What's the best core holding for long-term investors?

08 October 2018 | Markets and Economy


 Remove  Save

Defending Index target

Many investment experts have long cited the S&P 500 index as the best way to get exposure to the US equity market for long-term investors seeking a core exposure. In fact, some also feel that an S&P 500 index based investment fund would suit anyone seeking a global exposure since the underlying companies are large US based multinationals that generate a significant portion of their revenues and profits from the rest of the world. Indeed, an analysis of the revenues of these companies shows that almost 25% of revenues are generated from outside the Americasi.

S&P 500 index: broad, but concentrated

With the S&P 500 index having recently made headlines as it continues its longest ever rally (almost ten years and counting), you would have been well rewarded if you had chosen this option. And, as the index covers around 82% of the US equity market, it certainly does provide investors with a broad based exposure to US equitiesii.

However, critics of the index argue that it is too concentrated and not diverse enough. They say that the strength in recent years has been driven in part by the information technology sector and, in particular the so-called FAANGs – the tech giants Facebook, Amazon, Apple, Netflix and Google's parent company Alphabet. With the sector making up 26.5% of the index (and the FAANGs alone half of this), this would be hard to argue withiii.

A total stock market approach

An alternative to the S&P 500 could be a total stock market fund. Given its broader coverage of stocks it provides investors with more diversification, as well as more exposure to smaller companies. Although smaller companies can carry more risk, over time, they have a history of outperforming larger ones. This could therefore enhance overall returns for an investor in the long-term.

A total stock market fund would naturally include all the companies with the S&P 500 index. And given that these funds often invest based on market-weights, the top holdings would also be identical to an S&P 500 index based investment. However, they would be less concentrated, improving overall diversity and reducing single stock risk. Therefore, such a fund could provide investors with a better overall risk profile, despite an increased exposure to smaller companies.

By way of comparison, the Vanguard US Equity Index Fund, which takes a total stock market approach, has almost seven times as many holdings as the Vanguard S&P 500 UCITS ETF (3,479 vs 507) and its top ten holdings are also less concentrated (19.1% vs 23.3%)iv.

So while an S&P 500 based investment will suit many investors, for those who don't own any other US funds, who don't have exposure to small caps or just want a more diverse portfolio, a total stock market fund could provide a low-cost, all in one investment solution.

James NortonJames Norton
Senior investment planner, Vanguard UK

iSource: S&P Dow Jones Indices LLC and FactSet. Data as at December 2017.
iiSource: S&P Dow Jones Indices LLC. Data as at December 2017.
iiiSource: S&P Dow Jones Indices LLC. Data as at August 2018.
ivSource: Vanguard. Data as at August 2018.

Investment Risk Information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results. Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.

Investments in smaller companies may be more volatile than investments in well-established blue chip companies.

ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.

The fund(s) may invest in financial derivative instruments that could increase or reduce exposure to underlying assets and result in greater fluctuations of the fund's Net Asset Value. Some derivatives give rise to increased potential for loss where the fund's counterparty defaults in meeting its payment obligations.

Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.

Other Important Information

This document is designed for use by, and is directed only at persons resident in the UK. The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of [units/shares] of, and the receipt of distribution from any investment.

The opinions expressed in this article are those of individual authors and may not be representative of Vanguard Asset Management, Limited.

Vanguard Asset Management, Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of any investment, please contact your financial adviser.

Vanguard Funds plc has been authorised by the Central Bank of Ireland as a UCITS and has been registered for public distribution in certain EU countries. Prospective investors are referred to the Funds' prospectus for further information. Prospective investors are also urged to consult their own professional advisers on the implications of making an investment in, and holding or disposing shares of the Funds and the receipt of distributions with respect to such shares under the law of the countries in which they are liable to taxation.

The Manager of Vanguard Funds plc is Vanguard Group (Ireland) Limited. Vanguard Asset Management, Limited is a distributor for Vanguard Funds plc. The Authorised Corporate Director for Vanguard Investment Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard Investment Funds ICVC.

For further information on the funds’ investment policy, please refer to the Key Investor Information Document (“KIID”). The KIID and the Prospectus for these funds are available from Vanguard via our website

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.


 Remove  Save