Should You Buy the Vanguard S&P 500 ETF With the Stock Market at An All-Time High? History Offers a Clear Answer.

The S&P 500 (SNPINDEX: ^GSPC) index is made up of 500 companies from 11 different sectors of the economy. It's weighted by market capitalization, so its largest constituents -- which include artificial intelligence (AI) powerhouses like Nvidia and Alphabet -- have a much greater influence over its performance than the smallest.

The S&P 500 set a new record high last Thursday on the back of a 16% gain in 2025 so far, which is well above its average annual return since it was established in 1957. Accelerated returns have been common over the last few years, as AI fuels remarkable growth in the semiconductor, software, and cloud computing industries, and this dynamic is likely to persist for the foreseeable future.

The Vanguard S&P 500 ETF (NYSEMKT: VOO) is a low-cost exchange-traded fund (ETF) that tracks the performance of the S&P 500. Should investors buy it with the index at an all-time high? History offers a clear answer.

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High exposure to tech and AI, with a healthy splash of diversification

Information technology is the largest of the 11 S&P 500 sectors, with a weighting of 36.1%. The sector is home to three of the world's largest companies, Nvidia, Microsoft, and Apple, which have a combined market cap of $11.9 trillion, so its heavy influence isn't a surprise. Those three companies, along with many others in this sector, operate at the forefront of the AI revolution.

The S&P 500 has climbed by 78% since the beginning of 2023, which is when the AI boom started gathering momentum. But if we exclude the information technology sector, that return shrinks to just 52%, which truly highlights its significance.

Data by YCharts.

The financial sector is the second largest in the S&P 500, with a weighting of 12.9%. It's home to Warren Buffett's trillion-dollar conglomerate Berkshire Hathaway, in addition to the world's biggest investment bank JPMorgan Chase, and payment giants Visa and Mastercard.

The consumer discretionary sector is third, with a weighting of 10.5%, thanks to tech-adjacent AI companies like Amazon and Tesla. Then there is the communication services sector at 10.1%, which hosts other AI powerhouses like Meta Platforms and Alphabet.

The remaining seven sectors in the S&P 500 include healthcare, industrials, consumer staples, energy, utilities, real estate, and materials, so it's highly diversified.

The Vanguard S&P 500 ETF is a great way to invest in the index because of its ultra-low cost. With an expense ratio of just 0.03%, an investment of $10,000 will incur an annual fee of just $3. Vanguard says comparable ETFs from other providers charge a whopping 24 times more, with an average expense ratio of 0.73%.

There is rarely a bad time to invest

Although past performance isn't always a reliable indicator of future results, the S&P 500 has a stellar long-term track record, with a compound annual return of 10.5% since its inception in 1957. However, it isn't always smooth sailing, and it's important to remember that sell-offs, corrections, and even bear markets are a normal part of the investing journey.

According to Capital Group, the S&P 500 experiences a decline of at least 5% once per year, on average. Steeper declines of at least 10% typically come around every two and a half years, and bear markets, which are defined by peak-to-trough declines of 20% or more, happen every six years or so.

The last bear market was in 2022, so unless there is an unexpected economic shock or an outright recession, history suggests investors could enjoy a few more years of positive returns before the next major downturn in the S&P 500.

Plus, there are some very strong tailwinds that should support further upside from here. First, the AI boom is expected to continue creating trillions of dollars in value, and second, the Federal Reserve is gradually lowering interest rates, which is typically positive for corporate earnings.

With all that said, the S&P 500 is trading at a historically elevated valuation right now, which does increase the risk of a correction in the near term. That doesn't mean investors should steer clear of the Vanguard S&P 500 ETF, but starting with a small position and adding to it consistently over time might be the best strategy from here. This will ensure a lower cost basis if the index does suffer a sharp sell-off.

JPMorgan Chase is an advertising partner of Motley Fool Money. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, JPMorgan Chase, Mastercard, Meta Platforms, Microsoft, Nvidia, Tesla, Vanguard S&P 500 ETF, and Visa. 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.