The profitability screen requires that the sum of a company’s generally accepted accounting principles earnings over the past four quarters be positive as well as the most recent quarter. The screen imparts a slight quality tilt to the portfolio but has a limited impact on the portfolio’s composition relative to other large-cap-focused benchmarks since many large-cap stocks tend to be profitable. But there have been instances where profitability prevented otherwise qualified companies from index inclusion. For example, Tesla TSLA was only added to the index after it passed the profitability screen in December 2020, despite passing the liquidity and market-cap thresholds in January 2013. Once the index committee selects stocks, it weights them by their market cap.
Market-cap weighting harnesses the market’s collective wisdom on stocks’ relative valuations and helps curb turnover and trading costs. The index committee further curbs turnover by implementing changes as it sees fit rather than adhering to a strict reconstitution schedule.
The fund directly holds constituents of the S&P 500 to best replicate the index’s performance. It does not hedge currency risks, which reduces its costs but adds exchange-rate risk.
This fund is better diversified than most of its peers. Its top 10 holdings represent 24% of the portfolio, much lower than the average fund in its category. However, the portfolio can become top-heavy during the market’s frenzied episodes. Over shorter time frames, investors’ enthusiasm for a particular stock or sector can make the portfolio top-heavy as it tilts toward recent winners. For example, the fund’s top 10 holdings ballooned to 30% of the portfolio in November 2021 before markets reversed in 2022.
The fund’s portfolio closely resembles its average category peer in both style and sector allocations. Capturing the same opportunity set as its active peers emphasizes the effect of the fund’s low fee, giving it a durable advantage over the long run.
Note: The Process Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a passively managed vehicle that tracks a particular index, Morningstar associates the Process Pillar rating assigned to that vehicle with the index concerned. Morningstar then maps the Process Pillar associated with a given index to any other uncovered passive strategies that track the same index. This ensures that the analyst’s view is leveraged whenever available and promotes consistency when analyzing passive vehicles associated with a given index.