what the market is going to do in the short term. Most of the best investors like Warren Buffett are always long stocks and avoid making short-term market predictions.
Investing At Peaks And Valleys
Although DCA is great in theory, it can’t always be done. Some investors have a large pile of cash they don’t want to sit on, and some investors find that DCA isn’t a good fit for their personality. So, let’s take a look at what would happen to investors who lump sum invest in the most extreme cases.
The above graphic from A Wealth Of Common Sense shows what would happen if you invested all of your money right before a major crash and never DCA’d after that. We can see that on every time interval of 20 years or longer, investors would be better off in the market than in cash, and that in 6 of 8 scenarios they would even be better off after 10 years. So, at least historically, there’s never really been a bad time to lump sum invest.
On the other side of the coin, investing at an exact market bottom can produce incredible returns that widely outperform DCA. For example, investing in Feb 2020 would have produced 11% annualized returns since, while investing in Mar 2020 would have produced a nearly 35% CAGR. Similarly, investing at the 2009 bottom produced a 14% CAGR compared to 7% since 2007.
Most investors who lump sum invest will not be so (un)lucky as to buy at an exact peak or valley, but instead will buy somewhere in the middle and will likely see returns more similar to those of DCA. DCA is just a way to “guarantee” that average buy-in price and the average returns associated with it.
The Current Market
Of course, VOO already fell 20% this year, so investors who lump sum invest now can at least take comfort in knowing that they won’t be buying at the exact peak. The graphic in the previous section shows that there could be a lot further to fall in the most historic crashes. However, those happen fairly infrequently, usually less than once per decade.
On the other hand, bear markets where the market falls at least 20% are more common, typically occur once every 3-4 years and bottom out before a fall of 30% or more. Although the results differ depending on the time period you consider, whether you include dividends, and a few other factors, in general, bear markets typically last about a year, meaning that investors who buy when the market has fallen 20% usually see a 20% return on their investment within the following years.
This seems counter-intuitive, since right now there is a lot of bad news with negative GDP growth, inflation, a hawkish Fed, the Russia/Ukraine war, the China lockdowns, stocks crashing but still having high P/E ratios, mixed earnings, supply chain issues, etc. Fear sells, so news outlets love to cover these types of stories.
However, bear markets often bottom out when sentiment is most negative, which is before the news becomes positive. It’s not usually possible to time the market based on news or even most macro factors.
For example, I pointed out to members of Tech Investing Edge that the reversal of the 30-year trends of globalization and falling interest rates is being spun as an obvious reason why the market will continue falling. However, even if this reversal continues, it’s rarely pointed out that this 30-year period actually had below-average stock market returns, with the S&P 500 retuning an average of 8% per year compared to its historical average of 10.5%.
Rather than look at macro factors, I’ve shared multiple valuation models with Tech Investing Edge members that indicate VOO is actually slightly undervalued today relative to the growth potential and quality of the companies that compose it. One model is from me and the other is from Morningstar. Even if I’m right that the market is undervalued, it doesn’t mean that it will immediately rebound in the short term, because short-term movement is unpredictable. However, it would mean that people who lump sum invest today would see a better-than-average long-term return.
Investing in the S&P 500 through VOO is a proven way to build wealth over time. That trend should continue in the future as long as the USA continues to have leading companies and growing GDP. Building this wealth requires patience, sometimes decades of patience. But history shows that long-term investors are unlikely to regret buying VOO today, especially those who increase their exposure slowly over time.
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