VV: Vanguard's Large Cap ETF Offers Exposure To New And Innovative Companies That You Don't Get In The S&P 500

Summary

• The Vanguard Large Cap Index ETF tracks the CRSP Large Cap Index, which tracks the top 85% of the market capitalization of the U.S. equity market.
• Vanguard's Large Cap Index is a little more diversified than the S&P 500, with 582 holdings.
• Not all S&P 500 companies are included in Vanguard's Large Cap Index, as some are too small to be included.
• Historically, Vanguard's Large Cap Index has outperformed the S&P 500. I believe this is because it is exposed to some faster-growing companies, and excludes some of the weakest components of the S&P 500.
• To offer some perspective on the differences between the two indexes, it may be helpful to take a look at the companies within it.

I believe Vanguard's Large Cap ETF (NYSEARCA:VV) may offer some slight advantages over the S&P 500 (NYSEARCA:SPY), (IVV), (VOO), Index. Historically, VV outperformed SPY 288.47% to 265.41% since its inception in 2004. It outperformed during some bull years (2005, 2007, 2009, 2017, 2019) and during some bear years (2008, 2018.)

I previously wrote about the "Google Effect" -- a significant advantage VV has over SPY; as companies tend to rise on the news of being added into the S&P 500. The S&P 500 is structured to add companies at inflated prices, and conversely subtracts companies at deflated prices.

Beyond this advantage, I think it's more important to take a look at specifically what companies this ETF exposes you to. Knowing what you're investing in can give you a better perspective on whether this index fits your risk-reward goals, and whether you're exposed to the sectors and industries that are growing.

It should also be noted that VV applies something closer to a truly passive approach to investing, focused solely on a company's size and market cap... while the S&P 500 index, as 'passive' as it may be characterized, does apply some minimal criteria in an actively managed way to select its components.

I examined very carefully which companies are included in VV; but before we get into that, let's start by seeing what's excluded.

I used to assume that all of the S&P 500 companies were automatically included in VV, (as they are required to be large when they get added into the S&P 500; a minimum market cap of $8.2 billion); however; after getting into the S&P 500, a company can shrink in size, and still remain in the index for a while. Incredibly, there are several S&P 500 companies that are too small to be included in VV.

Those companies are as follows:

Companies in the S&P 500, excluded from Vanguard Large Cap Index:

Company	Market Cap (in billions)
Harley-Davidson (HOG)	3.27
L Brands (LB)	4.48
Flowserve (FLS)	3.40
H&R Block (HRB)	3.27
SL Green Realty (SLG)	3.22
Unum Group (UNM)	3.08
TechnipFMC PLC (FTI)	3.32
Invesco (IVZ)	3.66
Alliance Data Systems (ADS)	2.21
Gap (GPS)	3.32
Nordstrom (JWN)	2.52
DXC Technologies (DXC)	3.61
Hanesbrands (HBI)	3.43

Click to enlarge

Notice what all of these companies have in common: They are all shrinking in size, and they are all under-performing the market. VV excludes these losers from its index! That's a big advantage. I wouldn't want exposure to those companies; they're the weakest components of the S&P 500. Although maybe it's not that big, each one of these companies only makes up 0.01% of SPY, so it's a combined 0.13% of SPY. It should also be noted that as of now, VV does have exposure to some other shrinking S&P 500 companies, Norwegian Cruise Line Holdings (NCLH) ($4.01 billion), Kohl's (KSS) ($2.98 billion), and Xerox Holdings (XRX) ($3.38 billion). There's a strong chance these companies will be removed from VV soon, but may remain in the S&P 500 for a little while longer. Macy's (M), for example, was recently removed from the S&P 500, with a market cap now of about $1.97 billion; but it appears it was removed from VV much earlier, as it used to have a much larger market cap. VV is quicker to get rid of the losers... and VV is also quicker to add in the winners; as these faster-growing companies tend to outperform the broad market on their way into the S&P 500, VV already includes them before they get to that point.

