Let's try backing up and going through this again, slowly.
I wondered how the differences in methodologies might effect the composition of the fund as a result of the change.The methodologies here are of two indexes. Ideally then one would compare the indexes themselves. Unfortunately, since one of those indexes (Nasdaq US Dividend Achievers Select Index) is proprietary, it's impossible to get data directly about the index. (This illustrates why one of the promoted advantages of index funds - transparency via the underling index - is sometimes less than advertised.) So BaluBalu used VDADX as a proxy for the Nasdaq index.
To its credit, Vanguard is moving this fund from an opaque index to a transparent one.
People generally look at funds in terms of average (mean) market cap. When they ask whether a fund is large-, mid-, or small-cap, they are looking at where the fund's average market cap falls. When they do screening on fund market caps, they are screening on average market cap. And so on.
There are two points here. One is that a discussion of average (mean) market caps is on point because the question is about how these two indexes compare. Average market cap is a part of that comparison. The other is that the use of median rather than average (mean) market cap as a basis of comparison seems a little odd given the greater familiarity with mean market cap. For both these reasons, I will continue to discuss mean market cap as well as median.
Vanguard reports the mean market cap of VDADX (as of June 30) to be $262.8B (vs. $262.6B for the underlying index). In comparison, S&P reports the mean market cap of the replacement index to be $53.3B. As this 5:
1 ratio is huge, albeit not nearly as large as the
13:
1 ratio of median market caps reported, it raises the same question: is this large difference for real?
That question has the same answer for either average: The discrepancy is due to the fact that S&P calculates unweighted
averages (both mean and median), while Vanguard calculates weighted averages.
How would one know this? One way would be simply as a result of due diligence - reading the fund's
statutory prospectus, hardly something obscure or difficult to find. In it, one sees:
Median Market Capitalization. ...the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
As far as knowing that the average (mean) market cap figures given by funds are weighted, I take that as a given. As noted above, most people look at market cap numbers (or market cap ranges/style boxes) when carefully researching funds. So we can assume that most people understand what these figures represent.
Average market caps are a very familiar quantity. Forget about Vanguard. Even Blackrock, another large purveyor of index funds, posts average market cap figures without seeing the need to add a footnote that the averages are weighted. I understand people's zeal in
ragging exclusively on Vanguard, but in this case the narrow focus is misplaced.
Because VDADX is a market-cap weighted fund, the proportion of the fund's assets invested in each stock is proportional to the market cap of that stock. So weighting each holding by the dollars invested is tantamount to weighting each holding by its market cap.
A trivial hypothetical can illustrate this: Assume three companies, A (market cap $2B), B (market cap $3B), and C (market cap $4B), and a market cap weighted fund holding these three companies. So their weights would be in the ratio 2:3:4.
We would compute the weighted mean as:
2/9 x $2B (A) + 3/9 x $3B (B) + 4/9 x $4B (C)
Notice that aside from scaling (dividing by 9), the summands are the squares of the market caps: 2², 3² and 4².
Again appealing to the fact that "everyone" understands and works with weighted average market caps, I'll skip illustrating why weighting presents a better picture than relying on unweighted averages.
I hope I've covered all the comments, from whataboutism to why market cap weighting is relevant to the squaring of market caps in computing averages. As well as the stuff in between.
