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Should You Buy This S&P Index Fund in 2011?

While financial services firms are the biggest single sector in the fund, at 15.7%, that exposure has been pared down from the highs of 2007, mitigating some of the biggest risks that remain in larger financial stocks. Likewise, weightings of sectors less prone to recovery in 2011 are smaller: Media firms make up only 3% of VFINX, and discretionary business services are only 3.15% of assets.

A Continuing Rally in 2011

The latter half of 2010 brought us a fairly powerful push higher as stocks reached highs not seen since September 2008. That rally is showing few signs of stopping -- at least in the first quarter of the new year. That's thanks in part to improved economic fundamentals and business performance, and in part to inflationary forces that look to bid up equities as corporate balance sheets trade at a discount to fair value.

From a fundamental perspective, companies are starting to look attractive on from a value perspective. That's financial performance has largely outpaced the rally in stocks.

To be fair, I'm not suggesting that we'll see new market highs in 2011 -- that prediction is far too speculative to make at this point in time. 2008 showed Main Street investors that markets can turn on a dime and quickly come out of step with fundamentals. That said, with technical indicators and economic data aligning investors and traders on the long side right now, we're entering 2011 under the right circumstances for higher stock prices.

Cheap Diversification

One of the primary draws of index funds is the low cost of investing in them. With an expense ratio of 0.18%, the Vanguard 500 Fund has consistently ranked as one of the cheapest S&P index funds on the market. Meanwhile, new offerings, such as the Vanguard S&P 500 ETF (VOO), are providing investors with even cheaper alternatives (the ETF has an expense ratio of only 0.06%).

For that price, investors get exposure to a highly diversified portfolio of 504 stocks. The Vanguard 500's top 10 holdings only constitute around 10% of the portfolio's total assets -- a factor that means investors in the fund aren't susceptible to blowups in a single firm.
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VOO $171.14 0.00%
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Chart of I:DJI
DOW 15,973.84 +313.66 2.00%
S&P 500 1,864.78 +35.70 1.95%
NASDAQ 4,337.5120 +70.6750 1.66%

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