Index management expertise
makes Vanguard ETFs a solid choice
™
The benefits of
BETTER
INDEX
construction
Low portfolio turnover, which leads
to lower transaction costs and
potentially greater tax-efficiency.
A better reflection of the targeted
markets, which makes index
funds better asset allocation tools,
especially for those investors
who parse their portfolios by
market segments or sectors.
History of competitive performance
relative to actively managed
funds, with differences dictated
more by costs and less by index
construction methodology.
INDEX
expertise
Since launching the first index mutual fund
for individual investors in 1976, Vanguard
has developed a rigorous process to screen,
evaluate, and select benchmarks for its index
funds and ETFs.
We select indexes that we think best represent
the targeted market segment and not necessarily
those with the most name recognition. Nor do
we limit ourselves to any one index provider,
as we do not believe any single firm has a
monopoly on best practices.
What Vanguard seeks in an index
In a past paper published in the Journal of Indexes, Vanguard’s
chief investment officer, George U. “Gus” Sauter, spelled out what
he considers to be the best practices in index methodologies:
•
Construction based on objective rules, not subjective judgment.
•
Overlapping buffer zones around the breakpoints between
market-cap segments.
•
Multiple criteria to identify growth versus value.
•
Full float adjustment to reflect only those shares that are
available and freely traded on the open market.
•
Gradual, orderly rebalancing to reflect market changes.
MSCI was the first of the major index providers to adopt many
of these practices. Other providers eventually followed.
Why index selection matters
A comparison of major U.S. stock index methodologies
Index products—and the benchmarks they seek
to track—have proliferated rapidly over the last
few years, posing a challenge to financial advisors
who have some legal responsibility in choosing
appropriate investments for their clients.
Because of the different methodologies used by
index providers, two benchmarks supposedly
tracking the same market segment can deliver
very different results.
MSCI
Russell
Standard & Poor’s
Considerations
Composition
deciding factors
Transparent, objective rules
Transparent, objective rules
Committee, using subjective
and objective criteria
Objectivity helps avoid bias
and arbitrary holdings.
Rebalancing schedule
Semiannual rebalancing,
with quarterly marketcapitalization adjustments
Annually
Ad hoc
(annually for style indexes)
Frequent, incremental
rebalancing provides more
timely, accurate reflection
of the market and potentially
lowers market impact and
“front running.”
Market-cap
buffer zones
Overlapping buffer zones
between large-, mid-,
and small-cap segments
+/– 2.5% band in
market-cap rankings
None
Buffer zones mean lower
portfolio turnover, lower
portfolio transaction costs,
and potentially greater
tax-efficiency.
Growth criteria
Long-term forward earnings per
share (EPS) growth rate, shortterm forward EPS growth rate,
current internal growth rate, longterm historical EPS growth trend,
long-term historical sales/share
growth trend
Price/book ratio and average
estimate of long-term EPS
growth forecast
5-year EPS growth rate,
5-year sales per share growth rate,
5-year internal growth rate
Multiple factors better reflect
how real-world investors and
asset managers define growth
versus value.
Value criteria
Book value/price ratio,
12-month forward earnings/
price ratio, dividend yield
Same as for growth
Book value/price ratio, cash
flow/price ratio, sales/price
ratio, dividend yield
See entry immediately above.
Market coverage
Comprehensive (98%), except for
micro-caps with market caps
below $10 million
Comprehensive (98%)
Comprehensive (99%+)
Comprehensiveness should
be weighed against the cost
and liquidity of holding the
smallest micro-caps. Investors
who “slice and dice” the
market should also be
mindful of gaps between
market segment indexes.
Sector classifications
Uses the Global Industry
Classification System (GICS)
Uses Russell, GICS, and
ICB classifications
Uses GICS
GICS is more widely recognized
among U.S. investors.
Number of U.S. stocks
2,500
3,000
4,000+
A larger universe of stocks
provides better diversification
and broader market-cap
exposure within each sector.
