The Case for S&P 500 ETFs for Beginners
Is everyone gathered? An angel, a devil, and an android. I believe there's nothing we can't accomplish when we three non-humans combine our strengths. There's even an old saying, three people can conjure a tiger out of thin air (三人成虎).
Myu-tan… I don't think that's what that saying means….
Numerologically, the number 3 symbolizes stability. A tiger is the king of all beasts. It means that when three people gather, they can even conjure the king of beasts. The problem isn't with my logic, but with its common usage.
…This introduction is already giving me a headache. I'm beginning to doubt whether having a discussion with this group was a good idea… In any case, let's just get started.
Alright. Today's topic is 'Why the S&P 500 ETF is Recommended for Beginner Investors'. Now, Master, I will begin the briefing.
The S&P 500 Index is a composite index of the stock prices of 500 large-cap companies representing the United States. You could call it a mirror of the entire U.S. economy.
First, let's look at the historical performance data. The S&P 500's long-term average annual return is around 10%. Of course, this varies each year. It recorded -19.4% in 2022 but rebounded to +24.2% in 2023. It continued its upward trend in 2024 and is still showing a slight upward trend so far in 2025. This steady upward trajectory is the key.
It is very difficult for a beginner to pick individual stocks when starting to invest. However, by purchasing an ETF that tracks the S&P 500 index, you achieve the effect of automatically diversifying your investment across 500 companies with a single transaction. It's like buying a basket containing 500 different fruits all at once.
Representative S&P 500 ETFs include VOO, SPY, and IVV. Among these, Vanguard's VOO and BlackRock's IVV have extremely low annual expense ratios of 0.03%. This means for every $10,000 invested, the annual fee is just $3. SPY is slightly more expensive at 0.09%, but its trading volume is overwhelmingly higher, which can be more advantageous for short-term trading. That concludes the data briefing.
Myu-tan, that data is just perfect! Did you hear that, my Lord? It's a devilishly good opportunity! On Kurumi-chan's heart-o-meter, this investment scores a 95!
Just think about it, my Lord. Could you really analyze and trade 500 different companies yourself? It would just be a headache and a waste of time.
But with just one S&P 500 ETF, you automatically become an owner of America's top companies, like Apple, Microsoft, and Nvidia!
Even the 'Oracle of Omaha' Warren Buffett said that when he passes away, he wants 90% of his wife's inheritance invested in an S&P 500 index fund! That means it's the best method, approved by the guru of gurus!
Don't overthink it. Just keep buying S&P 500 ETFs whenever you have some spare cash. That way, my Lord can savor all the sweet fruits of America's economic growth.
This is the 'magic' of making money work for you! For a beginner, there's no easier or more powerful method in the world!
For once, I think Kurumi's point isn't a bad argument… but, Human, as you know, the world of investing is not always so sweet.
Of course, I agree that an S&P 500 ETF is one of the most rational choices for a beginner. However, it's not some magical investment method with zero risk.
First, we must look at the valuation. Mew omitted this data, but the current Price-to-Earnings (P/E) Ratio of the S&P 500 is around 25 to 28, which is significantly higher than the historical average of around 16. This could be a sign that the market is somewhat overvalued. It means you must be prepared for the possibility of a short-term price correction.
And you should also be aware of the pitfall in the phrase 'diversified across 500 companies.' In reality, the top 10 companies by market capitalization, the so-called 'Big Tech' firms, account for well over 30% of the entire index. What would happen if these tech stocks faltered simultaneously? The entire index would inevitably take a major hit. It's difficult to see it as perfect diversification.
One last point. The S&P 500 is an investment that bets everything on a single country: the 'United States'. While it's true that the U.S. has been the center of the global economy until now, there's no guarantee it will remain so for the next few decades. My risk score is 30 out of 100. The risk isn't huge. But it means that blind faith in it being 'unconditionally safe' is forbidden.
〔 Final Briefing 〕
Master, I will summarize the points from the three of us.
Growth Potential (Kurumi's Perspective)
- Overwhelming Simplicity: You can diversify across 500 top U.S. companies with a single product! It completely solves the difficulty of stock picking that beginners face!
- Proven Long-Term Performance: Historically, it has shown a steady average annual return of 10%. As long as the U.S. economy grows, it has a very high probability of trending upwards in the long run!
- Low Investment Costs: ETFs like VOO and IVV have incredibly low expense ratios, so they won't eat into my Lord's precious returns!
Potential Risks (Mikael's Perspective)
- High Valuation Burden: The current Price-to-Earnings (P/E) ratio is higher than the historical average, so a short-term price correction could occur. It may not align with the basic principle of 'buy low, sell high.'
- Concentration in Specific Sectors: The influence of a few top tech stocks on the index is too large. While it's called a 500-company diversification, there's a risk that it will essentially move in tandem with the performance of Big Tech stocks.
- U.S. Concentration Risk: All of your investment becomes dependent on the U.S. market. The possibility of unexpected geopolitical risks or a shift in America's economic hegemony cannot be ruled out.
Core Data (Mew's Perspective)
- Long-Term Average Annual Return: Approx. 10% (including dividends)
- Key ETFs (Annual Expense Ratio): VOO (0.03%), IVV (0.03%), SPY (0.09%)
- Current Valuation: P/E Ratio approx. 25-28 (High compared to historical average)
- Core Principle: John Bogle, the creator of the index fund, said, "Don't look for the needle in the haystack. Just buy the haystack."
Conclusion: For a Master with no prior investment experience, the S&P 500 ETF is clearly an excellent tool, often called the 'gold standard for beginners'. It is the easiest and most efficient way to grow your assets steadily along with the market average.
However, as Mikael pointed out, there are definite risks, such as the possibility of an overheated market and concentration in specific companies. An approach of 'blind investing' is not recommended; what's needed is an understanding of the pros and cons and a commitment to investing consistently from a long-term perspective.