Is the Vanguard 500 Index Fund ETF a Buy Now?

Key Points

• The Vanguard S&P 500 ETF tracks the S&P 500 index, a broad stock market gauge.

• The index is trading near all-time highs, so now could be a risky time to jump into it.

• Yet, history suggests that investing, even at a market top, will be fine in the long term.

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The S&P 500 is near its all-time highs as investors continue to push the market higher despite geopolitical, tariff, and economic concerns. Is now the time to buy the Vanguard S&P 500 ETF (NYSEMKT: VOO)? That answer isn't exactly a straightforward yes or no. Here's what you need to consider.

What does the S&P 500 index do?

The S&P 500 index is meant to be a collection of companies that are broadly representative of the U.S. economy. The list of roughly 500 stocks is selected by a committee, with the companies picked generally being large and economically important within the industries in which they operate. The index is weighted by market capitalization, so the largest companies have the greatest effect on performance.

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There are nuances here, of course. The market cap weighting can lead to a small number of companies having a disproportionate effect on the overall index's performance. Changes to the index can cause odd price moves in the stocks that are being added and removed. But overall the approach used to create the S&P 500 index seems to provide a good picture of "the market."

Is the S&P 500 index worth buying right now?

There are a number of ways to invest in the S&P 500 index, from mutual funds to exchange-traded funds (ETFs). One of the most cost-effective ways is to buy the Vanguard 500 Index Fund ETF. This particular S&P 500 tracker has a tiny expense ratio of 0.03%, which is as close to free on Wall Street as you can get. But being a good option for tracking the S&P 500 doesn't mean that now is the right time to buy the Vanguard 500 Index Fund ETF.

After all, the S&P 500 is currently trading near all-time highs. The average price-to-earnings (P/E) ratio for the index is around 27x, which is kind of lofty, and the dividend yield is a miserly 1.2%.

If you're currently invested in the market and are simply looking to add more money to your investments, it might make sense to sit on cash for a little while. You could also select an ETF that has more of a value focus and highlights "cheap" stocks, like the Vanguard Value Index ETF (NYSEMKT: VTV). The average P/E of the Vanguard Value Index ETF is around 20x, and it has a dividend yield of around 2.2%.

But there's another view to consider. What if you're just starting out as an investor or are early in your investment journey? In such situations, it's likely far more important that you build the saving and investing habit, rather than trying to time the market's peaks and valleys.

The S&P 500 index has a long history of rising over the long term, with even the biggest bear markets of the past looking like mere blips when you examine a performance graph. If the question you're really asking is whether or not you should start investing, the answer in virtually every case is going to be "Yes." The Vanguard 500 Index Fund ETF is a great choice for a new investor.

There's still another angle to consider. What if you aren't an active investor, and you're following a regular saving and investing plan that includes the Vanguard 500 Index Fund ETF? If you're putting money away every month, you shouldn't stop no matter what the level of the market is. You are basically dollar-cost averaging. That's a great way to invest, but you'll throw a monkey wrench into your plan if you suddenly switch to trying to market-time.

^SPX data by YCharts.

Saving and investing is the big goal

There are most certainly active investors who already have sizable savings and who may want to hit the pause button on investing in the Vanguard 500 Index Fund ETF, or any other S&P 500 tracker. For this type of investor, there could be better choices, from individual stocks to ETFs with a more specialized focus.

But for new investors or those who are dollar-cost averaging, buying the Vanguard 500 Index Fund ETF, even when the S&P 500 index looks expensive, is probably a good call. History suggests that simply saving and investing (in a broad-based index fund like the Vanguard 500 Index Fund ETF) is a long-term winning strategy. Your ability to stick to a saving and investment plan will probably have a bigger effect on your wealth than anything else you do.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Value ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.