VFINX – Vanguard 500 Index Investor Fund Stock Pri

Best-in-class option for large-cap investors.

Brendan McCann

Associate Analyst

Summary

Vanguard S&P 500 funds offer well-diversified, market-cap-weighted portfolios of 500 of the largest US stocks. The funds accurately represent the large-cap opportunity set while charging rock-bottom fees, a recipe for success over the long run.

The funds track the flagship S&P 500, which selects 500 of the largest US stocks—roughly 80% of the US equity market—and weights them by the market cap. An index committee has discretion over selecting companies that meet certain liquidity and profitability standards. While a committee-based approach may lack clarity, it adds flexibility to reduce unnecessary changes during reconstitution, taming transaction costs compared with more rigid rules-based indexes.

The end portfolio is well-diversified and accurately represents the US large-cap opportunity set. This allows the strategy to capitalize on its low fee and closely track the performance of the large-cap market.

The bedrock of this strategy is market-cap weighting, which harnesses the market’s collective wisdom of the relative value of each holding with the added benefit of low turnover and associated trading costs. It’s a sensible approach because the market tends to do a good job pricing large-cap stocks. Large, highly traded markets tend to reflect new information quickly and are well-suited for indexing.

When a few richly valued companies or sectors power most of the market gains, market-cap weighting may expose the strategy to stock- or sector-level concentration risk. As of year-end 2024, the top 10 holdings made up the largest portion of the index (37%) in several decades, and the 34% allocation to technology stocks was the highest since the dot-com bubble. But this is not a fault in design. The S&P 500 simply reflects the market composition. In the long run, its broad diversification, low turnover, and low fee outweigh these risks.

by Brendan McCann

This strategy accurately captures the large-cap opportunity set and keeps a lid on turnover by leveraging the market’s collective wisdom to size its positions.

Brendan McCann

Associate Analyst

Process High

It earns a High Process Pillar rating.

The strategy tracks the S&P 500, which selects 500 of the largest US companies that pass its liquidity and profitability screens. The profitability screen requires that the sum of a company’s GAAP earnings over the past four quarters be positive as well as the most recent quarter. The screen imparts a slight quality tilt to the portfolio but doesn’t distinguish it from similar benchmarks since large-cap stocks tend to be profitable. There have been instances where the profitability screen prevented otherwise qualified companies from index inclusion. Most notably, Tesla was added to the index only in December 2020, despite passing the liquidity and market-cap thresholds in January 2013. Once the index committee selects stocks, it weights them by market cap.

Market-cap weighting harnesses the market’s collective wisdom on a stock’s relative value and helps reduce turnover and associated trading costs. The index committee further curbs turnover by implementing changes as it sees fit rather than adhering to a strict reconstitution schedule.

The strategy approximates the contours of the large-cap market. Its sector composition is in line with its average peer in the US large-blend Morningstar Category, and no sector deviates by more than 4 percentage points as of year-end 2024. The fund’s value-growth and market-cap orientation both mirror the US category average, too.

Market-cap weighting consistently guides the index into the largest and most established names. As of year-end 2024, 94% of the strategy’s assets were companies with wide or narrow Morningstar Economic Moat Ratings, showcasing the portfolio’s durability.

This strategy is well-diversified. The average large-blend fund’s top 10 holdings represent approximately 50% of their portfolios as of year-end 2024; this strategy’s top 10 holdings represented 37% of the portfolio. While that’s lower than the US category average, it’s an increase from previous years. For example, in 2015, the top 10 holdings hovered around only 17% of the total holdings. Stocks such as Microsoft and Apple were some of the largest holdings then. They still ranked in the top 10 as of December 2024, but both their weightings have more than doubled since 2015.

by Brendan McCann

Vanguard's equity index group earns an Above Average People Pillar rating for its well-supported and stable management team adept at leveraging Vanguard's comprehensive resources.

Brendan McCann

Associate Analyst

People Above Average

Its portfolio managers benefit from the firm's global infrastructure and advanced portfolio management technology, which facilitates cost-efficient trading around the globe. The infrequent turnover of managers, coupled with Vanguard's practice of rotating them across various funds, enhances their expertise and understanding of different market segments.

The fund's managers directly handle trading, providing them with deeper insights into the portfolio's operations than a stand-alone trader might have. They are backed by a global team of dedicated personnel and employ sophisticated, scalable technology to minimize their workload and enhance tracking accuracy. Vanguard's independent risk-management team plays a crucial role in ensuring its funds adhere to predetermined tracking tolerances. It collaborates closely with the managers to oversee trades and address potential issues proactively. Vanguard compensates managers based on tracking error and excess return metrics to foster a culture of accountability and ensure that the management team's interests are closely tied to investors'.

by Brendan McCann

The Vanguard Group retains a High Parent rating as its new CEO settles in.

Daniel Sotiroff

Senior Analyst

Parent High

Former BlackRock executive Salim Ramji succeeded Tim Buckley as Vanguard’s fifth chief executive officer on July 8, 2024. Ramji left BlackRock in January 2024 as its global head of iShares and index investing, and his appointment represents a departure from Vanguard’s historical norm. The firm’s prior CEOs came from its internal executive ranks, making Ramji the first external candidate to take the reins.

Ramji inherited a firm that is succeeding in many ways. Recent fund launches fit the low-cost Vanguard mold, and it cut the minimum investment for its popular robo-advisor platform to just USD 100 from USD 3,000. Investor-friendly efforts like those are part of the reason Vanguard hasn’t struggled to garner assets. It managed more than USD 9.1 trillion from roughly 50 million clients globally at the end of June 2024. It took in more than USD 144 billion over the first half of the year, second only to BlackRock.

Yet, there’s no shortage of challenges awaiting Ramji. Vanguard hasn’t been immune to investors abandoning actively managed mutual funds for low-cost exchange-traded funds. Customer complaints remain a sore spot, and Vanguard recently received some backlash for raising fees on some of its brokerage services. It has struggled to grow outside of the US. Efforts to expand in markets like Germany and China were abandoned after only a few years.

Vanguard’s investor-first mentality remains its North Star. It has invested heavily in its advice business and ETF lineup over the past several years. Ramji accumulated a lot of experience in both areas at BlackRock, but it remains to be seen what his appointment means for Vanguard’s direction.

by Daniel Sotiroff

This strategy accurately represents the US large-cap opportunity set, allowing the funds to leverage their cost advantage and drive sound relative performance.

Brendan McCann

Associate Analyst

Performance

The fund’s low fee should help it beat its pricier US large-cap peers over the long run.

The strategy’s performance closely follows the ups and downs of the US stock market, since it is always fully invested. All else equal, this strategy should outperform its peers that hold cash during market rallies. Likewise, the strategy should lag similar peers when the market falls because it lacks a cash buffer.

Because of the strategy’s bias toward the largest and the most established companies, it misses out when small-cap stocks outperform large-cap stocks as they did in the fourth quarter of 2020. Likewise, when the S&P 500 becomes concentrated in a few large companies, the strategy can become top-heavy. This exposes the funds to US market risks should another dot-com-type bubble burst, during which the S&P 500 fell over 40% in the early 2000s.

by Brendan McCann

It’s critical to evaluate expenses, as they come directly out of returns.

Brendan McCann

Associate Analyst

Price

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Silver.

by Brendan McCann