With $1.7 trillion in total assets, the Vanguard S&P 500 ETF (NYSEMKT: VOO) is an extremely popular exchange-traded fund (ETF) within the investment community. It provides instant access to the S&P 500 index. And the expense ratio of 0.03% is very compelling.
Even Warren Buffett recommends this fund as a leading investment choice for most people who want exposure to the stock market. Are you looking to buy this ETF? History says it’s crucial to know these three things before investing any money.
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Portfolio concentration
The first thing investors need to know about the Vanguard S&P 500 ETF is that it is extremely concentrated these days. This fund tracks the S&P 500, but this benchmark is heavily skewed toward the world’s most valuable businesses. The top 10 stocks in the portfolio make up 38% of the entire ETF. That means the other 490 or so companies fill out the remaining 62%.
Throughout history, there has never been a time when the S&P index was this concentrated. During the dot-com era, the top 10 stocks then represented 27% of the benchmark.
As you would imagine, technology stocks dominate. The information technology sector as a whole accounts for 37% of the ETF. Nvidia, Apple, Alphabet, Microsoft, and Amazon are the leading five positions. As a group, they are squarely in the middle of the artificial intelligence boom. This exposure includes chip manufacturing, cloud computing, enterprise software, and consumer-facing applications.
When buying this fund, you are making a bullish bet on the economic prospects of this revolutionary technology. If this doesn’t agree with your line of thinking, then perhaps it’s best to allocate your capital elsewhere.
Average return
The last decade has been particularly special from a performance perspective. The Vanguard S&P 500 ETF has generated a total return of 314% over the last 10 years (as of Aug. 19). Had you invested $10,000 back then, you would have $41,400 today, for an annualized rate of return of 15%. From a historical point of view, this fantastic gain is significantly above average.
Since the S&P 500 index was created in 1957 in its current form, the benchmark has produced a yearly total return of around 10%. A starting $10,000 sum would grow to a much lower 159% in 10 years based on this performance.
