Vanguard 500 Index Fund
From Bogleheads
| Company: | Vanguard |
|---|---|
| Fund category: | US Large Cap Stocks |
| Benchmark: | S&P 500 Index |
| Start date: | 08/31/1976 |
| Expense ratio: | 0.15% |
Vanguard 500 Index Fund is a market-weighted large-cap equity fund, presently encompassing about 80% of U.S. stock capitalization. According to its prospectus:
The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.
The Fund Holdings page on the Vanguard website reports that as of 11/30/2008, the fund actually invests in 510 stocks, while the benchmark index (predictably) includes 500. The fund is huge, with net assets of $80.7 billion. The fund's most recent holdings can be accessed from the latest N-Q report.
Contrary to common belief, the S&P 500 does not consist of the 500 largest U.S. stocks. Its components are chosen subjectively by Standard & Poor's U.S. Index Committee: S&P U.S. Indices Methodology. Nevertheless, Vanguard reports the index as having a hefty $42.8 billion median market capitalization.
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Share Classes
Two share classes are available to individual investors:
- Investor (VFINX), with an expense ratio (ER) of 0.15% and an initial minimum investment of $3,000
- Admiral (VFIAX), with an ER of 0.07% and a minimum investment of $100,000, except $50,000 suffices for conversion of an Investor Shares account in existence 10 years
Three additional share classes are offered through some workplace retirement plans:
- Signal (VIFSX), with an ER of 0.07%
- Institutional (VINIX), with an ER of 0.05%
- Institutional Plus (VIIIX), with an ER of 0.025%
Advantages
Widely Recognized Benchmark
The S&P 500 is the most frequently quoted of the broad indexes measuring U.S. stock market performance. Vanguard 500 Index Fund shareholders are assured of their investment tracking closely with commonly reported market results.
Low Costs
Owning the fund is quite inexpensive, with share class expense ratios varying from 0.025% to 0.15% and no purchase or redemption fees. The average large blend fund's ER, as reported by Vanguard, is 1.18%.
The fund paid $1,039,000 in brokerage commissions in fiscal year 2007, which produced a Commission Ratio (CR) of 0.001%.
Tax Efficiency
Vanguard 500 Index Fund is very tax-efficient, making it a suitable holding for a taxable account. The S&P 500 is market-weighted, and its overseeing committee is unlikely to kick out successful companies. So the fund won't generally sell enough stocks to realize big capital gains. About the only scenario under which the fund could distribute large capital gains is massive shareholder redemptions, unlikely in the absence of an unprecedented market crash, which would in itself solve the capital gains problem. According to {1}, the fund did distribute small (under 1%) capital gains in fiscal 1992-1999, but none since then.[For fund distributions for the period 1989-2007 please refer to Vanguard 500 Index Fund Tax Distributions.]
The fund's dividend yield, being in line with the U.S. market's, is not unusually high. Further, most or all of the fund's income should be in the form of qualified dividends, currently taxable at a 15% rate or less. The fund's dividends were 100% qualified in 2004, 2005, 2006, and 2007.
Criticisms
Somewhat Actively Managed Target
While the Vanguard S&P 500 Index Fund passively tracks its benchmark, that target index is maintained by a committee, using criteria which aren't particularly objective. One could view the S&P 500 Index itself as being actively managed. However, the S&P U.S. Index Committee makes no attempt to select stocks based on predicted outperformance, and turnover has historically been very low.
Front-Running
Arbitrageurs may attempt to profit by buying stocks about to enter the S&P 500 (or any other index) and selling ones about to exit. Further explanation is provided in the Understanding index front running article from thetradenews.com.
If everyone knows which stocks they need to buy (and sell) and when, speculators will obviously attempt to trade the stocks before the passive index funds – the rather crude term for this is ‘index front running’.
Index revision schedules are normally released to the market well before the effective revision date, leaving the route open for speculators. As a result, passive index funds with the tightest tracking error allowances typically choose to wait until the last moment on the effective day of change before trading, leading to inflated prices on the purchase of those stocks being added to the index (and substantially lower prices on those to be removed).
Bubble Risk
If a group of stocks becomes irrationally popular, their market capitalizations increase, so they are more heavily weighted in the S&P 500 Index Fund. This effect, which depends upon the belief that stock sectors can become significantly mispriced, may lead to sharp fund declines when the bubble bursts, i.e., the overvaluation unwinds itself. An obvious example, with benefit of hindsight, is the technology boom of the late 1990s followed by the 2000-2002 bust.
Alternatives
Investors looking for the widest U.S. equity exposure are better served by the Vanguard Total Stock Market Index Fund, which tracks the MSCI U.S. Broad Market Index, covering at least 99.5% of market capitalization. This product makes for a superior core U.S. equity holding.
Since the S&P 500 Index Fund has no ETF share class, investors preferring exchange traded funds must look elsewhere. Options which are cheaper than VFINX include:
- iShares S&P 500 Index Fund (IVV), with an ER of 0.09%.
- SPDR® S&P® 500 ETF (SPY), with an ER of 0.10%.
- Vanguard Large-Cap ETF (VV), with an ER of 0.07%. This product does not track the S&P 500 Index, but it follows the rather similar MSCI U.S. Prime Market Index.
For investors who prefer open-end vehicles, the Fidelity Spartan 500 Index Fund - Investor Class (FSMKX) has a $10,000 minimum and a 0.10% ER, comparing favorably to VFINX in terms of current costs.
Performance
This historical returns webpage provides VFINX performance for each of the most recent 16 calendar years. Its best calendar year result was +37.45% (1995), and its worst was -37.02% (2008). The ten year returns for the fund measure -1.46% for the fund compared to the -1.38% performance of the index. Tracking error relative to its benchmark varied from -0.19% (1993) to +0.04% (1998 & 2000).
Vanguard Institutional reports updated three year standard deviations of monthly returns. This measure of return volatility shows the fund had a 15.04% standard deviation compared to the 15.05% standard deviation of the benchmark as of 11/31/08.
History
Inception dates of the various share classes are as follows:
- Investor: 08/31/1976
- Institutional: 07/31/1990
- Admiral: 11/13/2000
- Institutional Plus: 07/07/1997
- Signal: 09/29/2006
The fund's fiscal year ends on 12/31 of each year.
The Vanguard S&P 500 Index Fund was the pioneering product of its kind. John Bogle recounts details of the fund's founding and early history in his April 1997 speech The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy.
See also
Links
- Morningstar Fund Page
- Vanguard Index Fund Tax Attributes FY-2007 (monograph by Barry Barnitz) contains tax data on the fund
- Vanguard 500 Index Fund accounting data