Profitability

One big difference between VV and SPY is that VV includes more companies that are not currently profitable. Profitability (over both the most recent quarter and most recent year) is a requirement to enter the S&P 500; but, as noted above, stocks can violate the criteria and still remain in the S&P 500. In 2019, there were only three unprofitable companies in the S&P 500. With the ongoing recession/pandemic situation, the number of unprofitable companies could rise to fourteen. With VV, however, it's common to get a good mix of both profitable and unprofitable companies. Exposure to unprofitable companies may sound like a bad thing on surface, but; in today's technology world, it's very common for companies to grow and succeed even without a current net profit on their balance sheet. Lacking current profit doesn't necessarily result in a stock getting punished, as it can still show growth and project profitability at some point in the future. Just keep in mind that Amazon (AMZN) was unprofitable for many years before it became the giant it is today. The transition from unprofitable to profitable can propel a stock much higher; those gains don't happen in the S&P 500 as the companies are profitable to begin with. Some companies in VV that are unprofitable have delivered excellent returns; such as Splunk (SPLK), Twilio (TWLO), Okta (OKTA), RingCentral (RNG), Wayfair (W), Seattle Genetics (SGEN), and Datadog (DDOG). VV's largest (non-S&P 500) holding, Tesla (TSLA), has been unprofitable for years; but that didn't stop its stock from going much higher. Although recently Tesla has been on the verge of finally achieving profitability; there's speculation that Tesla could soon join the S&P 500, possibly by the end of the year.

Now, let's examine what kinds of companies VV will expose you to:

Companies included in Vanguard Large Cap Index, excluded from the S&P 500:

Company	Percent of VV ETF	Market Cap (in billions)
Tesla (TSLA)	0.45	154.78
Uber (UBER)	0.14	62.98
Blackstone (BX)	0.14	67.49
Lululemon Athletica (LULU)	0.13	39.07
Veeva Systems (VEEV)	0.11	32.75
Workday (WDAY)	0.11	43.01
Splunk (SPLK)	0.11	29.51
Square (SQ)	0.11	35.62
CoStar Group (CSG)	0.09	25.63
Waste Connections (WCN)	0.09	24.72
Twilio (TWLO)	0.09	27.67
Palo Alto Networks (PANW)	0.08	22.70
Marvell Technology (MRVL)	0.08	21.63
IAC Interactive Corp. (IAC)	0.08	22.97
Okta (OKTA)	0.08	24.37
Snap (SNAP)	0.07	27.38
Liberty Broadband (LBRDK)	0.07	24.73
BioMarin Pharmaceutical (BMRN)	0.07	19.27
Seattle Genetics (SGEN)	0.07	27.21
TransUnion (TRU)	0.06	16.38
KKR & Co. (KKR)	0.06	23.45
Alnylam Pharma (ALNY)	0.06	15.53
VMware (VMW)	0.05	65.32
Markel Corporation (MKL)	0.05	12.36
Sun Communities (SUI)	0.05	13.48
Invitation Homes (INVH)	0.05	14.3
GoDaddy Inc. (GDDY)	0.05	12.87
SS&C Technologies (SSNC)	0.05	14.84
Exact Sciences (EXAS)	0.05	12.86

Click to enlarge

Additional non-S&P 500 Companies that make up less than 0.05% of VV are as follows: Arch Capital Group (ACGL), W. P. Carey (WPC), FactSet Research Systems (FDS), TD Ameritrade (AMTD), Westinghouse Air Brake Technologies (WAB), Black Knight (BKI), Dell Technologies (DELL), Trimble (TRMB), RingCentral, Cheniere Energy (LNG), Roku (ROKU), Annaly Capital Management (NLY), Wayfair, Elanco Animal Health (ELAN), Crown Holdings (CCK), Camden Property Trust (CPT), Alleghany Corp. (Y), Altice USA Inc. (ATUS), Keurig Dr. Pepper Inc. (KDP), Zoom Video Communications (ZM), Fidelity National Financial (FNF), SEI Investments (SEIC), Slack Technologies (WORK), Hubbell Inc. (HUBB), Vistra Energy (VST), Equitable Holdings (EQH), AGNC Investment Corp. (AGNC), Ally Financial (ALLY), Burlington Stores (BURL), Heico (HEI), Aramark (ARMK), Arconic (ARNC), OGE Energy (OGE), Bunge (BG), Sirius XM Holdings (SIRI), Voya Financial (VOYA), Jazz Pharmaceuticals (JAZZ), Reinsurance Group of America (RGA), Lear Corp. (LEA), Pinterest (PINS), Sensata Technologies (ST), Dropbox (DBX), Athene Holding (ATH), Match Group (MTCH), Cognex (CGNX), Vail Resorts (MTN), Targa Resources Corp. (TRGP), Lyft (LYFT), Interactive Brokers Group (IBKR), Reliance Steel & Aluminum (RS), Avangrid (AGR), Jones Lang (JLL), XPO Logistics (XPO), Axalta Coating Systems (AXTA), Chewy (CHWY), Hyatt (H), Westlake Chemical (WLK), Carvana Co. (CVNA), PPD (PPD), CrowdStrike (CRWD), Datadog, Continental Resources (CLR), Levi Strauss (LEVI).

