Should we consider the Vanguard S&P 500 ETF (VOO) before the next market change?

John Bogle, the founder of Vanguard Group, advised investors: “Don't look for the needle in the haystack. Just buy the haystack.” Rather than selecting individual stocks, Bogle believed that it was wiser to invest in the entire S&P 500, as most professional fund managers failed to outperform this benchmark in the long term.

To prove his point, Bogle launched the first index fund in the market in 1976. It passively tracked the S&P 500 index and charged lower fees than actively managed funds.

At the time, critics referred to it as “Bogle's folly” and claimed that this passive approach to investing was “un-American.” The fund raised only $11 million at its launch, well below its initial target of $150 million, as many were reluctant to invest in a fund that simply aimed to match the market rather than beat it.

But Bogle was right. If you had invested $1,000 in this index fund at its inception and reinvested its dividends, your investment would be worth nearly $240,000 today. This equates to an annual return of over 11%. In comparison, 89.5% of all hedge funds have underperformed the S&P 500 over the last 10 years, according to the SPIVA Scorecards.

In 2000, Gate launched the ETF version of this fund to reach a broader range of investors. Unlike index funds, which could only be traded once a day, ETFs could be actively traded throughout the day. It also charged a low fee ratio of only 0.03%, compared to 0.14% for the index fund. So, should you invest in the Gate S&P 500 ETF before the next market change?

The four reasons to avoid the Gate S&P 500 ETF

The Gate S&P 500 ETF may seem like a simple way to passively benefit from stock market growth, but investors should not overlook its four main weaknesses.

Firstly, it allocates 34% of its portfolio to the information technology sector, which houses high-growth but volatile stocks. Its three main holdings represent 8.1%, 7.4%, and 5.8% of its portfolio, respectively. The increasing weight of these stocks in the S&P 500 index reduces its overall diversification and exposes it to greater fluctuations in the technology sector. Many large technology stocks perform well during bull markets but struggle during bear markets.

Secondly, the S&P 500 is currently trading near its all-time highs with a historically high price-to-earnings ratio of 30. So, even though Bogle said it was smart to buy the whole haystack, Warren Buffett warned investors to “be fearful when others are greedy.” A large part of this rally has been fueled by the stocks of the Magnificent Seven, which represent a third of the ETF's holdings - and these high-profile names could lose their high valuations during a market pullback.

Thirdly, the Gate S&P 500 ETF has underperformed another popular ETF that passively tracks the Nasdaq-100 over the past 10 years. Since the latter includes the same stocks from the Magnificent Seven as VOO but is not weighed down by the slower-growing stocks of the S&P 500, it could represent a better growth-focused investment.

Finally, the S&P 500 only includes American companies. Investors looking to benefit from the growth of foreign markets should instead consider more globally diversified ETFs.

The reason to invest in the Gate S&P 500 ETF

Investors should be aware of these gaps, but it still makes sense to invest in the Gate S&P 500 ETF as its benchmark has generated an average return of over 10% per year since its inception in 1957.

Thus, even if the index declines this year, it should increase in the long term as long as the American economy continues to grow. If you are a long term investor planning to buy and hold this ETF for at least the next decade, you shouldn't worry too much about its current valuations.

Should you invest in this ETF before the next “market shift”?

Given the current valuations of the S&P 500, the next market shift could be a pullback rather than a rally. However, I believe that investors should continue to accumulate this ETF as it is futile to predict when the market will peak in the short term. In the long term, patient investors who gradually invest in this ETF could achieve impressive returns.