Vanguard S&P 500 ETF: August 2025 update

• Vanguard is a pioneer in index investing and launched its first ETF in 2001

• This ETF provides exposure to the largest companies in the US

• It’s a low-cost way to track the S&P 500 Index

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.

The Vanguard S&P 500 ETF offers a low-cost way to track the performance of the S&P 500 Index. This index is widely regarded as the best measure of the performance of large US companies and features household names like Microsoft, Apple and Amazon.

An ETF 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. This ETF could be used to diversify a long-term global 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 largest index funds and ETFs in the world. Given its size, it has a big investment team with the expertise and resources to help its ETFs track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team. 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 ETF. As a collective team, Vanguard has run this ETF for 13 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 should help the ETFs track their benchmarks as tightly as possible.

Process

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

The ETF invests a large amount in the technology sector which accounts for 33.1% of its assets as at 30 June. This is followed by financials, consumer discretionary and communication services, which make up 14.0%, 10.4% and 9.8% of the ETF respectively.

Reducing costs is a key part of keeping the tracking difference between the ETF and the benchmark to a minimum. In any ETF, factors like taxes, dealing commissions and spreads, and the cost of running the ETF 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.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can be used to offset some of the costs. It will only lend securities to a limited number of high-quality approved dealers. Vanguard indemnifies the fund against any loss from this process, meaning there should be no negative impact on investors. However, stock lending adds risk.

As this ETF is listed offshore investors are not usually entitled to compensation from the UK Financial Services Compensation Scheme.

Culture

Vanguard is currently the second largest asset manager in the world and manages around $10trn of assets globally as of March 2025. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

John 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 companies 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 ETF effectively.

ESG Integration

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

Vanguard’s Investment Stewardship team 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, board oversight of strategy and risk, executive pay and shareholder rights.

The Investment Stewardship team produces frequent insights on their engagement activity at both a corporate and governmental level. Investors can also access fund-by-fund proxy voting records, although voting rationales are not provided. That said, voting and engagement case studies can be found in the firm’s annual Investment Stewardship report and quarterly Engagement and Voting reports.

Vanguard courted controversy in 2022 when it left the Net Zero Asset Managers’ Initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. It claimed its decision would improve clarity for investors and allow it to speak independently. We view this as a disappointing backward step. Furthermore, in 2024 it was reported that Vanguard failed to support a single shareholder proposal requiring more action from investee companies on environmental and social matters.

The Vanguard S&P 500 ETF tracks an index that doesn’t specifically integrate ESG considerations into its process. The ETF can therefore invest in shares issued by companies in any sector in line with the benchmark.

Cost

The ETF currently has an ongoing annual fund charge of 0.07%. Ensuring an ETF has a low charge is an important part of tracking the underlying index closely.

The annual charge to hold ETFs in the HL Stocks & Shares ISA or SIPP is 0.45% and in the HL Lifetime ISA is 0.25% (capped at £45 in the ISAs and £200 in the SIPP). There are no charges from HL to hold ETFs within the HL Fund and Share Account or HL Junior ISA.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

Since launch in May 2012, the ETF has tracked the S&P 500 Index well. In the last 10 years, it’s gained 310.64%*. As expected from an ETF, it’s fallen behind the benchmark over the long term because of the costs involved in running the ETF. However, the tools used by the managers have helped keep performance close to the index. Remember, past performance isn’t a guide to the future.

Over the past 12 months, the ETF has tracked its benchmark tightly, returning 12.61%. A significant event during this time was Donald Trump winning the US presidential election. The Federal Reserve (Fed) also lowered interest rates for the first time in four years in September 2024.

The financials sector was a big contributor to the ETF’s performance over the year. Even though the Fed has cut interest rates twice more since September, it’s taken a gradual approach, so rates have stayed higher, and for longer, than initially expected. Higher interest rates have benefited banks as the increased cost of borrowing boosts profits. JPMorgan Chase, the largest bank in the US, reported record profits in 2024.

As the technology sector makes up the largest part of the index, it has a big impact on overall returns and was a positive contributor to the ETF’s performance. Artificial Intelligence (AI) remains a key theme and US tech companies have been some of the biggest winners of AI. Nvidia, the largest AI chipmaker, has seen its market value grow significantly in recent years driven by strong demand for AI chips.

The healthcare sector was one of the biggest detractors from performance over the year, due to uncertainty following the election and the appointment of the new US Health Secretary. The energy sector also fell in value as the profits of energy companies have been impacted by lower oil and gas prices.

The US stock market has performed strongly in recent years but hasn’t performed as well as most other major markets so far in 2025. This is due to concerns that Trump’s proposed tariffs could cause inflation to rise again and slow growth in the US.

Given Vanguard’s size, experience and expertise, we expect the ETF to continue to track the benchmark closely in the future, though there are no guarantees.