Vanguard S&P 500 ETF VOO

Vanguard S&P 500 accurately represents the large-cap US stock market, allowing its low fee and efficient portfolio to carve it a long-term edge.

The fund tracks the S&P 500. A committee selects 500 of the largest US stocks, or roughly 80% of the US stock market, and weights them by market cap. The index committee has discretion over selecting companies that meet its liquidity and profitability standards. 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.

Assigning position sizes based on a stock’s market cap is a simple and efficient method to weight the portfolio. Since US stocks are highly traded, they quickly reflect new information, and carving an edge is difficult. Market-cap weighting naturally adjusts to price changes without frequent rebalancing, generating lower trading costs. That, and lower fees, give large-blend index funds a long-term performance advantage over most actively managed peers.

The fund holds a broad, well-diversified portfolio. It typically includes around 500 stocks, and the top 10 represented around 40% of the portfolio at year-end 2025. Still, market-cap weighting can contribute to portfolio concentration when a few stocks dominate the market. This has been the case lately with a handful of mega-cap technology stocks growing to prominence and commanding a greater share of the portfolio.

When a few richly valued companies or sectors power most of the market gains, market-cap weighting may overexpose the strategy to the fluctuations of one stock or sector. But this is not a fault in design, as it simply reflects the market’s composition. The strategy's low turnover, low fee, and broad diversification across the US market more than offset these risks.

The US exchange-traded fund share class returned 14.8% annualized over the past 10 years through year-end 2025. It holds little cash, which should help it outperform cash-saddled active peers during market rallies. Likewise, low cash drag could hurt this fund when the stock market declines, but long-term positive returns give this efficient approach a clear edge. Performance across share classes will vary owing to differences in fees and currency exchange rates for non-US investors.

This strategy accurately captures the US stock market and benefits from the efficiencies of market-cap weighting, earning it a High Process Pillar rating.

The S&P 500 selects 500 of the largest US companies that pass its liquidity and profitability screens. Companies are only eligible for inclusion when the sum of their GAAP earnings over the past four quarters is positive, as well as the most recent quarter. Screening for profitability imparts a slight quality tilt to the portfolio. There have been instances where the profitability screen prevented otherwise qualified companies from index inclusion. Most notably, Tesla was first added to the index in December 2020, despite passing the liquidity and market-cap thresholds in January 2013. Once the index committee selects stocks, it weights them by market cap.

Market-cap weighting is a sensible approach for the US stock market. Highly traded stocks usually reflect new information quickly, and market-cap weighting requires minimal trading costs, which can detract from returns. It follows the wisdom of crowds and takes the guesswork out of stock selection. The US stock market has historically produced solid long-term gains, and owning about 80% of the market has allowed investors to capitalize on those gains. Should strong market performance continue, the fund is well-positioned to reap those rewards.

Market-cap weighting tilts the index toward the largest and most established names. Companies with wide or narrow Morningstar Economic Moat Ratings dominate the portfolio, showcasing the strategy’s durability. Holding 500 stocks reduces the opportunity cost of missing out on strong performers, too. When a portfolio owns a greater chunk of the US stock universe, it has a better chance of capturing gains from companies that end up driving returns. Concentrated active funds are more likely to miss out if those stocks are excluded from their narrow portfolios.

Large allocations to the biggest names in the US stock market could present concentration risk, but the index simply represents the market. While higher concentration may be a concern for investors, there isn’t a clear relationship between index performance and market concentration. In addition, the largest companies, such as Apple and Microsoft, often have diversified business lines, so they don’t rely on a single product, service, or market to determine company success.

Vanguard's equity index group earns an Above Average People Pillar for its well-supported and stable management team adept at leveraging Vanguard's comprehensive resources. Its portfolio managers benefit from the firm's global infrastructure and advanced portfolio management technology, which facilitates cost-efficient trading around the globe. The infrequent turnover of managers, coupled with Vanguard's practice of rotating them across various funds, enhances their expertise and understanding of different market segments.

The fund's managers directly handle trading, providing them with deeper insights into the portfolio's operations than a stand-alone trader might have. They are backed by a global team of dedicated personnel and employ sophisticated, scalable technology to minimize their workload and enhance tracking accuracy. Vanguard's independent risk-management team plays a crucial role in ensuring its funds adhere to predetermined tracking tolerances. It collaborates closely with the managers to oversee trades and address potential issues proactively. Vanguard compensates managers based on tracking error and excess return metrics to foster a culture of accountability and ensure that the management team's interests are closely tied to those of investors.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

The S&P 500 returned 14.8% annualized over the past 10 years through 2025. The Vanguard share classes following this strategy vary in fees, influencing relative returns. That said, fees across the board are very low, allowing them to capture nearly all of the S&P 500’s performance. Currency performance across regions can also drive relative returns. Additionally, most share classes engage in securities lending, which allows them to earn back a portion of their fees, slightly improving investor returns.

The strategy’s performance closely follows the ups and downs of the US stock market, since it is always fully invested. All else equal, this strategy should outperform category peers that hold cash during market rallies, holding back returns. But no cash buffer also means that the strategy may lag similar peers when the market falls.

The strategy tends to favor the largest US stocks and will perform best when those stocks soar. That’s been the case over the past decade or so. The market’s largest stocks, like Nvidia, have dominated the S&P 500’s returns. However, if mid- and small-cap stocks outperform, it will lag peers that favor smaller companies.

Investors should expect meaningful fluctuations in performance over shorter periods because of the S&P 500’s dependence on the market’s largest companies. In its more than 50-year history, the S&P 500 has registered a negative annual return about 20% of the time. However, this is still less often than its average US large-blend Morningstar Category peer, and only twice did it decline over a 10-year period.

For non-US investors, Vanguard offers traditional or currency-hedged funds that replicate this strategy. While hedged funds mitigate currency risk, the cost of hedging can erode returns. Unhedged funds are exposed to currency fluctuations, but the impact of foreign-exchange rates on total return tends to wash out in the long term.

Vanguard S&P 500 ETF's Prospectus Adjusted Expense Ratio is 0.03% per year. It places it in the cheapest quintile of the Morningstar US Fund Large Blend Category, where the median fee is 0.67% per year. This cost positioning translates into a Medalist Rating Price Score of 2.37, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.