Sources: FactSet, MSCI, Russell, and S&P, as of September 30, 2008.
SIZE
How our target U.S. stock indexes are segmented
comparison
Our target U.S. equity indexes provide comprehensive
market coverage and potentially better tax-efficiency.
Market capitalization1
Number of stocks
98%
99.5%
100%
98%
86%
99%+
0
U.S. equity
universe
300
MSCI US
Broad Market
Index
MSCI US
Investable
Market
2500 Index
MSCI US
Prime Market
750 Index
MSCI US
Large Cap
300 Index
MSCI US
Mid Cap
450 Index
750
MSCI US
Small Cap
1750 Index
S&P 500
Index
S&P
Completion
Index (3,500+
stocks)
2,500
Vanguard ETFs
VTI Total Stock
Market ETF
MSCI Investable
Market Index sectors:
VCR
VDC
VDE
VFH
VHT
VIS
VGT
VAW
VOX
VPU
1 Approximate cumulative market-cap coverage as percentage of U.S. equity universe.
2 Vanguard 500 Index Fund is a traditional mutual fund, not an ETF.
VV Large-Cap ETF
VB Small-Cap ETF
MGC Mega Cap
300 ETF
VO Mid-Cap ETF
Vanguard® 500 Index Fund 2
VXF Extended Market ETF
Consumer discretionary
Consumer staples
Energy
Financials
Health care
Industrials
Information technology
Materials
Telecommunication services
Utilities
3
Eight-factor style criteria provide
an accurate reflection of targeted markets
STYLE
Growth
Value
comparison
•
MSCI was the first major index provider to
use a two-dimensional, multifactor model to
determine investment style (three factors for
value, five factors for growth).
•
Stocks can fall in either value or growth, both
(but with different weightings), or neither.
Methodology more closely reflects how
real-world investors and asset managers
classify value versus growth.
•
Multifactor rules-based criteria for investment
style eliminate the arbitrariness of holdings
derived from subjective criteria or static
formulas with fixed cutoff points.
Book value/price ratio
12-month forward earnings/price ratio
Dividend yield
Long-term forward earnings per share (EPS) growth rate
Short-term forward EPS growth rate
Current internal growth rate
Long-term historical EPS growth trend
Long-term historical sales/share growth trend
Vanguard ETFs by style box
Style
Large
Style
Style
Value
ValueBlend
Blend
Growth
Growth
Value
MGV
Large
MGVMGC
MGCMGK
MGK
Large
Large
Mid
Small
Market Cap
Market Cap
VTV
VOE
Mid
VOE VO
VO VOT
VOT
Mid
Mid
VBR
Small
VBR VB
VB VBK
VBK
Small
VBR
Small
ValueBlend
Blend
Growth
Growth
VTV VV
VVVUG
VUG
VBR VB
VBVBK
VBK
Vanguard ETFs
Vanguard ETFs
MGV Mega Cap
300Mega
ValueCap
Index300 Value Index
MGV
MGC Mega Cap
300Mega
Index Cap 300 Index
MGC
MGK Mega Cap
300Mega
Growth
Index
MGK
Cap
300 Growth Index
Value ETF
VOE Mid-CapVOE
ValueMid-Cap
ETF
VO Mid-CapVO
ETF Mid-Cap ETF
Mid-Cap
VOT Mid-CapVOT
Growth
ETF Growth ETF
VBR Small-Cap
Value
ETF
VBR
Small-Cap
Value ETF
VB Small-Cap
VBETFSmall-Cap ETF
VBK Small-Cap
Growth
ETF Growth ETF
VBK
Small-Cap
4
Style
VTV Value ETF
VTV Value ETF
VV Large-Cap
VVETF Large-Cap ETF
VUG GrowthVUG
ETF Growth ETF
SECTOR
comparison
More inclusive sectors provide
broad diversification across market caps
Sector
MSCI US
Investable
Market
2500 Index
MSCI US
REIT Index
INTERNATIONAL
comparison
Vanguard ETFs
Consumer discretionary
Consumer staples
Energy
Financials
Health care
Industrials
Information technology
Materials
Telecommunication services
Utilities
VCR
VDC
VDE
VFH
VHT
VIS
VGT
VAW
VOX
VPU
REITs
VNQ
•
MSCI sectors parse from a universe of 2,500
U.S. stocks, covering roughly 98% of the U.S.
stock market’s capitalization.
