VOO ETF Was A Buy And Still Is A Buy At All-Time Highs (2024)

One of the smartest people I know once told me not to try to beat the market, just to invest in ETFs. While I didn't listen to his advice, as my investment methodology is more complex than most investors, I did dedicate a section of my portfolio to ETFs. The Vanguard S&P 500 ETF (NYSEARCA:VOO) has been a staple within my portfolio as it represents an allocation into the 500 largest companies across the United States. If you have a long-term time horizon and believe in the future of the United States, I am not sure if there is a better investment plan for long-term success than investing in VOO or another S&P 500 index fund. I prefer VOO to other S&P 500 index funds, but if you're looking to write covered calls to generate income, the SPDR S&P 500 ETF (SPY) has more frequent option chains. With an expense ratio of 0.03%, it's not hard to understand why VOO has more than $1 trillion in assets under management (AUM). While VOO is up 11.1% in 2024, I believe it's going to continue to increase throughout the rest of the year. While we could experience dips and retracements, the S&P 500 has proven to generate substantial returns for investors, and VOO is my favorite proxy for gaining exposure to the S&P 500.

Following up on my previous article about VOO

In my last article on VOO, which was published on February 14^th (can be read here), I discussed why investors shouldn't be scared to buy VOO at all-time highs. At the time, VOO traded for $456.58 and has since appreciated by 6.31% ($28.79) to $485.37. The market recently hit new all-time highs, and I believe we're headed higher. I am following up with a new article on VOO now that we have more economic data and a clearer picture of where the Fed sees rates going. Many of the largest companies in the world have reported Q1 earnings, and their projections indicate substantial earnings growth, which should lead the market to higher growth.

Risks to investing in VOO

While investing in an index fund such as VOO is a diversified approach to gaining ownership in the 500 largest companies within the United States, there is still a level of risk that investors need to recognize. First, there is opportunity cost, as investing in VOO is a conservative approach. The historical average return from the S&P 500 since 1957 is 10.26%. If you're able to pick stocks well, there is an opportunity to outperform the market. Investors who purchased Nvidia Corporation (NVDA) last year are up over 200%, while investments such as Apple (AAPL) have appreciated by 300% over the past 5-years. Investing in VOO is a more passive way to invest, but there are many well-known investments that power the S&P 500 higher and outperform it. The other risk is that the market doesn't just grind higher at 10.26% annually, and there are lost periods of appreciation. In the dotcom bubble, the S&P 500 declined by -10.14% in 2000, -13.04% in 2001, and -23.37% in 2002. This was met with 5 consecutive years of growth, then 2008 occurred, and the S&P 500 crashed by -38.49%. While over time, investing in an index fund such as VOO has proven to appreciate in value, future gains are not guaranteed, and if the macroeconomic landscape changes, the returns from VOO could be flat or decline over a period of time.

Why I prefer VOO to other index funds

The largest 3 S&P 500 index funds, to my knowledge, are VOO, SPY, and the iShares Core S&P 500 ETF (IVV). While I believe investing in any of these over a long-term period will generate substantial gains, I want to be invested in the best of the best, which I feel is VOO. Over the past year, the overall returns are extremely similar, as the range is within a tenth of a percent between the 3 ETFs. Extrapolating these results out over an extended period are equally similar, so I wanted to get a bit more granular in the details to determine which index fund I would allocate capital toward.

The determining factors for me came down to expense ratio and dividend yield. I put a chart together, which can be viewed below, of the comparison between VOO, SPY, and IVV. I am operating on the principle that they are all investing in the S&P 500, and the returns are going to remain extremely close to each other as they have previously. If the returns are going to be extremely similar, then I need to look at the other factors that will impact my overall returns. This is why I am placing a large consideration on expense ratios and dividend yields. I am cheap, and I want to pay the least amount that I can in management fees, while collecting as much as I can from the dividends paid. SPY charges investors a 0.09% management fee, which is low in the grand scheme of things, but when I can pay 0.03% from VOO or IVV it certainly impacts my decision-making. Paying $3 on every $10,000 rather than $9 adds up, and while this number may seem insignificant, that extra $6 on every $10,000 is better off invested in the S&P in my account than in the hands of the investment house. In addition to paying the least amount in management fees, I want to get the largest dividend yield that I can. VOO has a dividend yield of 1.32%, while IVV and SPY yield 1.30% and 1.27%. This may not seem like a lot, but generating the most yield on my capital that will be reinvested will help my investment grow on a continuous basis.

