History Says This Is the Smartest ETF to Buy During the Next Bear Market

The S&P 500 (^GSPC -0.43%) index fell 37% in 2008 and rebounded 26.5% in 2009. However, investors who held through both calendar years still lost 20.3%, even with dividends reinvested.

These returns highlight why the price investors pay during a bear market matters. Investors looking to buy an ETF during the next bear market without having to predict which sector will outperform can consider the Vanguard S&P 500 ETF (VOO -0.48%).

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What previous bear markets reveal

The Vanguard S&P 500 ETF tracks the S&P 500, which entered bear market territory in July 2008. The index continued declining until March 2009, eventually losing 56.8% from its October 2007 peak. The Vanguard S&P 500 ETF was launched in 2010, but this history demonstrates the potential downside of buying an S&P 500 ETF early in a bear market.

The 2022 bear market was less severe. The S&P 500 lost 18.1% that year, while the Vanguard S&P 500 ETF declined 18.2%. The ETF subsequently gained 26.3% in 2023, leaving investors who held through both calendar years with a cumulative return of just 3.3%, including reinvested dividends.

Hence, buying during a bear market does not guarantee quick gains. Investors must also consider whether lower stock prices adequately reflect the potential decline in corporate earnings.

Why VOO stands out

The Vanguard S&P 500 ETF provides investors with exposure to major U.S. companies across technology, healthcare, financials, industrials, and other sectors. The ETF's annual expense ratio is just 0.03%, or about $3 for every $10,000 invested.

Unlike the iShares Semiconductor ETF or the Vanguard Energy ETF, the Vanguard S&P 500 ETF does not depend heavily on the performance of any single sector. This makes it a suitable choice for investors who cannot predict which industries will perform best during and after the next bear market.

However, the Vanguard S&P 500 ETF is not equally weighted. The 10 largest holdings accounted for 39.1% of assets as of Sept. 30. Technology companies, particularly Nvidia , Apple , and Microsoft, have a significant influence on the ETF's performance. A technology sell-off could therefore still hurt the ETF significantly.

A lower price may not mean better value

According to FactSet Research Systems' Nov. 6 report, the S&P 500 was trading at 17.7 times its expected earnings for the next 12 months. This is below its five-year average of 19.8 and 10-year average of 19.1.

If the S&P 500 index falls by 20% during the next bear market and earnings estimates remain unchanged, its price-to-earnings (P/E) ratio would decline to 14.2. However, if earnings estimates also fall 20%, the P/E ratio would remain at 17.7. Despite lower share prices, investors would still be paying the same multiple of expected earnings.

Hence, a falling market does not automatically mean stocks have become cheaper relative to their earnings prospects.

Should you buy VOO during the next bear market?

I would prefer buying the Vanguard S&P 500 ETF during the next bear market if share prices decline significantly without a similar deterioration in the long-term earnings prospects of its holdings.

Waiting exclusively for the next bear market also carries a risk, since the S&P 500 index could rise significantly before one occurs. Nevertheless, the Vanguard S&P 500 ETF offers a way to invest across different sectors without having to predict which one will outperform.