•
Each sector provides broad diversification
across individual securities and across
market-cap levels.
•
MSCI uses the widely accepted Global Industry
Classification Standard (GICS) methodology for
defining sectors and industries.
•
REITs are a subset of the financial sector.
Vanguard REIT ETF seeks to track an MSCI
index separate from MSCI’s investable market
sector indexes.
International stock indexes provide
coverage for the rest of the world
•
MSCI EAFE
Index
MSCI Europe
Index
MSCI Pacific
Index
MSCI US
Emerging
Markets
VEA
Europe
Pacific ETF
VWO
Emerging
Markets ETF
•
MSCI Europe and Pacific Indexes are subsets
of the MSCI EAFE Index, covering 21 developed
markets outside the United States.
The MSCI Emerging Markets Index provides
diversified exposure to more than 20
emerging markets in Europe, Asia, Africa,
and Latin America.
VGK European ETF
VPL Pacific ETF
5
BOND
comparison
Bond indexes provide broad coverage
of U.S. investment-grade fixed income market
•
Barclays Capital U.S. Aggregate Bond Index
provides the broadest exposure to the U.S.
bond market, including mortgage-backed
securities which are not included in many
of the other Barclays indexes.
•
The Barclays Capital U.S. Government/
Credit Bond Indexes provide exposure to
a maturity-based subset of the Barclays
Capital U.S. Aggregate Bond Index. These
indexes measure the investment return of
all medium and larger public issues of U.S.
Treasury, agency, investment-grade corporate,
and investment-grade international dollardenominated bonds with varying ranges
of maturities.
Barclays Capital U.S.
Aggregrate Bond Index
Barclays Capital U.S.
Aggregrate Bond Index
Vanguard ETF
BND Total
Vanguard
ETF Bond Market ETF
BND Total Bond Market ETF
Barclays Capital U.S.
Government / Credit Index
Barclays Capital U.S.
Government / Credit Index
Barclays Capital
U.S. 1–5 year
Barclays
Capital /
U.S. Government
U.S.
yearIndex
Credit1–5
Bond
U.S. Government /
Credit Bond Index
Barclays Capital
U.S. 5–10 year
Barclays
Capital /
U.S. Government
U.S.
5–10
year
Credit
Bond
Index
U.S. Government /
Credit Bond Index
Barclays Capital
U.S. Long
Barclays
Capital
Government
/
U.S.
Long
Credit
Bond Index
Government /
Credit Bond Index
Vanguard ETFs
BSV ETFs
Vanguard
Short-Term
BSV
Bond ETF
Short-Term
Bond ETF
6
BIV
Intermediate-Term
BIV
Bond ETF
Intermediate-Term
Bond ETF
BLV
Long-Term
BLV
Bond ETF
Long-Term
Bond ETF
Vanguard International
Institutional Asset Management
P.O. Box 2900
Valley Forge, PA 19482-2900
Connect with Vanguard ® > www.vanguard.com/chile > +1 610.669.3348
> www.vanguard.com/mexico
For more information on Vanguard funds and Vanguard ETF™
Shares, visit our website or call to obtain a prospectus.
Investment objectives, risks, charges, expenses, and other
important information are contained in the prospectus; read
and consider it carefully before investing.
