Key Morningstar Metrics for Vanguard S&P 500 ETF
- Morningstar Medalist Rating: Gold
- Process Pillar: High
- People Pillar: Above Average
- Parent Pillar: High
Vanguard S&P 500 ETF VOO offers a well-diversified, market-cap-weighted portfolio of 500 of the largest US stocks. The fund accurately represents the large-cap opportunity set while charging rock-bottom fees, a recipe for success over the long run.
The fund fully replicates the S&P 500, which selects 500 of the largest US stocks—roughly 80% of the US equity market. An index committee has discretion over selecting companies as long as they are profitable and easy to trade. While a committee-based approach may lack clarity, it adds flexibility to reduce unnecessary changes during reconstitution, taming transaction costs compared with more-rigid rules-based indexes.
The end portfolio is well-diversified and accurately represents the US large-cap opportunity set. This allows the exchange-traded fund to capitalize on its low fee and closely track the performance of the large-cap market.
The bedrock of this ETF’s strategy is market-cap-weighting, which harnesses the market’s collective wisdom on the relative value of each holding with the added benefit of low turnover and associated trading costs. It’s a sensible approach because the market tends to do a good job pricing large-cap stocks. Large, highly traded markets tend to reflect new information quickly and are well-suited for indexing.
When a few richly valued companies or sectors power most of the market’s gains, market-cap weighting may expose the ETF to stock- or sector-level concentration risk. As of year-end 2024, the top 10 holdings made up the largest portion of the index (37%) in several decades, and the 34% allocation to technology stocks was the highest since the dot-com bubble. But this is not a fault in design. The S&P 500 simply reflects the market composition.
A higher concentration in the top 10 holdings may be a concern for some investors, but there isn’t a clear relationship between index performance and market concentration. In addition, many of the largest companies, such as Apple AAPL and Microsoft MSFT, are diversified internally and don’t rely on a single product or service. In the long run, the ETF’s broad diversification, low turnover, and low fee outweigh these risks.
Vanguard S&P 500 ETF: Performance Highlights
This ETF accurately represents the US large-cap opportunity set, allowing the fund to leverage its cost advantage. It outperformed its average peer in the US large-blend Morningstar Category by 2.28 percentage points over the 10 years through December 2024.
The ETF’s performance closely follows the ups and downs of the US stock market since the fund is always fully invested. All else equal, this fund should outperform peers that hold cash during market rallies. Likewise, the fund should lag similar peers when the market falls because it lacks a cash buffer.
Because of the ETF’s bias toward the largest and the most established companies, it misses out when small-cap stocks outperform large-cap stocks, as they did in the fourth quarter of 2020. Likewise, when the S&P 500 becomes concentrated in a few large companies, the ETF can become top-heavy. This exposes the fund to US market risks should another dot-com-type bubble burst, during which the S&P 500 fell over 40% in the early 2000s.
In the long run, this fund’s razor-thin fee and minuscule cash holdings should lead to solid performance compared with its large-blend peers. Index funds tend to perform well in large, highly traded markets. This ETF is no exception.
The author or authors do own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
