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Vanguard S&P 500 ETF: May 2022 update

In this update, Passive Investment Analyst Alex Watkins shares our analysis on the manager, process, culture, ESG Integration, cost and performance of the Vanguard S&P 500 Exchange Traded Fund (ETF).

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • Vanguard is a pioneer in index investing, and created the first retail tracker fund
  • This ETF offers exposure to some of the largest companies in the US
  • The fund’s low charges could help it track the S&P 500 index closely

How it fits in a portfolio

An ETF is a basket of investments that often includes company shares or bonds. They tend to track the performance of an index such as the S&P 500 and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

Find out more about ETFs

The Vanguard S&P 500 UCITS ETF offers a low-cost solution for tracking the performance of the S&P 500 index. The index is widely regarded as the best gauge of the performance of large US companies and features household names like Apple, Microsoft, Amazon and Tesla.

A tracker fund is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. ETFs that focus on the larger US companies could be used to diversify a long-term global investment portfolio, including those focused on other regions such as the UK, Europe or emerging markets, or one focused on smaller companies.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the biggest index funds in the world. Given its size, it has a large investment team with the expertise and resources to help its funds track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team of 80. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the fund. As a collective team, Vanguard has run this ETF for over 10 years.

Vanguard also has a trading analytics team, which is responsible for ensuring the ETFs buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs could help the ETFs track their benchmarks as closely as possible.

Process

This Vanguard S&P 500 UCITS ETF aims to track the performance of some of the largest companies in the US, as measured by the S&P 500 index. It does this by investing in every company, and in line with each company’s index weight. This is known as full replication and can help the fund track the index very closely.

Reducing costs is a key part of keeping the performance difference between the ETF and the benchmark to a minimum. In any index tracker fund, taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. To help keep these costs down, the team aims to make large investments in companies instead of lots of small transactions.

The ETF currently has a large weighting in the Information Technology sector which accounts for 28.00% of the underlying index. This is followed by the Healthcare, Consumer Discretionary and Financial sectors, which make up 13.60%, 12.00% and 11.10% of the index respectively.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can reduce the costs for investors, though this adds risk. Vanguard will only lend securities to a limited number of approved dealers. They also indemnify the fund against any loss from this process, meaning there should be no negative impact on investors.

Culture

Vanguard is currently the second largest asset manager in the world and runs £6.2 trillion of assets globally as of March 2022. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual stocks which may beat them.

The team running this ETF works closely with other equity research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the fund effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it has offered exclusions-based passive funds for many years, it has lagged peers in offering passive funds that explicitly integrate ESG (Environment, Social and Governance) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team, which consists of over 35 people, carries out most of the firm’s voting and engagement activity. Its stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation and shareholder rights.

As an example, in the US, the team has engaged with Tesla at least annually over the past five years. Last year Vanguard supported a proposal seeking additional reporting on its diversity and inclusion efforts. They also engaged with the company on diversity, equity and inclusion in the workforce, alongside the board’s oversight of human rights-related risks.

As the Vanguard S&P 500 UCITS ETF tracks an index of companies, it does not specifically integrate ESG considerations into its investment process, and the fund may therefore invest in companies deemed to be sin stocks, such as weapons and alcohol producers.

Cost

The fund has an ongoing annual fund charge of 0.07%. There are no charges from HL to hold ETFs within the HL Fund and Share Account. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 in the ISA and £200 in the SIPP). Ensuring a passive fund has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, buys and sells are subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The Vanguard S&P 500 UCITS ETF has tracked the S&P 500 index well since launch. Over this time, the fund’s returned 353.10%* versus the benchmark’s 369.62%. As expected from a tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance as close to the index as possible.

As the S&P 500 index currently has large exposures to sectors like Information Technology, these companies would currently have the biggest impact on the market’s performance, though the makeup of any index can change over time. The fund is also concentrated in the top 10 companies which make up 27.70% of the total index. Again, these businesses are likely to have the largest bearing on performance.

Over the last year, the S&P 500 has returned 10.51% to the end of April 2022. US Oil & Gas companies in particular performed well over the year. This is partly down to the ongoing effects of the Ukraine crisis which has led to a surge in global oil & gas prices.

Given Vanguard’s size, experience and expertise running ETFs, the fund could continue to track the S&P 500 index well in future, though there are no guarantees on how it will perform. A glance at the five-year table below shows that in some years the fund has tracked its benchmark closer than others. Remember, past performance isn’t a guide to future returns.

Annual percentage growth

Apr 17 – Apr 18 Apr 18 – Apr 19 Apr 19 – Apr 20 Apr 20 – Apr 21 Apr 21 – Apr 22
Vanguard S&P 500 UCITS ETF USD Dis GBP 4.29% 17.44% 2.11% 30.80% 8.95%
S&P 500 TR 6.39% 19.91% 4.25% 32.99% 10.51%

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2022.

Find out more about the Vanguard S&P 500 UCITS ETF including charges

View Vanguard S&P 500 UCITS ETF Key investor information

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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