As I indicated, all 3 are solid funds, but I think VOO is most aligned with shareholders. When appreciation is basically a moot point, it comes down to expense ratios and dividend yields. Unless you are actively selling covered calls, I do not see a reason to pick SPY over VOO. SPY has underperformed VOO over the past year, generates less dividend yield, and charges 3x more management fees. IVV charges the same management fee as VOO, and is slightly ahead of VOO on appreciation, but it generates less dividend yield. On any given day, VOO could be ahead of IVV or SPY on appreciation and vice versa. I think there is a reason why the AUM is drastically larger when it comes to VOO, and I believe it's because investors are getting the rock bottom management fee with the larger yield. Over several decades, this will certainly impact the overall investment.

I believe there is never a bad time for long-term investors to invest in VOO and that shares of VOO will continue higher

I am not a short-term investor, so I tend to look at things with a minimum time horizon of 5-10 years. When it comes to VOO, the capital I am allocating toward index funds, I am looking at a 30-40 year horizon. Over the past decade, we have endured recessions, an oil crisis, a pandemic, inflation, inverted yield curves, and geopolitical tensions, and no matter what has occurred, there have always been bearish and bullish individuals on the market. Going back over the past 10 years, no matter which new high was purchased, the market has ultimately gone higher. If you had bought the top before the pandemic, you would have experienced short-term pain, but the market rebounded and went substantially higher. If you had invested at the top in 2021, it may have taken two years, but the market is higher than it was, and you have collected 8 dividends or so along the way, which is ultimately producing larger dividends that are being reinvested. I don't subscribe to the idea of timing the markets because it's too difficult. If you are constantly investing in VOO, whether monthly, quarterly, or bi-annually, I don't believe there is ever a bad time to add shares of VOO, even if it's at a new high for long-term investors. VOO was at new highs when my last article was published, and since then, shares have climbed more than 6%. We could see dips along the way and even experience bear markets, but if you have a long-term time horizon, I believe that VOO will continue appreciating no matter what the short-term headwinds will be.

Rates remained unchanged at the last FOMC meeting, and Fed Chair Powell's message was dovish during the press conference. The key takeaway was that the Fed's next move is likely to be lower rather than higher, despite continuing to be data-dependent. Since then, the labor report came in softer than expected, and we just got the latest CPI print of 3.4%, which was 0.1% lower than the March print of 3.5%. The core CPI print came in at 3.6%, which was a 0.2% decline in MoM from the 3.8% print in March. Core CPI is at its lowest level since May of 2021 and crude is still hovering around $80 per barrel. Crude ran from $77 to $87 per barrel from the middle of March to the beginning of April, and the decline in prices is likely to start throughout the manufacturing process. The United States is the largest oil and gas producer globally, and its oil production has increased from 12.58 million bpd to 13.15 million bpd. If oil production continues to increase a bit and the price of oil can get back to around $70 per barrel, I think we could see a rate cut in July, especially since it looks like rents are starting to come in a bit. If the Fed cuts in July, it will give them 2 months to see how the economy reacts as there is no meeting in August, and it could set the stage for a cut in September and then again at the end of the year. If this occurs, I think the market will rally because businesses and individuals will be more inclined to spend as the cost of capital declines, and a significant portion of the capital will be spent with the largest companies in the S&P 500.

When I look at the top 10 holdings in VOO, I see a lot of forward earnings growth on the horizon. VOO holds both classes of Alphabet (GOOGL) (GOOG) in its top ten, but I only listed it once. That's why there are 9 companies in the chart below. The top holdings trade at a 32.83 forward P/E based on 2024 earnings as a group. When I look out to 2026, they trade at 23.11 times 2026 earnings. The average company is looking at roughly $39.44% in EPS growth over the next 2 fiscal years, and the markets are forward-looking. If we get rate cuts sooner rather than later, I think the markets will continue to grow without a significant sell-off. Over the long term, I think VOO is headed higher as it will be fueled by an easing economic environment in addition to its largest positions growing earnings across the board.

Conclusion

VOO has been my favorite ETF to track the S&P 500 because of its low expense ratio and larger dividend yield than its peers. I don't believe there is ever a bad time to invest in VOO if you have a long-term time horizon. Excluding the new highs, investors are ultimately up on their investment in VOO, no matter which market top was purchased. Sometimes rebounds take longer than others, but the market has historically gone up and to the right even after several years of lost growth. I am never scared to buy at the top because I can't time the markets, and I believe in time in the market rather than timing the market. I allocate capital toward index funds every 2 weeks, and my purchase prices even out over time. Investing in VOO has proven to be a winning strategy, and while the market could certainly retrace, I think VOO will end in 2024 at a higher rate than it is today.

Steven Fiorillo