Vanguard S&P 500 ETF September 2023 Update

• Vanguard is a pioneer of index investing
• This ETF provides exposure to some of the largest companies in the US
• A low-cost way to track the performance of the S&P 500 index

How it fits in a portfolio

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

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.

An index 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. 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 largest index funds 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.

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 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 exchange traded 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 28.20%. This is followed by the Healthcare, Financials and Consumer Discretionary sector, which make up 13.20%, 12.40% and 10.60% 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 just over $7.2trn of assets globally as of December 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 ETF 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 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, which consists of over 60 people, carries out most of the firm’s voting and engagement activity. Their 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. The Stewardship team also produces frequent insights on their engagement activity at both a corporate and governmental level.

Vanguard has recently left the Net Zero Asset Management initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.

The Vanguard S&P 500 ETF tracks an index that does not specifically integrate ESG considerations into its process. The ETF can therefore invest in shares issued by companies in any sector.

Cost

The ETF currently 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 p.a. in the ISA and £200 in the SIPP). Ensuring an ETF has a low charge is an important part of tracking the underlying index closely.

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

Performance

The ETF aims to track the S&P 500 index and has done so well since launch returning 399.15%*. As expected from an ETF, 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 close to the index. Past performance is not a guide to the future.

This performance is partially down to the inclusion of technology companies in the index whose stock prices have seen a rally in recent years.

With US inflation currently falling to around 3.2%, and the view that the Fed are close to ending their rate hiking cycle, technology companies have come back into favour in 2023. This comes after a disappointing 2022, where technology companies had a tougher time as the US Federal Reserve raised interest rates to try to combat inflation.

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

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2023.

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