The S&P 500 continues to reach new heights, exceeding 6,600 at the close of the previous trading session, marking yet another record for this benchmark index. Historically regarded as a stable investment for wealth growth, the S&P 500’s current valuation has raised concerns for risk-averse investors, especially given the ongoing economic uncertainties.
Much of the index’s performance can be attributed to major technology companies like Nvidia, Microsoft, and Apple, which have experienced substantial growth amid advancements in artificial intelligence (AI). These tech giants hold significant positions within the S&P 500, leading some investors to reconsider the safety of heavily relying on this index for their portfolios.
As an alternative, investors might consider tracking a broader portion of the stock market to achieve better diversification. The Vanguard Total Stock Market Index Fund represents one such option, positioning itself as a potential substitute for those who want to avoid the concentrated risks associated with the S&P 500.
When comparing returns over the past five years, the SPDR S&P 500 ETF has delivered a total return of 109%, including reinvested dividends. In contrast, the Vanguard fund has provided a slightly lower return of 103%. For instance, a $10,000 investment would have appreciated to about $20,900 in the S&P 500 ETF, compared to $20,300 in the Vanguard fund. This relatively modest difference in returns highlights the effectiveness of the S&P 500 as a reflection of the overall market’s health, particularly when conditions are favorable.
However, the sustainability of this trend remains questionable, especially for investors concerned about high valuations and their implications for future returns. The last major market downturn occurred in 2022, driven by runaway inflation and an overextension of businesses that needed to scale back, resulting in significant job cuts. During this crash, the S&P 500 saw a total return decline of 18.2%, while the Vanguard fund was not immune, with returns dropping by 19.5%.
While the Vanguard Total Stock Market Index Fund encompasses over 3,500 stocks, its performance remains heavily influenced by the leading tech companies, which continue to dominate both its portfolio and that of the SPDR ETF. The three largest holdings in the Vanguard fund—Nvidia, Microsoft, and Apple—represent 18.1% of its total assets, compared to 20.8% in the SPDR ETF. Despite a broader selection of stocks, the majority of the Vanguard fund’s holdings are smaller companies, which contribute minimally to its overall performance.
Investors seeking to mitigate their exposure to high-priced tech stocks may find that broadening their investment through the Vanguard fund does not significantly reduce risk. The S&P 500 remains a reliable indicator of market performance, leading to skepticism about whether tracking a more extensive index truly results in a safer investment.
For those aiming to lessen their risk, targeting specific sectors might be a more effective strategy. Options include the Vanguard Value Index Fund, which focuses on value stocks, or the Invesco S&P 500 Revenue ETF, which tracks the S&P 500 with weighted allocations based on revenue rather than market capitalization. These funds may offer potential relief for investors wary of high valuations associated with the S&P 500 and the broader tech sector.
