Is the Vanguard 500 Index Fund ETF a Buy Now?

With the stock market crashing at the end of last week, many investors are wondering if now is the time to invest in an exchange traded fund (ETF) like the Vanguard S&P 500 ETF (NYSEMKT: VOO). The ETF is now down about 15% year to date, as of this writing. Note, the market has been extremely volatile with stocks making big moves quickly, so by the time you read this the year-to-date return could be completely different.

I think this is a good time to add some shares of the Vanguard S&P 500, but with two caveats. First, let's look at why the Vanguard S&P 500 ETF is a solid investment option.

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A proven long-term winner

The Vanguard S&P 500 ETF tracks the performance of the S&P 500 index, which consists of about the 500 largest companies that trade on U.S. stock exchanges. The index is market capitalization (market cap) weighted, meaning that the larger a company is, the more weight it holds within the index. The index makes a slight adjustment for shares closely controlled by insiders, but market cap is generally calculated using a stock's shares outstanding multiplied by its share price.

Not surprisingly, the index is made up of the stocks of some of the largest and best-known companies in the world.

Here is a list of the ETF's top holdings and their weightings as of the end of February:

The S&P 500's success largely stems from letting its winners run as its losers become less important or eventually drop out of the index. This lets the index capture the success of stocks that grow to be mega-winners. Meanwhile, it never doubles down on its losers.

With an extremely low expense ratio, the Vanguard S&P 500 ETF tracks the performance of the underlying index very closely. And that performance has been strong over the long run. The ETF is has generated a total return of 223.7% over the past 10 years, as of the end of February, which is equal to an average annual return of 12.5%. Since its inception in September 2010, the ETF has an average annual return of 14%.

While the ETF doesn't stretch back 30 years, if you were able to invest $1,000 in the S&P 500 index 30 years ago it would be worth around $17,500 today. That includes going through bear markets related to the dot-com bust, the 2008 financial crisis, and the COVID-19 pandemic.

Data by YCharts.

Now here's the first caveat. Those strong gains occurred long-term. If you want similar performance, you will need to buy with the idea of holding this stock for a while. There will be periods of short term weakness to deal with. But history has shown it will eventually recover. As such, the recent market weakness is no reason to panic.

A volatile market

Then there is the second caveat. Typically when the stock market has crashed during the modern era, there has generally been a concerted effort on the part of multiple entities (including the government) to improve the situation that led to its fall. However, in an unusual move, the U.S. government enacted policies that caused this market crash.

Meanwhile, it doesn't appear there will be a concerted effort to help stocks rebound. Instead, President Donald Trump has said that while he doesn't want stocks to go down, "sometimes you have to take medicine to fix something."

As such, I think investors should consider slowly beginning to dip their toes into the market by buying the Vanguard 500 ETF, but I wouldn't be pouring money into the market. More volatility is likely in the short term. Instead, I would take a more cautious approach, adding to positions on the dips that are likely to keep coming as the market works to figure out the new normal here.

Given the market volatility, investors should alternatively consider using a dollar-cost averaging strategy. This is slightly different than the previous strategy as you don't track the market waiting for dips. Instead, you invest in the ETF at set times and with set dollar increments. This could be every other week or once a month. During a down market, this will help lower your cost basis and should set you up for strong returns when the market begins to turn.

Stocks are still one of the best ways to accumulate wealth over the long term, so stay invested and look to continue to use the ongoing weakness to build positions.

Should you invest $1,000 in Vanguard S&P 500 ETF right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Alphabet and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.