Is the Vanguard S&P 500 ETF a Buy?

Key Points

• The S&P 500's technology concentration has swelled to 33.5%, transforming this "broad market" fund into an AI and megacap growth play.

• Still, the fund is trading above its 25-year average valuation.

• Dollar-cost averaging into the fund offers a disciplined approach to navigating today's rich multiples while maintaining long-term market exposure.

• 10 stocks we like better than Vanguard S&P 500 ETF ›

Every seasoned investor knows the Vanguard S&P 500 ETF (NYSEMKT: VOO) tracks America's 500 largest companies. What's less obvious is that owning it today is effectively a bet on artificial intelligence (AI) leadership -- at valuations that rival past market bubbles.

The fund is up 12.8% year to date through Sept. 26, 2025. The benchmark S&P 500's forward price-to-earnings (P/E) ratio now sits well above its 25-year average, while the cyclically adjusted price-to-earnings (CAPE) ratio has surged past 40 -- its highest since the 2000 dot-com peak. With October looming -- home to 1929's and 1987's famous crashes -- history argues for caution.

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And yet, for investors with patience, the Vanguard S&P 500 ETF may still be the cleanest way to own the AI revolution reshaping global business. Volatility may shake markets in the near term, but the fund's microscopic fees and broad exposure make it a long-term cornerstone.

The accidental tech fund

The S&P 500 no longer resembles the balanced industrial index of decades past. Information technology now makes up 33.5% of the index as of Aug. 29, 2025. Add in tech-heavy names from communication services and consumer discretionary, and nearly half the benchmark is effectively tethered to the digital transformation.

That concentration isn't a flaw; it's the point. Market-cap weighting mirrors where U.S. corporations generate the bulk of their profits. Microsoft, Apple, Nvidia, and Alphabet didn't reach trillion-dollar status by luck. They dominate because they control the infrastructure behind AI, cloud computing, and next-generation consumer tech.

The fund delivers exposure to all of that innovation for a microscopic 0.03% expense ratio -- about $3 a year for every $10,000 invested. By contrast, many active funds charge 10 to 20 times more and still fail to beat the S&P 500. That cost advantage, combined with automatic exposure to America's most profitable companies, is what makes the Vanguard S&P 500 ETF's simplicity so powerful.

Who should buy today

Despite these headwinds, the Vanguard S&P 500 ETF remains compelling for specific investors. Long-term savers using dollar-cost averaging can actually benefit from volatility, accumulating shares when corrections arrive. Tax-conscious investors appreciate the ETF's structural efficiency -- minimal capital gains distributions mean you control when to realize taxes.

For those worried about valuations but wanting exposure, consider blending strategies. Pairing the Vanguard S&P 500 ETF with the Invesco S&P 500 Equal Weight ETF reduces concentration risk. Adding international exposure through the Vanguard Total International Stock ETF provides geographic diversification when U.S. multiples compress.

Who should wait? Retirees needing capital preservation within five years might find today's entry point too risky. Anyone leveraged or using margin should think twice -- a 20% to 30% drawdown at these valuations isn't just possible, it's probable based on history. Short-term traders hoping for a quick flip should look elsewhere; this is a time for decades-long commitments, not quarterly bets.

The discipline premium

The S&P 500 has survived world wars, pandemics, financial crises, and dot-com busts. At elevated levels, it's not a bargain -- it's a premium-priced ticket to own America's corporate champions when their competitive moats have never been wider. The technology giants dominating the index generate massive free cash flows and possess rock-solid pricing power.

For investors with decades-long horizons, the fund is nearly guaranteed to outperform both cash sitting in money market accounts or most types of bonds. The key for prospective investors is discipline: Make systematic contributions regardless of headlines, rebalancing when allocations drift and remembering that history's best days often follow the worst.

So is the Vanguard S&P 500 ETF a buy? Yes -- if you're willing to pay the premium and hold through the storms.

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George Budwell has positions in Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, Nvidia, Vanguard S&P 500 ETF, and Vanguard Total International Stock ETF. The Motley Fool 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.