The Fed just cut interest rates for the first time in 4 years. History says the Vanguard S&P 500 Index Fund will continue to do so.

The higher interest rate environment of the past two years has done the important job of taming inflation — but it has also hurt consumer spending and businesses’ ability to borrow and invest in their businesses. As a result, higher rates have limited corporate earnings growth and pushed some investors to think twice before buying shares in these companies.

The S&P 500 still managed to climb, leading tech stocks as investors put worries aside and looked ahead to the potential of artificial intelligence (AI). And the index even confirmed its presence in a bull market earlier this year. Investors in a top index fund such as Vanguard S&P 500 Index Fund (VOO 0.44%) benefited from the momentum. The Vanguard fund, an exchange-traded fund (ETF) that tracks the performance of the benchmark index, is on track for a 20% gain this year.

You might be wondering what this top fund will do next in the wake of the Federal Reserve’s massive rate cut. The move was great news, but it’s important to remember that lower rates take time to have a positive impact on businesses and individuals. To get an idea of ​​what’s next for the Vanguard S&P 500 Index fund, let’s take a look at what history has to say.

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Investments in index funds

First, let’s talk a little about investing in an index fund. As mentioned, this type of asset allows you to bet on the performance of the biggest companies of the time — those in the S&P 500. These funds buy shares of the companies in the index at the same weighting so that they can mimic the benchmark. performance.

Over time, the strategy has proven to be a winning one, as the S&P 500 has delivered an average annual return of 10% since the late 1950s. This means that if you hold an index fund for the long term, it can grow you considerably the portfolio.

The Vanguard S&P 500 Index Fund helps you take advantage of the opportunity because it’s an ETF. That means it trades on the market every day just like a stock — and you can buy or sell shares of it just like a stock, too.

The only main difference is that ETFs carry an expense ratio, a measure of fees to cover the management of the fund. It’s important to choose an ETF with an expense ratio of less than 1% so that fees don’t hurt your returns over time. The Vanguard fund fits the bill, with an expense ratio of just 0.03%.

Today, the Vanguard ETF, like the S&P 500, depends heavily on the performance of tech stocks — they make up the largest weighting at 31%, and the fund owns names like Apple, Microsoftand Nvidia. But the ETF, like the benchmark, is also diversified, offering exposure to 10 other industries and, of course, about 500 companies.

It’s worth noting that this composition is not frozen and changes depending on the key players of the times — for example, the S&P 500 recently welcomed the rising tech giant. Palantir Technologies. So with this investment, you will always be investing in the companies that are leading the economy at all times.

What happened after the recent rate cuts?

Now, let’s consider what recent history has to say about how the benchmark, and therefore the Vanguard fund, might react in the coming months. After the start of the last two rounds of rate cuts — in 2019 and 2020 — the S&P 500 advanced by double digits. After the August 2019 rate cut, the index rose 14% through mid-February 2020, derailed only by the arrival of the pandemic.

The Fed then launched another short run of rate cuts — this time cutting them twice in March 2020 — and the S&P 500, following that initial cut, continued to rise nearly 60% through December 2021 .

Of course, stocks and the index don’t always follow historical patterns, so as always, it’s important to be aware of this — and stay invested for the long term to give yourself a better chance of a win.

However, a look into the past is valuable, as history is known to repeat itself. And right now, history shows us that the S&P 500 could roar higher after this recent rate cut and the potential on the horizon — and that gives us reason to be optimistic about what’s next for the Vanguard S&P 500 Index Fund.