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A Low-Cost S&P 500 Index Fund for Investors Looking for Diversified Exposure to U.S. Stocks

Victor Selva

Victor Selva

9 followers

On Dec. 31, Ken Fisher (Trades, Portfolio), the chief executive officer and chief investment officer of Fisher Investments, added Vanguard S&P 500 ETF (VOO) at an average price of $110.19, and is currently holding 902,575 shares of the ETF.

Exchange Traded Fund (ETF)

An ETF is a special type of fund that invests in a portfolio of stocks or bonds. The aim is to mimic the performance of a specified index. As well as the shares, they are traded in the secondary market at any time (market hours) and investors can sell short.

The advantages of this investment vehicle are that they provide an efficient method of diversification because investors gain exposure to an index or a particular sector. Secondly, investors know the composition of the fund at all times. Moreover, as they are a passive managed fund, they have good operating expense ratios.

Obviously there are some disadvantages. We can mention the fewer indices for ETFs to track outside the U.S. or the large bid-ask spread that some ETFs with low trading volume have.

The Vanguard S&P 500 ETF

The Vanguard 500 Index ETF is managed by Michael H. Buek at Vanguard Group Inc. This fund is one of 67 Vanguard Group Inc ETF. It is a passively managed ETF designed to track the performance of the Standard & Poor's 500 Index before fees and expenses, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. Remember that the S&P 500 has become the most popular index that mutual funds and ETFs track.

Returns

The ETF has returned an annual rate of 19.73% since inception. More recently, the fund has generated a total return of 15.31% in the last three years, 27.51% in the last year and 9.22% in the last six months.

Top Ten Holdings

It is best suited for investors looking for diversification across sectors at a low cost. Let's see the fund´s holding list:

  • Apple Inc (AAPL) 3.21%
  • Exxon Mobil Corp (XOM) 2.80%
  • Google Inc (GOOG) 1.97%
  • General Electric Co (GE) 1.80%
  • Microsoft Corp (MSFT) 1.78%
  • Johnson & Johnson (JNJ) 1.62%
  • Chevron Corp (CVX) 1.52%
  • Procter & Gamble Co (PG) 1.40%
  • JPMorgan Chase & Co (JPM) 1.38%
  • Wells Fargo & Co (WFC)1.38%

Total Percentage of Top 10 Holdings: 18.86%

We can see from the list above that those large cap companies offer significant international exposure.

Return and Volatility Measures – Five Years

For the past five years the regression analysis shows the following: 

  • Alpha - 0.042%
  • Beta 1.001
  • R-squared 99.4%
  • Standard Deviation 16.5%

Source: Bloomberg

Let´s explain some concepts:

  • Alpha - measures the portfolio manager's contribution to performance that is independent of the benchmark.
  • Beta - measures the portfolio sensitivity of its returns on the “market portfolio” of risky assets.
  • R-squared - measures how closely the derived forecast was able to explain the performance of the last five years.
  • Standard deviation - measures how closely actual values matched the forecasted values for performance.

Charges

ETFs require no investment minimum beyond the price of one share. iShares Core S&P 500 (IVV) charges 0.07%, while the largest S&P 500 Index fund, SPDR S&P 500 (SPY), charges 0.09%. Vanguard S&P 500 ETF (VOO) charges 0.05% and is technically a separate share class of the Vanguard 500 Index mutual fund.

Final Comment

Finishing the year at 1,848, the S&P 500 Index had a 32.39% total return in 2013. So for those investors seeking to invest their money in an ETF with exposure to large cap U.S. equities, the Vanguard ETF is a good option because it offers diversification and has a significantly low expense ratio compared to the average charged by similar funds.

Disclosure: Victor Selva holds no position in any stocks mentioned.


Rating: 4.4/5 (10 votes)

Comments

peterma
Peterma premium member - 5 months ago

The article indicated that Fisher purchased the Vanguard S&P 500 ETF (VOO) at an average price of $110.19 on Dec 31, 2013. Wasn't the price closer to $169?

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