The Vanguard S&P 500 ETF: Is It Still a Core Portfolio Holding?

The Vanguard S&P 500 ETF (NYSEMKT: VOO) became the world's largest exchange-traded fund (ETF) earlier this year when it surpassed the SPDR S&P 500 ETF Trust. Both funds track the performance of the S&P 500 (SNPINDEX: ^GSPC), but Vanguard's strong reputation as an index fund leader, along with a lower expense ratio, helped propel its ETF into the top spot.

However, given recent market volatility, some investors may wonder if the Vanguard ETF should still be a core holding. One of the arguments against the Vanguard 500 ETF is that the S&P 500 index has become too top-heavy with big tech companies. Over 30% of its holdings are in the technology sector, and that doesn't even include companies like Amazon and Tesla, which are technically classified in other sectors. The S&P 500 has become more concentrated in tech stocks and less diversified over time.

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Here is a list of the ETF's top holdings and their weightings as of the end of April:

Data source: Vanguard.

Looking at the table, you can see the ETF's top five positions at the end of April accounted for more than 26% of its holdings, and all are companies chasing artificial intelligence (AI) ambitions. The same could be said for three of its next five largest holdings, as well. For this reason, some market pundits, including analysts at Goldman Sachs, have recommended investors turn to S&P 500 equal-weighted ETFs, which, as the name implies, give an equal weighting to each stock in the S&P 500.

One example of such an ETF is the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP), where each holding has a less than 0.25% weighting. As such, not a single stock will have an outsized influence on the fund. It also greatly shifts the sector weighting of the ETF with industrials being the largest sector at around 15.5% and financials at 14.9%. Tech drops to third place at 13.4%.

Image source: Getty Images.

Why the Vanguard 500 ETF should continue to be a core holding

That said, moving away from the S&P 500 ETF as a core holding may not be the best approach, even as the index has become more concentrated in tech stocks.

The reason why these technology companies make up such a large share of the index (and its corresponding ETFs) is because their success has made them the largest companies in the world. They continue to innovate and grow, shaping much of the world in the process. AI, meanwhile, has the potential to be a generational opportunity, and these are the companies with the means and resources to invest in it. As such, investors shouldn't inherently be worried about large-cap technology companies' weighting in the index.

You could even argue that the long-term success of the S&P 500 is due to the fact it's a market-weighted index. The larger a company becomes based on its market capitalization, the greater the percentage of the index it represents. Meanwhile, companies that underperform become a smaller part of the index. This dynamic is key to the long-term performance of the S&P 500.

A J.P. Morgan study found the market's success over the years is typically driven by a handful of "megawinners." The investment bank noted that between 1980 and 2020, more than 40% of all stocks in the Russell 3000 index, which consists of the 3,000 largest companies traded in the U.S., experienced a 70% decline, from which they never fully recovered. In addition, over 40% of stocks saw negative returns during this period, and two-thirds of stocks underperformed the index.

Despite the weak returns of most individual stocks, indices like the S&P 500 have still performed well because its winning stocks make up an increasing share of the index. This is counter to what most professional investment managers do: They pare the positions of their winners and add more money to laggards to rebalance their portfolios. It's a big reason why so many portfolio managers struggle to outperform the S&P 500 index over the long run.

Individual investors can continue to view the Vanguard 500 ETF as a core holding. It has a long track record of success with the ETF producing an average annual return of 12.3% over the past 10 years.

And in this time of heightened volatility, investors can use a dollar-cost averaging strategy to build up their position in the ETF. By investing on a regular schedule, regardless of price, you can reduce the impact of short-term market swings.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.