Investors are concerned about the economy, both in the United States and on a global scale. The threat of high inflation and slowly rising interest rates on consumer spending and weakening corporate growth, could cause a recession. That concern has faded on the stock market over the past year. The broad-based S&P 500 having fallen 23% from its last peak in January 2022, and the technology-heavy Nasdaq Composite fell 33% from the last peak in November 2021. That puts both indices in bear market territory.

Losses of that magnitude can be frightening, but investors can take solace in one simple truth: The S&P 500 and the Nasdaq Composite have been through bear markets before, and both indexes have always bounced back. There is no reason to believe this time is any different. So the current downturn is a buying opportunity, and one smart way to capitalize is by investing in index funds that track the S&P 500 and the Nasdaq Composite.

A person sitting at a desk looking at diffraction charts on a computer screen.

Image source: Getty Images.

Here are two great examples.

1. Vanguard S&P 500 ETF

The IS Vanguard S&P 500 ETF (VOO 2.33%) It aims to track the performance of the S&P 500, a diversified index often seen as a benchmark for the overall US stock market. The ETF invests in 500 of the largest companies in the US, which is a mix of value and growth stocks. Its components cover all 11 market sectors, although certain sectors are weighted more heavily, meaning they have a greater impact on performance.

The chart below shows the sector allocation of the Vanguard S&P 500 ETF.

Stock Market Sector

Vanguard S&P 500 ETF Allocation

Information Technology

26.4%

Health care

15.1%

Consumer choice

11.7%

Financial

10.9%

Communication services

8.1%

Industries

7.9%

Consumer staples

6.9%

Energy

4.6%

Utilities

3.1%

Real Estate

2.8%

Subject

2.5%

Data source: Vanguard.

Over the past ten years, the Vanguard S&P 500 has returned a total of 212%, or about 12% per year. At that rate, $100 invested on a weekly basis would grow to $96,700 over ten years, and $1.3 million over thirty years. That means young investors could easily build million dollar portfolios through retirement, without even doing much work.

It’s worth noting that Warren Buffett has regularly recommended the S&P 500 index fund as the best way to gain exposure to the stock market for most investors. In fact, Buffett once made a bet that he could outperform a team of 200 plus hedge fund managers with nothing more than an S&P 500 index fund. Buffett won that bet.

Finally, the Vanguard S&P 500 ETF has a very low expense ratio of 0.03%, meaning the fee for a $10,000 portfolio is only $3 per year. With that in mind, this ETF is a great choice for investors looking to diversify across the US stock market.

2. Fidelity Nasdaq Composite ETF

The IS Fidelity Nasdaq Composite ETF (ONEQ 2.81%) It aims to track the performance of the Nasdaq Composite, an index often seen as a benchmark for technology stocks. The Fidelity ETF includes more than 1,000 US and international companies, representing a concentrated portfolio of large-cap growth stocks. Its components span all 11 market sectors, but the ETF is heavily weighted toward information technology.

The chart below shows the sector allocation of the Fidelity Nasdaq Composite ETF.

Stock Market Sector

Fidelity Nasdaq Composite ETF Allocation

Information Technology

43.7%

Consumer choice

16.8%

Communication services

13.9%

Health care

8.7%

Consumer staples

4.7%

Industries

4.5%

Financial

4.4%

Utilities

1%

Real Estate

0.9%

Energy

0.8%

Subject

0.3%

Data source: Fidelity.

The tech-heavy nature of the Nasdaq Composite makes it much more volatile than the S&P 500, as evidenced by the current downturn. The Nasdaq Composite is 34% off its all-time high, but the S&P 500 is down just 23%. But there are two sides to volatility, and the Nasdaq Composite has easily outperformed the S&P 500 over the long term.

On that note, the Fidelity Nasdaq Composite ETF has generated a total return of 295% over the past ten years, which equates to 14.7% per year. At that rate, $100 invested on a weekly basis would grow to $111,600 over ten years, and $2.3 million over thirty years.

However, that superior performance comes at a slightly higher price. The Fidelity Nasdaq Composite ETF has an expense ratio of 0.21%, meaning investors will pay $21 a year for a $10,000 portfolio. All things considered, this ETF is a great choice for risk-tolerant investors looking for exposure to growth stocks, especially growth stocks in the technology sector.

Trevor Jennewine holds positions in Vanguard S&P 500 ETF. The Motley Fool posts and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.



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