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Why Vanguard S&P 500 ETF Is Highly Rated

Vanguard S&P 500 ETF (VOO) offers diversified, low-turnover exposure to U.S. large-cap stocks at an attractive price. It tracks the market-cap-weighted S&P 500, which has historically been tough for active managers in the large-blend Morningstar Category to beat. Its minuscule expense ratio gives this fund a durable performance edge over its category peers. All of its share classes earn a Morningstar Analyst Rating of Gold except the investor share class ((VFINX)), which is rated Silver for its relatively higher fee.

The S&P 500 represents the U.S. large-cap opportunity set in a cost-efficient way. S&P’s eligibility criteria require index constituents be profitable and highly liquid. An index committee selects the stocks of 500 companies that meet these criteria, which represents approximately 80% of total U.S. market capitalization. While a committee-based approach lacks transparency, it provides more flexibility around reconstitution and can reduce unnecessary index changes. This cuts back on transaction costs compared with more-rigid rules-based indexes.

The U.S. large-cap market enjoys a high level of information availability and liquidity, with new information quickly incorporated into prices. Market-cap weighting leverages those prices to determine each stock’s weight in a cost-efficient manner. This approach promotes diversification and lowers unnecessary turnover.

However, market-cap weighting may expose the index to significant stock- or sector-level concentration during the market’s intermittent manic episodes. This can tilt the portfolio toward richly valued names or sectors, as was the case during the late-1990s technology bubble. In the long run, the benefits of broad diversification, low turnover, and a low fee outweigh these drawbacks.

Key Proprietary Morningstar Metrics for Vanguard S&P 500 ETF

Morningstar Analyst Rating: Gold
Process Pillar: High
People Pillar: Above Average
Parent Pillar: High

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