Vanguard S&P 500 ETF (NYSE:VOO) has quietly become America’s go-to passive wager even while the very index that it tracks becomes riskier by the day.
With the S&P 500 up almost 85% in the last three years, VOO has ballooned to more than $750 billion in assets, making it the world’s largest ETF. But behind that success is an irony: the most “diversified” fund in the market is more concentrated than ever.
Ten mega-cap stocks, headed by Nvidia Corporation (NASDAQ:NVDA), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL), now constitute almost 40 % of the index. That’s a level of concentration not experienced since the dot-com bubble. So VOO’s “broad market exposure” is dominated by a few tech giants.
That notwithstanding, VOO doesn’t seem bothered. Despite the escalating trade war with China, the U.S. federal government continuing an extended shutdown, and local banks reporting bad and phony loans, VOO is standing firm and shrugging off three full-blown catalysts that would typically send even the toughest bull winching.
Also Read: High Stakes For VOO And SPY: The S&P 500’s Lofty Valuations Put ETF Strategies To Test
Breaking It Down
- Trade tensions escalating — the U.S. Treasury Secretary is to meet his Chinese counterpart in the face of new tariff threats and delisting Chinese companies.
- Government shutdown impasse — the Senate again could not approve funding, extending the shutdown into double digits.
- Banking trouble in the making — regional banks like Zions Bancorp and Western Alliance Bancorp are fighting loan-fraud and exposure problems.
None of these has derailed VOO. It is up over 13% year to date, even with sideways trading in recent weeks. Also, according to data on Etfdb.com, the fund experienced inflows of $3.4 billion in the past 5 trading days, surpassing peers like SPDR S&P 500 ETF Trust (NYSE:SPY) and iShares Core S&P 500 ETF (NYSE:IVV).
There is, however, a downside. While investors might enjoy the low-cost, sit-back ease of VOO (mere 0.03% expense ratio), they are, in effect, relying on the leading holdings continuing their reign and profit growth. The index’s elevated forward P/E (~22.4x) is reflecting the past. For instance, periods when the S&P 500 traded at over 22x have provided 10-year average annualized returns close to zero (around 3%).
For the moment, VOO is the epitome of stability. But as concentration risk runs deeper, the low-cost index behemoth may soon be confronted with a paradox: too cheap to ignore, and too concentrated to resist.
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