Why this ETF is my #1 recommendation for new investors

For new investors, it can be difficult to research and invest in individual companies. Luckily, that’s where exchange-traded funds (ETFs) come in. ETFs allow investors to invest in multiple assets with a single investment. Different ETFs are created based on different criteria, such as industry, company size, or company mission.

If you’re new to investing, you can rarely go wrong by first looking at the S&P500, which tracks the 500 largest publicly traded U.S. companies. This is why the Vanguard S&P 500 Index Fund ETF (NYSEMKT: VOO) is my #1 recommendation for new investors.

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You can get instant diversification

One of the pillars of a good investment portfolio is diversification. The adage “don’t put all your eggs in one basket” applies to many aspects of life, and investing is one of them. As an investor, you never want your portfolio’s success (or slowdown) to be based on too few investments; you want your risk spread. With the Vanguard 500 Index Fund ETF, investors can achieve instant diversification with a single investment.

The ETF consists of 506 large-cap companies covering every conceivable industry. The top five industries represented in the fund are:

  • Technology (28%)
  • Healthcare (13.6%)
  • Consumer Discretionary (12%)
  • Finance (11.1%)
  • Communication Services (9.4%)

Although the majority of the fund is made up of the five major sectors, it also includes real estate, energy, industrials and utilities companies. For new investors, accessing these industries with a single purchase is much more efficient than learning each respective sector and finding individual companies to invest in.

It pays dividends

Apart from an increase in the price of a stock, dividends are the other main way to make money from an investment. It’s a way for companies to reward shareholders who keep their shares. As of May 2, the Vanguard S&P 500 ETF had a dividend yield of 1.46%. And while that percentage may seem low, it can make a big difference over time compared to an ETF that doesn’t pay dividends.

Suppose an ETF returns 8% per year, a little below the historical annual return of the S&P 500. If you were to contribute $500 per month to the ETF, you would have accumulated over $679,000 in 30 years. If you did the same thing and factored in a dividend yield of 1.46%, that total would jump to over $891,000. Without more effort or work on the investor’s behalf, a “simple” dividend can be worth over $200,000 in the long run.

It’s cheap to own

ETFs come with a expense ratio, which is charged as a percentage of the total amount invested. If the expense ratio is 0.5%, you will be charged $5 for every $1,000 invested. Although the S&P 500 is a universal index, different financial companies establish their own respective S&P 500 ETFs and may have different expense ratios.

At 0.03%, Vanguard’s S&P 500 ETF is one of the cheapest ETFs you’ll come across. Yes, free is best, but paying only $0.30 per $1,000 invested is a bargain. Just as a relatively low dividend yield can add up to thousands over time, the smallest differences in expense ratios can add up to huge amounts over the long term.

The most important thing is to start

If you’re new to investing, the best thing to do is get started. Much of the value of investing comes from compound interest, which takes time. The earlier you start investing, the better – and it doesn’t have to be complicated. Constantly invest in a S&P 500 Funds can work wonders and put you in a position to prosper financially when you retire.

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stefon walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions and recommends Vanguard S&P 500 ETF. 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.

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