vanguard's 500 index fund

Vanguard’s 500 Index Fund Review: Should You Invest?

The Vanguard 500 Index fund is a fund that invests in the largest companies in the USA. Also referred to as VOO, the Vanguard 500 tracks the S&P 500 index by investing in all the equities in the S&P 500. This investment is often considered the measure of the performance of the US stock markets.

The Vanguard 500 is a portfolio of investments and stocks representing a specific part of the US stock markets. The S&P 500 is a board-based index, meaning that investors cannot invest in the index directly. They can, however, invest in funds that mirror the index.

Therefore, the Vanguard 500 index fund is a great investment option for investors since it is well diversified across the largest companies in the United States. It offers low fees since the team does not actively manage the fund but mirrors the S&P 500.

Vanguard 500 Index Fund Description

The Vanguard 500 tracks its benchmark index, the S&P 500, and its name index fund. The S&P index is one of the most-watched benchmark indexes on the US equity markets. The fund appeals to most investors since it is well-diversified and made of shares from large companies, also known as large-cap stocks.

The large-cap stocks are more stable and have a solid track in profitability compared to smaller companies. Investors reduce the risk of loss of their investment. Here are the key features of the Vanguard 500 index fund:

  • Assets under management (AUM): $808.8 billion
  • SEC yield (30-day): 1.31%
  • 3-year performance: 18.93%
  • Expense ratio: 0.03%
  • Annualized return since inception:15.34%

The Securities and Exchange Commission (SEC) yield provides investors with a measure to compare the interest earned by the dividend yield of the different funds.

Here is a list of the top 10 holdings on the Vanguard S&P 500 ETF and their shares on the ETF. The following companies make up 29.5% of the VOO portfolio:

Holdings Percentage
Apple Inc. 6.9%
Microsoft Corp. 6.0%
Alphabet (GOOG & GOOGL) 4.2%
Amazon.com 3.6%
Tesla Inc. 1.9%
Nvidia 1.6%
Berkshire Hathaway 1.6%
Meta (formerly Facebook) 1.3%
UnitedHealth Group 1.2%
Johnson & Johnson 1.2%

 

 

Fund Selection Criteria

Funds have equities from different sectors of the economy. A sector is a group of companies with similar business activities, i.e., they offer similar services or products.

The Vanguard 500 has equities in different sectors, including energy, real estate, and financials, that perform the best in the US stock market. Here is an overview of the sectors the Vanguard 500 ETF has shares in:

Equity Sector Sector Weighting
Information Technology 28.1%
Healthcare 13.3%
Consumer Discretionary 11.8%
Financials 11.5%
Communication Services 8.6%
Industrials 8.0%
Consumer Staples 6.2%
Energy 3.7%
Real Estate 2.6%
Materials 2.6%
Utilities 2.6%

 

Fund Performance

The Vanguard 500 has had 16.23% in the last year. It has had an 18.09% return over the past three years and 15.02 percent over the past five years. Additionally, it has had an average of 14.43% in returns over the past decade.

1-MONTH 3-MONTH 6-MONTH 1-YEAR
VFIAX -2.99 -3.9 -2.64 16.35
S&P 500 TR USD -2.99 -3.89 -2.62 16.39
Category (LB) -2.52 -3.47 -3.56 13.84
+/- S&P 500 TR USD 0 -0.01 -0.02 -0.04
+/- Category (LB) -0.47 -0.43 0.92 2.51
Rank in Category 61 53 34 25

 

Should You Invest in It? 

Investing in the Vanguard 500 index fund is one of the best investment decisions you can make for yourself. The fund has a lower expense ratio since its fund managers do not actively manage it but mirror the S&P 500 index. Vanguard’s 500 EFT top holdings include Johnson & Johnson, Apple, Facebook, Amazon, and Microsoft, among the best companies to invest in the equity market.

Here are some reasons why you should consider investing in the Vanguard 500 index fund:

1. Broad Diversification

The S&P 500 tracks different stocks from different sectors of the economy. While the performance of the stocks may fluctuate with time, putting your money in the fund matches the index’s performance. You get to diversify your portfolio to ensure that the value of your portfolio does not overly rely on the performance of only one company.

2. You Will Incur a Lower Cost

By investing in the Vanguard 500 index, you will benefit from index funds’ low costs charges, including low taxes and low management fees.

3. Low Management Fees

You will incur low management fees since your fund’s investment ratio determines it. Index funds are not actively managed, hence the low expense ratio. They are passively managed since they only track an index by buying and holding all the stocks, and the index holdings rarely change.

4. Low Turnover Ratio

Index funds also have a lower turnover ratio. The turnover ratio measures the percentage of the fund holdings replaced every year. The turnover ratio of actively managed funds is usually 20% or higher than the index funds, which is usually between 1% and 2%.

5. Low Taxes on Capital Gains

The difference between the initial purchase price and the final price is capital gain. Funds with higher turnover rations get capital gains more often, resulting in more taxes owed by the fund owed by the investors.

However, this is not a concern with index funds since they have low turnover rates. Fund managers are not selling stocks all the time; hence there are no capital gains to pass to the shareholders or investors.