Summary

This list of companies gives you an idea of the biggest companies you're missing out on by investing in the S&P 500. You may want to ask yourself; are these companies you envision growing? Are these companies the future of the economy? Obviously, there's a big mix of both outperforms and under-performers; so it's a decision that requires weighing the two sides. Just remember that Tesla is the biggest company you will get additional exposure to. Tesla's stock has been a phenomenal performer to date, and there's a good chance that it will go even higher if it achieves consistent profitability, and gets added to the S&P 500. I am also very bullish on Uber Technologies, as their ambitions are huge. Uber has a vision in mind to become the 'Google and Amazon of Transportation.' Some of the other companies within VV also have a good history of outperforming the market, such as Veeva Systems, Twilio, and CoStar Group, and Marvell Technology Group. Some have questioned whether the S&P 500 is 'flawed' in the sense that it excludes some of the biggest winners like Tesla.

In the modern world, I believe the Vanguard Large Cap Index may serve as a more sensible benchmark for the stock market than the S&P 500. The average lifespan for companies to remain in the S&P 500 is shorter than it used to be. At the current rate, 50% of companies in the S&P 500 will be replaced for the next decade. In this modern day and age, unicorn startup tech companies are becoming somewhat of a norm. The S&P 500 excludes some of the most incredible companies that may make up the future of our economy, and it holds onto shrinking companies that maybe don't offer the most promising future. Therefore, the Vanguard Large Cap Index may be a slightly superior alternative and a better benchmark for large-cap investors.

Risks/Challenges

The biggest challenge to my thesis is that many of the companies within VV are unknown, unprofitable, and perhaps not well-established. While VV offers good exposure to some of the most innovative and underrated technology companies, it also offers some exposure to under-performing sectors such as energy. Some of the REITs within VV have also under-performed. It's a mix of winners and losers. The standards for a company to enter VV are based solely on size, and not quality, growth, or anything else. A company's size may not tell a whole lot about the company's ability to grow and succeed. There's also the issue that VV is not fixed to a certain number of stocks; as it's based on 85% of the U.S. total market capitalization, the number of companies within the index can be constantly changing. That could be an advantage, as it adjusts to reflect the constantly-changing market, but also a disadvantage; as there's less control over what companies and sectors are permitted to enter the index.

Conclusion

VV is a great fund for ordinary, long-term investors. I am not suggesting it is a 'good time' to buy VV, as I am not making any calls on timing the market. I would recommend that the average long-term investor has a diversified portfolio with some exposure to both VV and the S&P 500. The S&P 500 is undoubtedly a more mainstream, well-known, and well-tested index, and it's good to have exposure to the most mainstream option. However, VV may be an index that could redefine what's mainstream, and become the new norm. With no guarantee that VV will outperform, having exposure to both of these indexes is a good way to embrace diversification.

Analyst’s Disclosure: I am/we are long VV, VOO, IVV, UBER. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Sanjay John]

Good research, nice ETF, covers the new growth companies especially in software space, thanks for the great article.

[nicholas davout]

VV is definitely an improvement over VOO but it's still missing seemingly surefire growth positions like TDOC or DOCU for example.

[clrodrick]

Interesting analysis, I will put VV on my radar. Thanks

[Philitas]

I sense a strong flavor of incoherence in some of the arguments pertaining to the attractiveness/justification for including some companies and excluding others.

As just one example, UNM is included in the list of those excluded from the Vanguard Large Cap Index and characterized as a "loser" (partly because of its decline in market cap); but UBER gets extolled as a winner because "it's ambitions are huge" and it "has a vision". Well ... So did WeWork -- and any number of others. Moreover, a side-by-side comparison of UNM and UBER -- in terms of both fundamentals and prevalent analyst opinions -- doesn't make UBER look like the obvious winner in anything OTHER than market cap. And this makes the justification for excluding UNM and including UBER come out to be more psychological/emotional than financial/analytic -- and I hope Vanguard isn't using criteria like that.

