Attempting to outperform the stock market within a single calendar year? The chances are usually under 50%. Stretch that out over multiple years, and the odds drop even more. In fact, with a standard 10-year investment horizon, it’s debatable whether it’s even worth the hassle.
According to the latest SPIVA US Scorecard from S&P Dow Jones Indices, updated semi-annually, over 15 years, more than 90% of actively managed large-cap funds have underperformed.
This reality has led to a significant rise in popularity of exchange-traded funds (ETFs). Instead of facing management fees that often exceed 1% with actively managed funds, passively managed index funds offer much lower expense ratios, enabling investors to retain more of their returns without paying a financial advisor.
The logic remains strong: Why pay hefty fees when the likelihood of underperformance is so high? Why not just aim to match, say, the S&P 500? That’s why it’s suggested that investors focus more on the Vanguard S&P 500 ETF instead.
Why the Vanguard S&P 500 ETF Works So Well
The standout feature of the Vanguard S&P 500 ETF is its straightforwardness. It mirrors the S&P 500 index and charges a remarkably low expense ratio of just 0.03%. This gives investors broad access to the large-cap U.S. market with minimal costs.
Actively managed mutual funds frequently impose management fees of 1% or even more. Such fees can significantly affect shareholder returns and are a core reason for long-term underperformance. Although actively managed ETFs might charge less—often under half of traditional funds—they can still add unnecessary costs.
In contrast, the Vanguard S&P 500 ETF enables investors to keep nearly all their earnings on investments. It allows for a close replication of index performance while lessening the impact of fees.
| VOO Metric | value |
|---|---|
| Assets under management | $974 billion |
| expense ratio | 0.03% |
| 1 year total return | +31.2% |
| Total return for 5 years (annualized) | +14% |
| dividend yield | 1.1% |
| top sector | Technology (35%), Finance (12%), Communication Services (11%) |
| Top holding stocks | Nvidia (7.9%), Apple (6.5%), Alphabet (6.5%), Microsoft (4.9%) |
Right now, a potential concern with investing in the S&P 500 is the heavy representation of tech stocks, which make up over a third of the holdings, particularly among the top ten companies.
However, this aligns with the current direction of the U.S. economy. The ongoing AI boom is yielding increases in revenue and efficiency. Thus, the Vanguard S&P 500 ETF seems crafted for both the present and the future. Even seasoned money managers often find it challenging to surpass this performance.
