The reasons for owning the S&P 500 in your portfolio go beyond what you may realize.
The reasons for owning the S&P 500 in your portfolio go beyond what you may realize.
Predicting what will happen a week, a month, or a year from now is next to impossible. So many factors can change with little warning, so conditions from before can look nothing like they do now.
That's why buying and holding for the long term is such an effective strategy. You don't have to try to pick today's winners or the future's next big trends. Owning a fund like the Vanguard S&P 500 ETF (VOO -1.10%) that covers the biggest and most successful U.S. companies gives you broad exposure to the U.S. economic growth engine.
But just because it's a diversified basket of U.S. large caps isn't the only reason to hold it long-term. Here are four other just-as-important reasons.
The S&P 500 has a built-in momentum strategy
The Vanguard S&P 500 ETF is far from just a stagnant portfolio of stocks that rarely changes. Sure, most of the index's components carry over from year to year. But there's a lot more happening to it than you might think.
For example, there have been roughly 800 constituent changes to the index since 1995, roughly 27 per year. But about 70% of those have been due to corporate events, such as mergers or acquisitions. The rest occur for other reasons, such as its market cap, liquidity, or profitability. Since the index members are selected by a committee rather than by an automated set of strict inclusion criteria, it can be difficult to predict who stays and who goes.
The net effect of this, however, is that smaller, perhaps less successful companies are dropped while larger, growing companies are added. This is effectively a momentum strategy. The index's market cap weighting also has this effect. Companies whose stock prices have risen get larger weightings in the index and vice versa.
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