Course 303: Choosing an Index Fund
Know Which Index the Fund Follows
In this course
1 Introduction
2 Know Which Index the Fund Follows
3 Know Your Options
4 Know the Tax Effects
5 Know the Costs

Vanguard FTSE Social Index VFTSX and Vanguard Growth Index VIGRX both land in the large-cap growth category, and they are both index funds. But their performance patterns have diverged over the past five years through April 2011. What gives? The funds may be large-growth, but they track different indexes.

FTSE Social Index tracks the FTSE4Good U.S. Select Index, which excludes alcoholic-beverage and tobacco makers, as well as firms with unfair or unsafe labor practices and poor environmental records. (We'll cover socially responsible investing in an upcoming lesson.) The index's strict inclusion criteria mean that certain industries and sectors are more represented than others. This leads the fund to a pronounced sector profile, including a much larger stake in financials--the fund holds more than 25% in the sector--versus the Growth Index, which holds just 6% in financials. The financial-services sector has been the worst performing sector over the last five years, acting as a major headwind against the Social Index Fund.

Knowing what index a fund tracks gives you a handle on the risks and returns you can expect and how they differ from other index funds. Although both funds feature Apple AAPL as their top holding (as of March 2011), J.P. Morgan shows up as the second-largest stake in the Social Index, at 3.5%. Wells Fargo is also in the top five holdings. Neither name shows up in the Growth Index at all.

Next: Know Your Options >>

Print Lesson |Feedback | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.