The Fed Just Cut Interest Rates for the First Time in 4 Years. History Says the Vanguard S&P 500 Index Fund Will Do This Next.

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

The S&P 500 still managed to climb, led by technology stocks, as investors set 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 like the Vanguard S&P 500 Index Fund (VOO 0.44%) benefited from the momentum. The Vanguard fund, an exchange-traded fund (ETF) that tracks the benchmark’s performance, is heading for a 20% gain so far this year.

You may be wondering what this top fund will do next, following the Federal Reserve’s supersized rate cut last month. The move was great news, but it’s important to remember that lower rates take time to positively impact companies 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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Index fund investing

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

Over time, the strategy has shown itself 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 on to an index fund for the long term, it could considerably boost your portfolio.

The Vanguard S&P 500 Index Fund makes it easy for you to get in on the opportunity because it’s an ETF. This means it trades on the market daily just like a stock — and you can buy or sell shares of it just like a stock, too.

The one main difference is that ETFs involve 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, greatly depends on the performance of technology stocks — they make up the biggest weighting at 31%, and the fund holds names such as Apple, Microsoft, and Nvidia. But the ETF, like the benchmark, also is diversified, offering exposure to 10 other industries, and of course, about 500 companies.

It’s worth keeping in mind that this composition isn’t frozen and changes according to the key players of the times — for example, the S&P 500 recently welcomed growing tech giant Palantir Technologies. So, with this investment, you’ll always be investing in the companies driving the economy at any particular time.

What happened after recent rate cuts?

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

The Fed then launched another short series of rate cuts — this time lowering them twice in March 2020 — and the S&P 500, following that initial cut, went on to soar 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 remain invested for the long term to offer yourself a greater chance of scoring a win.

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