In my last long ISA portfolio read, I explained why the Vanguard FTSE Developed World ETF — VHVG — does most of the heavy lifting in my ISA. It gives me broad exposure to developed markets around the world and forms the core of my portfolio at 40%.

But VHVG is not the whole story, far from it.

I also allocate 20% of my ISA portfolio to the S&P 500 through the Vanguard S&P 500 UCITS ETF — VUAG.

At first glance, that might look like I am simply doubling down on America. After all, VHVG already has a large weighting to US companies. But that is not really what is happening when you look at my portfolio as a whole.

The S&P 500 plays a very specific role. It helps me maintain strong exposure to America’s largest and most profitable companies while the rest of my portfolio deliberately diversifies into other areas.

That distinction matters.

The S&P 500 tracks around 500 of the largest publicly listed companies in the United States.

That means businesses such as Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta and many of the other companies that have become dominant parts of the global economy.

But it is not purely a technology index.

The S&P 500 also contains major healthcare companies, banks, industrial businesses, consumer brands, energy companies, utilities and property businesses.

Technology might dominate the headlines, particularly with the growth of artificial intelligence, but the index is much broader than that.

When I invest in the S&P 500, I am effectively buying a slice of corporate America.

This is probably the most important question. VHVG already contains the largest American companies, so yes there is already some overlap.

But overlap does not automatically mean my overall portfolio is overweight the United States. That is because I also deliberately allocate capital elsewhere.

I hold a significant allocation to UK equities.

I invest separately in Asia-Pacific markets.

I also hold global smaller companies.

Those positions naturally reduce the proportion of my overall portfolio sitting in large US companies. The S&P 500 allocation helps counterbalance that.

In other words, I am diversifying away from America in some parts of the portfolio while deliberately retaining substantial exposure to it in another.

Because I still want America to matter.

The US remains home to many of the largest, most profitable and most innovative companies in the world. Much of the recent growth in artificial intelligence, semiconductors, cloud computing and software has been concentrated there.

Companies such as Nvidia, Microsoft, Alphabet, Amazon and Meta sit at the centre of some enormous structural trends. But I do not want my entire portfolio dependent on those trends continuing forever.

That is why the S&P 500 is 20% rather than 80% or 100%.

It is large enough to have a meaningful impact. But it still sits alongside a much broader collection of markets and companies.

For me, that is the sweet spot.

The S&P 500 has an extraordinary good long-term record. But, that does not mean those returns will continue at the same rate forever. It certainly does not mean the index cannot fall sharply.

But over long periods, the index has benefited from the ability of successful companies to grow while weaker companies gradually lose importance or leave the index altogether.

That is one of the things I like most about index investing.

I do not have to correctly predict which company will dominate the next decade. I do not need to choose between Nvidia and Microsoft. I do not need to decide whether Amazon will outperform Alphabet.

I simply own the index.

If a company grows, its importance within the index generally grows with it. If another company declines, its influence falls.

The winners effectively rise through the portfolio without me having to identify them beforehand.

It would be impossible to talk about the S&P 500 today without mentioning artificial intelligence. AI-related businesses have become an increasingly important driver of the index.

But I do not own the S&P 500 because I am making a short-term bet on AI.

That would be far too narrow.

I own it because it gives me exposure to a huge range of businesses that have repeatedly demonstrated an ability to innovate, grow profits and expand internationally.

If AI becomes one of the defining economic transformations of the next 20 years, the S&P 500 should give me exposure to many of the companies benefiting from it.

If something completely different becomes the next major growth engine, there is a good chance many of those winners will eventually find their way into the index too.

That adaptability is incredibly powerful.

There is another reason I am comfortable holding a meaningful allocation to the S&P 500. Many of its biggest companies generate revenue all over the world.

Apple sells products globally.

Microsoft sells software globally.

Visa and Mastercard process payments internationally.

Amazon, Coca-Cola, McDonald’s, Alphabet and countless others operate far beyond the United States.

So although the companies are US-listed, the economic exposure is much broader. That does not make the S&P 500 a substitute for a genuinely global fund. But it does mean I am not simply making a bet on American consumers or the US economy.

I am investing in companies that often serve the entire world.

The particular fund I use is VUAG — Vanguard’s accumulating S&P 500 ETF. The accumulation part is very important to me.

Rather than paying dividends out as cash, the fund automatically reinvests them.

That suits the stage I am at perfectly because I am still trying to grow the portfolio, not live from it. So I want dividends reinvested and compounding without me having to do anything.

It is simple. And simple is exactly what I want.

Why not just own the S&P 500? Because I still believe diversification matters. No country dominates forever, no sector dominates forever, and no investor can know with certainty where the next decade’s best returns will come from.

That is why the rest of my portfolio exists. My global core gives me broad developed-market exposure, my UK allocation gives me access to a very different type of market, Asia adds another major economic region, and small caps broaden my exposure further down the company-size spectrum.

The S&P 500 then plays a specific role within that mix: it makes sure that, while I am spreading my money across different markets and styles, I do not dilute one of the most important parts of the global equity market too far.

That is the role it plays.

The bigger lesson is that portfolio construction is not always about avoiding overlap. Sometimes overlap is deliberate, and the important thing is understanding why it is there.

My S&P 500 allocation is not a statement that America will definitely outperform everything else, nor is it a prediction that technology will dominate forever. It is certainly not a reason to abandon global diversification.

It is simply my way of ensuring that the world’s largest US companies remain a meaningful part of my portfolio while I continue to diversify into other areas.

That is why I allocate 20% to the S&P 500.

The Compounder
Long-term investing made simple.

The Compounder is for financial education and commentary only. I am not authorised or regulated by the Financial Conduct Authority and I do not provide financial advice, investment advice, or personal recommendations. Nothing published here should be taken as a recommendation to buy, sell, hold or switch any investment, fund, pension, ISA, crypto asset or financial product. Always do your own research and consider speaking to an FCA-authorised financial adviser if you are unsure.