Trending
In the U.S., Vanguard is the second-largest issuer of exchange traded funds, trailing only BlackRock’s iShares business. That’s an impressive status when considering the late Jack Bogle’s company launched its first ETF on 2001, eight years after the first ETF debuted in this country.
Despite that late start, 10 of the 25 largest ETFs trading in the U.S. are currently Vanguard products, including the Vanguard S&P 500 ETF (NYSE: VOO). As of Feb. 14, VOO was about $4.2 billion removed from the top spot, meaning it could take the crown from the SPDR S&P 500 Trust (NYSE: SPY) any day now. The third-largest ETF is the iShares Core S&P 500 ETF (NYSE: IVV), meaning all three track the S&P 500. That trio combines for approximately $855 billion in assets under management.
Getting back to VOO, it’s one of the biggest ETFs in the world for simple reasons. Following the S&P 500 surely helps as does its annual fee of 0.03% -- the equivalent of $3 on a $10,000 investment. So yes, like so many Vanguard funds, VOO is cheap to own.
Owing to robust liquidity, investors can expect annual returns from VOO that mirror those of the underlying index minus the expense ratio. So if the S&P 500 rises 10% in a given year, VOO investors will earn 9.97%.
VOO Has Plenty of Perks
VOO is not a glamorous ETF. Nor are rivals IVV and SPY, but these products due their jobs and exemplify convenience. For many investors, eliminating the burden of stock-picking and mirroring the market are attractive objectives. So is investing in funds that are easy to understand. VOO is that.
“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,” notes Morningstar analyst Brendan McCann. “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.”
Despite lingering concern about concentration risk – something that’s a consideration with many cap-weighted equity funds – VOO and its peers have delivered for investors and, in recent years, proven to be significantly better bets than international equivalents. For the three years ending Feb. 14, VOO returned 39.5%, including paid dividends. By comparison, the COMBINED returns of the comparable Vanguard ex-US developed and emerging markets ETFs was just 13.1% over that span.
“This ETF accurately represents the US large-cap opportunity set, allowing the fund to leverage its cost advantage,” adds McCann. “It outperformed its average peer in the US large-blend Morningstar Category by 2.28 percentage points over the 10 years through December 2024.”
VOO Is Great, But Not Perfect
There’s an old saying that goes “aim for perfection, but remember it's a moving target.” It’s advice worth remembering when evaluating ETFs because “perfect” doesn’t exist. That’s applicable regarding VOO because the ETF has some drawbacks.
For example, if small-caps rally and start outperforming large stocks, ETFs such as VOO will lag. Likewise, if an earnest bear market comes to pass, VOO becomes nothing more than a cost-effective way to lose money, but that’s true of any pure beta ETF and doesn’t serve as indictment of the fund.
“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,” concludes McCann. “Index funds tend to perform well in large, highly traded markets. This ETF is no exception.”