- 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)|
|L Brands (LB)||4.48|
|H&R Block (HRB)||3.27|
|SL Green Realty (SLG)||3.22|
|Unum Group (UNM)||3.08|
|TechnipFMC PLC (FTI)||3.32|
|Alliance Data Systems (ADS)|| |
|Gap (GPS)|| |
|Nordstrom (JWN)|| |
|DXC Technologies (DXC)|| |
|Hanesbrands (HBI)|| |
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.
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)|
|Lululemon Athletica (LULU)||0.13||39.07|
|Veeva Systems (VEEV)||0.11||32.75|
|CoStar Group (CSG)||0.09||25.63|
|Waste Connections (WCN)||0.09||24.72|
|Palo Alto Networks (PANW)||0.08||22.70|
|Marvell Technology (MRVL)||0.08||21.63|
|IAC Interactive Corp. (IAC)||0.08||22.97|
|Liberty Broadband (LBRDK)||0.07||24.73|
|BioMarin Pharmaceutical (BMRN)||0.07||19.27|
|Seattle Genetics (SGEN)||0.07||27.21|
|KKR & Co. (KKR)||0.06||23.45|
|Alnylam Pharma (ALNY)||0.06||15.53|
|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|
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).
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.
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.
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.
This article was written by
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.
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