Shares in the Vanguard S&P 500 UCITS ETF (LSE: VUSA) have slipped recently, as the US market has sold off. The VUSA share price is now down by more than 10% from last year’s highs.
I’d be quite happy if this low-cost exchange-traded fund (ETF) carried on falling a little longer, because I’d like to add it to my portfolio as cheaply as possible. Let me explain why I’m interested in buying.
VUSA tracks the US S&P 500 index, which is roughly equivalent to the FTSE 100 here in the UK. The S&P 500 contains many of the US’s largest and most successful businesses. At the time of writing, the index’s largest members include:
Berkshire Hathaway (Warren Buffett’s company)
Alphabet (the owner of Google)
JPMorgan Chase & Co
You’ll probably recognise most of these names. One big difference to the UK’s FTSE 100 is that this list isn’t dominated by banks, oil companies, and miners. Instead, it includes a much broader mix of businesses. I reckon this could help diversify my portfolio.
Diversification: I want more
As a keen stock picker, I already have a portfolio of individual UK shares. I would say that my investments are reasonably diversified, but some big sectors of the world economy are simply missing.
This is the big reason why I’m considering adding the VUSA ETF to my portfolio. By buying a single, UK-listed share, I can invest in 500 of the largest and most successful companies in the US.
This would give me exposure to long-term growth sectors such as technology and payments. These are not well represented on the UK stock market.
I could buy US stocks directly instead of an ETF, but I don’t have the same level of US market knowledge as I do in the UK, where I’ve followed many companies in detail for years.
By buying VUSA shares, I can benefit from exposure to future US growth at a low cost, without the risk of picking individual companies.
Is it the right time to buy?
Some big US tech stocks have already suffered sharp falls. But I think there’s still a risk that the S&P 500 could have further to drop.
According to Vanguard, VUSA currently trades on 19 times forecast earnings, with a 1.4% dividend yield. This doesn’t seem all that cheap to me, although dividend yields are generally lower in the US.
One other risk that’s worth mentioning is the exchange rate. The shares held in VUSA are all priced in US dollars. But the ETF shares themselves are priced in pounds.
Last year, the changing exchange rate meant that VUSA outperformed the S&P 500. This year it could be different. There’s no way to be sure.
The future is always uncertain, but I’d be quite happy to buy some VUSA shares at current levels and tuck them away for 10 years. I’m pretty sure they’ll do okay over the long term.
As Warren Buffett said in 2021, “never bet against America”.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Amazon.com, Apple, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023