I'm afraid that considerations and examples like this detract from the usefulness and reliability of the recommendations favoring VV as an investment. And given the Risks/Challenges section and the Conclusion, I'm not sure what I'm supposed to think of it -- except that it's probably a coin flip between VV and a bunch of similar funds. Nothing compelling about it.

[Kyle Fishman]

I find your comparison of Unum and Uber rather odd.
one is a shrinking insurance company that no one has ever heard of,
the other is a fast-growing ridesharing disruptor, a transportation/technology company, and most people have heard of it because it plays a big role in their lives.
www.nytimes.com/...

[garkster]

You may be misunderstanding a key point about ETFs. Vanguard runs the ETF based on the index -- the index is managed by CRSP according to their rules, and is known in industry parlance as the "underlying" index. As such, Vanguard plays absolutely no role in determining what goes into the index.

As stated in the author's 1st bullet -- "...top 85% of the market capitalization of the U.S. equity market". That's a rule, not psychological/emotional.

[Philitas]

Actually, I think I understand that pretty well. I was making a different point regarding the author's approach and justification for choosing between investments in this case -- particularly in light of his introduction of the distinctions he employed.

Indeed, in his profile the author lists his approach as including such fundamental considerations as "I believe it's important to catch a company in its early years", "my investment philosophy values the opinion of simple minds that come from humble backgrounds", and (most telling) "I tend to pay more attention to a company's QUALITATIVE aspects rather than quantitative". [emphasis mine]

His evaluation of the "goodness" of VV really rests on this "investment strategy" -- and it's an approach, though one more subjective in ways that I prefer to avoid.

Perhaps my point should be viewed as the observation that when an attempt is made to bolster or justify investment choices made on these "simple" and "qualitative" principles by an appeal to quantitative considerations (which the author introduced in his comparisons), some incoherence and cognitive dissonance can result -- because it shrouds the use of emotional/intuitive/qualitative criteria in quantitative trappings incompatible with them. And so the result is an unconvincing argument regarding the benefits and attractiveness of a particular investment under consideration. At least I find this particular recommendation unconvincing for that reason, among others (similar to ones hinted at by other respondents).

[elba]

MGC better, and MGK out of the park.

[PaulY2]

Thank you very much. Ive stared at that ETF in Vanguards list for many years now wondering what the heck it was vs S&P.

[Jack Reacher]

give me the QQQ

[Kyle Fishman]

QQQ no doubt offers exposure to innovative tech companies -- but it has much more concentration and less diversification. Like one fifth of it is TWO companies (Apple and Microsoft).
VGT is no slouch either - it's also an impressive Technology ETF --- that devotes one third of its weight to Apple and Microsoft. That's crazy.

I'm a believer in Large Cap Tech. (really, I am).
and I'm also a believer in cap-weighted indexes.
I just don't think that many eggs should be in one basket.

VV gives you the benefit of more diversification. (and even then, Apple and Microsoft still make up like 10% of it).

Plus VV offers a lower fee 0.04% versus QQQ charging 0.20%.

[katmandu100]

Too much risk with companies that are not profitable.
Good data and commentary,thanks.

[William Darusmont]

I'll take a pass...would by MGC over this...Harley number one holding? Seriously?

[William Darusmont]

Mea culpa...I was looking at SPY...still I prefer MGC given the weightings.

[William Darusmont]

I just compared and returns are very close except MGC also a Vanguard ETF outperforms in every time period:
1,3,5 yrs:
VV 14.5%; 28.6%; 49%
MGC 16.7%; 31.1%; 52.9%

It's a u-pick-'em

[Kyle Fishman]

MGC is also a great option for long-term investors, with 70% of the addressable market capitalization.

MGC has a lot of pros, however there are some cons:
It does come with less diversification (263 holdings).
and a slightly higher expense ratio, (although still pretty cheap)...
MGC doesn't have that much in the way of Assets Under Management; so it's not that big or established...

and technically, since MGC's inception in December 2007,
VV outperformed MGC 177.74% to 176.75%. (although they both beat SPY at 171.11%).
(source: dividendchannel drip calculator)