The Vanguard S&P 500 ETF (VOO) is a fund that invests in the stocks of some of the largest companies within the United States. Vanguard's (VOO) is an exchange traded fund (ETF) that tracks the S&P 500 index by owning all of the equities within the S&P.

An index is a hypothetical portfolio of stocks or investments representing a specific portion of the market or the entire market. The S&P 500 and the Dow Jones Industrial Average (DJIA) are both examples of broad-based indexes. Investors cannot invest in an index, per se. Instead, they can invest in funds that mirror an index by owning the stocks within the index.

The Vanguard S&P 500 ETF is a popular and reputable index fund. The S&P 500's investment return is considered a gauge of the overall U.S. stock market.

Key Takeaways

  • The Vanguard S&P 500 ETF (VOO) track's the S&P 500 index by investing in all of the stocks within the S&P 500.
  • The Vanguard S&P 500 ETF is appealing for many investors since it's well-diversified and comprised of equities of large U.S. corporations.
  • The Vanguard S&P 500 ETF offers low fees since the fund's management team is not actively trading by buying and selling stocks.

Understanding the Vanguard S&P 500 ETF (VOO)

The S&P 500 represents 500 of the largest U.S. companies. The goal of the Vanguard S&P 500 ETF (VOO) is to track the returns of the S&P 500 index.

The VOO is appealing for many investors since it's well-diversified and comprised of equities of large corporations—called large-cap stocks. Large-cap stocks tend to be more stable with a solid track record of profitability versus smaller companies.

The broad-based, diversified portfolio of stocks within the fund can help lessen, but not eliminate, the risk of loss in the event of a market correction. Some of the key characteristics of the Vanguard S&P 500 (as of Oct. 24, 2021) include:

  • Assets under management (AUM): $770.2 billion
  • Expense ratio: 0.03%
  • SEC Yield (30-day): 1.31%
  • One-year performance: 29.96%
  • Performance since the inception date of September 07, 2010: 15.47%
  • Minimum investment: The price of one share

Please note that the SEC yield is a standardized metric mandated by the Securities Exchange Commission (SEC), which provides investors with a common yardstick for comparing the interest earned and dividend yield of various funds. Dividends are typically cash payments paid to investors by companies as a reward for owning their company's stock.

The Vanguard S&P 500 ETF's Largest Holdings

Listed below are the top ten holdings of the VOO along with their portfolio weightings, which in total make up nearly 30% of the fund's portfolio.

Top Ten Holdings of Vanguard S&P 500 ETF (VOO)
 Holdings  Percentage
 Apple Inc.  6.10%
 Microsoft Corp.  5.80%
 Alphabet Inc.  4.20%
 Amazon.com Inc.  3.90%
Facebook Inc.   2.20%
 Tesla Inc.  1.70%
 NVIDIA Corp.  1.40%
 Berkshire Hathaway Inc.  1.40%
 JPMorgan Chase & Co.  1.30%
 Johnson & Johnson  1.20%
Data as of September 30, 2021.

Equity Sector Diversification

Many funds contain equities from several sectors within the economy. A sector is a large grouping of companies organized by similar business activities, such as a product or service.

For example, the consumer staples sector represents essential goods, such as toilet paper, while the consumer discretionary sector represents non-essential goods, such as luxury items. Below is the weighting of each sector within the Vanguard S&P 500 ETF.

Equity Sector Diversification for Vanguard S&P 500 ETF (VOO)
 Equity Sector Sector Weighting
Information Technology 27.60%
Health Care 13.30%
Consumer Discretionary 12.40%
Communication Services 11.30%
Financials 11.40%
Industrials 8.00%
Consumer Staples 5.80%
Materials 2.50%
Real Estate 2.60%
Utilities 2.40%
Energy 2.70%
Data as of September 30, 2021.

The Risk of Loss from Dangerous Theories

Think back to the real estate boom of the mid-2000s. A common theory as to why real estate prices would appreciate forever was: “They’re not building more land.” This theory meant that supply would be limited, which would lead to increased demand and continuously rising prices.

Unfortunately, many investors were unprepared for the impending real estate crash, which led to the 2007-2008 Financial Crisis in part due to loose lending practices.

Now consider a similar theory with U.S. stocks: “It’s the only place to put your money right now.” An added incentive for many investors has been that if everyone sees U.S. equities as the only place to put their money, it will continue to drive equity prices higher.

In other words, it's essential that investors not become complacent in thinking the market can only go up. With investing in the stock market, there is a risk of market downturns and corrections, which can lead to a significant decline in an investor's portfolio and financial loss.

Valuable Dollars

Investors looking for a low-cost, low-maintenance fund that provides them with access to U.S. equity markets might opt for the Vanguard S&P 500 ETF. However, each investor must consider the level of risk they're willing to take when investing—called risk tolerance. Also, how long the money will be invested in the market should be considered.

Risk Tolerance and Time Horizon

Younger investors might opt to invest all their money in the equity markets since their portfolio has many years to make up for investment losses due to market corrections. Conversely, investors who are at or near retirement might opt for low-risk stocks and securities.

Risk-averse investors might buy U.S Treasury bonds and bills. Although the yield or interest is not always attractive, Treasuries are considered risk-free assets since they're backed by the U.S. Treasury. As a result, investors can't lose their principal or initial investment if the bond is held until its maturity or expiration date.

Rising and Falling Prices

Some investors concerned about the possibility of deflation, which is a decline in the prices of goods in an economy, may leave their money in cash. Although it may appear counterintuitive, if deflation occurs, the cash value in dollars can increase.

Conversely, some investors might be concerned about inflation, which is the pace at which prices increase in an economy. As a result, investors might invest in the stock market, including the Vanguard S&P 500 ETF, hoping to achieve a higher return rate than inflation.

Other investors might invest in securities that adjust for rising prices in the economy. For example, Treasury inflation-protected securities (TIPS) are designed to adjust in price as inflation increases, protecting investors so that they never receive less than the original amount invested.

The Bottom Line

Investing in the Vanguard S&P 500 ETF is a passive investment strategy in which the fund tracks the performance of the S&P 500. In other words, the fund's management team is not actively trading by buying and selling stocks, which helps maintain the lower expense ratio.

Investing in Vanguard's VOO is a low-stress way for investors to access the U.S. equity market. However, there is the risk of loss as with any investment, and investors should consult a financial professional before investing in the Vanguard S&P 500 ETF.

Dan Moskowitz doesn't own shares of VOO.