6. Index Fund Have Proven to Have Great Returns

Research shows that only 23% of an actively managed mutual fund can outperform the S&P 500 in the last five years. By investing in the Vanguard 500 fund, you are guaranteed to make a profit.

business man climbing on stock analysis

How Can I Invest in The Fund?

Investing in an index fund is similar to trading in ordinary shares. This means that you can easily purchase the Vanguard 500 ETF during trading hours. You can also trade the shares through an online brokerage firm like any other type of share.

Most brokerage firms do not charge a purchase commission for Vanguard 500 ETF. However, the best way to avoid paying the commission fee is by opening a brokerage account with Vanguard on their website. The downside of this move is that you will restrict your portfolios to the products only offered by Vanguard, but you can always open other accounts with other firms.

It is important to note that Vanguard does not have a minimum investment amount for the Vanguard 500 ETF. There are also other expenses, such as the annual operating expense, even though you will not pay a commission to purchase the stock.

The fund also incurs turnover fees for your portfolio. This means that your fund manager will incur expenses when they reconstitute your portfolio by selling or buying securities, increasing the overall expense. The fund’s portfolio turnover rate was 2.3% by the end of 2021.

It is also important to note that despite the fees Vanguard 500 index fund remains one of the most accessible and affordable ways to invest in the S&P 500.

graph of technical analysis stock market

Related Questions

1. What Is the Vanguard 500 Index Fund?

The VOO EFT invests in the largest companies in the United States that track and mirror the S&P 500 index.

2. Does Vanguard 500 ETF Offer the Fractional Shares Option?

 Vanguard can buy fractional shares on the VOO but its platform. You can also buy fractional shares from online trading platforms like Robinhood and TD Ameritrade.

3. How Many Stocks Are in The Vanguard 500 S&P ETF?

The Vanguard 500 index fund has 507 stocks as of 28th Feb 2022.

4. Is The S&P 500 Index Fund a Good Investment?

Investing in the S&P fund is one of the safest ways to make your profit over time. However, all ETFs that track the S&P 500 are all high risk and are not best suited to your long-term portfolio.

5. What Should I Know Before Investing in Index Funds?

Index funds are the best financial instruments out there, and with good reason. They require minor management, and they are low-cost and more diversified. However, there are several things you need to know before you decide to invest in index funds. Some of them include:

  • Expense Ratio

The expense ratio is a percentage of the fund’s total assets that the fund charges for its management services. One of the biggest things to consider with a fund is its expense ratio since the fees can quickly eat into the returns.

Index funds are passively managed; hence there is no need to look for an investment strategy that helps reduce the expense rations. The management fees are low, hence a low expense ratio when investing in index funds.

  • Risk and Returns

Index funds are less volatile since they are passively managed and track a stock market index. The risks are much lower than investing in actively managed stocks. Due to the low risk, the return from index funds is much higher.

However, analysts recommend that you change your investment to actively managed if there is a market slump. You, therefore, need to have a good mix of actively managed funds and index funds in your investment portfolio.

It is important to note that the returns of an index fund will be similar to that of the index it mirrors, but you also need to consider the tracking error. You, therefore, need to look at the index fund with the lowest tracking error before investing.

  • Invest According to Your Investment Goals

Index funds are recommended for people who want to invest long-term. Research has shown that index fund fluctuates in the short term but balance out over time. Therefore, you will need an investment window of not less than seven years to expect a good return ranging from 10 to 12%. You can therefore align your long-term goals with these investments.

  • Tax

Index funds are classified as equity funds and subject to dividend distribution tax and capital gain tax.

  • Dividend Distribution Tax (DDT)

If your index fund pays you a dividend, it will deduct 10% from your payment before releasing it.

  • Capital Gains Tax

When you redeem your index funds, you earn taxed capital gains. The tax rate depends on the holding period, I.e., how long you have invested in the fund.

6. Is There a Difference Between ETFs and Index Funds?

The main difference between the two is that ETFs can be traded during the day and while index funds can only trade at a given price at the end of a trading day.

7. Is S&P 500 An ETF or Index Fund?

You cannot invest in the S&P index directly, but as an ETF or as an index fund, you can invest in it.

8. What Is an Index Fund?

Index funds are mutual funds that mirror the stock market index like the STI and S&P 500. They are passively managed funds meaning that the fund manager invests in the same stocks are the underlying index and in the same proportion and doesn’t change its portfolio compositions. The funds aim to have similar returns are the funds they track.

Check out a guide how to on buy ETFs in Singapore.

Conclusion

The Vanguard 500 index fund invests in some of the United States’ most prominent companies. It is also referred to as the VOO and tracks the S&P 500 index, which is used to gauge the stock market’s overall performance in the United States. It provides an investment option with a lower expense ratio and an easier way for investors to access the US stock market.

Key Takeaways

  • The Vanguard 500 index fund is an ETF that tracks the performance of the S&P 500 index.
  • The Vanguard 500 is well-diversified hence the reason it appeals to many investors.
  • The Vanguard 500 500 ETF has lower management fees since it is passively managed.

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