I’ve never been drawn to the idea of picking single stocks. The reason is simple: the odds are stacked against individual investors when it comes to outperforming the market, and the time and effort required to attempt it hardly seem worth it.
I’m confident in the historical long-term returns of the U.S. stock market—over periods like 30 years, for example—and given my current savings rate, I’m on track to meet my retirement goals comfortably.
This is precisely why Vanguard S&P 500 Index ETF (TSX:VFV) stands as the single biggest holding in my personal investment portfolio. Here’s a detailed look at why I’ve chosen this particular exchange-traded fund (ETF).
It’s very hard to beat
It’s widely recognized that beating the S&P 500 over the long term is a formidable challenge. There’s a wealth of data supporting this, notably from SPIVA, which stands for the S&P Indices Versus Active.
SPIVA reports provide a comprehensive look at the performance of actively managed funds against their relevant S&P index benchmarks.
The statistics are telling. Over various time periods, a significant majority of U.S. funds have consistently underperformed the S&P 500. Here’s a snapshot:
- One year: 59.68% of funds underperformed
- Three years: 79.78% of funds underperformed
- Five years: 78.68% of funds underperformed
- 10 years: 87.42% of funds underperformed
- 15 years: 87.98% of funds underperformed
These figures underscore the challenge and inefficiency often associated with attempting to outperform the market through active management.
The consistency of this underperformance across multiple time frames highlights why many investors, myself included, opt to be index investors.
It’s extremely cheap
The management expense ratio for VFV is just 0.09% annually. To put that into perspective, if you invested $10,000 in VFV, your annual fees would amount to only about $9.
This extremely low fee structure is a significant advantage, especially when you consider the high costs often associated with actively managed funds, which can eat into returns.
The ability to invest in the broad market and match the performance of the S&P 500 for less than a 10th of a percent in fees each year is an exceptional value.
I find the notion of paying just 0.09% to potentially outperform the majority of professional and amateur stock pickers—simply by buying and holding this ETF—an incredibly compelling proposition.