VANGUARD'S INVESTMENT MANAGEMENT SERVICES ARE
PROVIDED OUTSIDE OF CHILE. THE PRODUCTS DESCRIBED
HEREIN HAVE NOT BEEN REGISTERED (OTHER THAN BY
THE CCR), APPROVED OR DISAPPROVED IN CHILE AND
ARE NOT REGISTERED IN THE SVS SECURITIES REGISTRY.
THE PRODUCTS DESCRIBED HEREIN ARE NOT GOVERNED
BY CHILEAN PUBLIC OFFER RULES. THE INFORMATION
CONTAINED HEREIN CONSTITUTES AN OFFER MADE ON
A ONE-ON-ONE BASIS AND DOES NOT CONSTITUTE A
PUBLIC OFFER OF FOREIGN SECURITIES IN CHILE.
This information is intended for investors outside the
United States. The information contained herein does not
constitute an offer or solicitation and may not be treated
as an offer or solicitation in any jurisdiction where such
an offer or solicitation is against the law, or to anyone to
whom it is unlawful to make such an offer or solicitation,
or if the person making the offer or solicitation is not
qualified to do so.
Vanguard ETFs™ are not redeemable with an Applicant Fund
other than in Creation Unit aggregations. Instead, investors
must buy or sell Vanguard ETF TM Shares in the secondary
market with the assistance of a stockbroker. In doing so,
the investor will incur brokerage commissions and may
pay more than net asset value when buying and receive
less than net asset value when selling.
Investors cannot invest directly in an index.
All Vanguard ETFs are subject to market risk, which may result
in the loss of principal. Prices of mid- and small-cap ETFs often
fluctuate more than those of large-cap ETFs. International ETFs
involve additional risks, including currency fluctuations and the
potential for adverse developments in specific countries or
regions. ETFs that invest in emerging markets are generally more
risky than those that invest in developed countries. Sector ETFs
are subject to sector risks and non-diversification risks, which
may result in performance fluctuations that are more extreme
than fluctuations in the overall stock market. In addition, sector
FOR INSTITUTIONAL AND QUALIFIED INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Investment Products: Not FDIC Insured • No Bank Guarantee • May Lose Value
ETFs that sample their target indexes to comply with tax diversification rules may experience a greater degree of tracking error
than other ETFs. Bond ETFs are subject to interest rate, inflation,
and credit risk.
Past performance does not guarantee future results.
The funds or securities referred to herein are not sponsored,
endorsed, or promoted by MSCI, and MSCI bears no liability
with respect to any such funds or securities. For any such funds
or securities, the prospectus or the Statement of Additional
Information contains a more detailed description of the limited
relationship MSCI has with The Vanguard Group and any
related funds.
Vanguard ETFs are not sponsored, endorsed, sold, or promoted
by Barclays Capital. Barclays Capital makes no representation or
warranty, express or implied, to the owners of Vanguard ETFs or
any member of the public regarding the advisability of investing
in securities generally or in Vanguard ETFs particularly or the
ability of the Barclays Capital Index to track general bond market
performance. Barclays Capital hereby expressly disclaims all
warranties of merchantability and fitness for a particular purpose
with respect to the Barclays Capital Index and any data included
therein. Barclays Capital’s only relationship to Vanguard and
Vanguard ETFs is the licensing of the Barclays Capital Index which
is determined, composed, and calculated by Barclays Capital
without regard to Vanguard or the Vanguard ETFs. Barclays
Capital is not responsible for and has not participated in the
determination of the timing of, prices of, or quantities of
Vanguard ETFs to be issued.
Standard & Poor’s®, S&P®, S&P 500®, and 500 are trademarks of
The McGraw-Hill Companies, Inc., and have been licensed for use
by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor’s, and
Standard & Poor’s makes no representation regarding the advisability of investing in the funds.
Russell is a trademark of The Frank Russell Company.
© 2009 The Vanguard Group, Inc.
All rights reserved. U.S. Pat. No. 6,879,964 B2; 7,337,138
Vanguard Marketing Corporation, Distributor.
INTIDX 082009