Investing in the Vanguard S&P 500 ETF (VOO)? Beware of This 1 Sneaky Risk.
The top 10 components recently made up a whopping 38% of the fund's value -- and the top three made up about 20%.
Investing in the Vanguard S&P 500 ETF (VOO) or the SPDR S&P 500 ETF (SPY) gives you partial ownership of 500 of America's biggest companies. Warren Buffett has recommended low-cost S&P 500 index funds for small investors, noting in his 2016 letter to shareholders that it has been his regular recommendation for investment advice.
However, according to Yahoo Finance, there is a problem with these index funds: they are quite concentrated. The top 10 holdings of the Vanguard S&P 500 ETF make up 38% of the fund's total value, with the top three holdings accounting for 20%. This means that while you will own a bit of 500 different companies with this fund, the majority of your investment will be in relatively few of them.
The concentration of the fund is due to its market cap-weighted nature, with larger companies holding more sway than smaller ones. This can be both good and bad for investors.
Brief written by urgent.news from Motley Fool, Yahoo Finance — 2 reports on this story. Machine-written — may contain errors; check the original before relying on it.
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