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Vanguard Social-Investing Error Prompts Funds To Check Controls
IMHO, Vanguard has been taking too much of the heat for the error made by the FTSE Group.
People have been saying for decades that index funds could be run by monkeys. I've argued that there's some intelligence needed: for cash flow management, for sampling (if the fund does not use full replication), for efficient trading, and so on. Nevertheless, the "monkey" perspective is somewhat appropriate in terms of what an index fund is supposed to do. That is, to follow its index, warts and all.
The cited articles says that "ETF portfolio managers are expected to match at least 80% of their holdings to whatever index they're tracking, with wiggle room to allow for pricing execution, liquidity or other concerns." It is mistakenly referring to the 80% rule for fund names, which is merely a minimum requirement.
Contrast the prospectus statements:
Vanguard Mid Cap Growth VMGRX: "Under normal circumstances, the Fund invests at least 80% of its assets in common stocks of mid-size companies."
Vanguard ESG US Stock ESGV: "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."
I understand that people buying an ESG fund expect it to follow ESG standards. But people buying an index fund should understand that the fund is required to follow the index.
Comments
People have been saying for decades that index funds could be run by monkeys. I've argued that there's some intelligence needed: for cash flow management, for sampling (if the fund does not use full replication), for efficient trading, and so on. Nevertheless, the "monkey" perspective is somewhat appropriate in terms of what an index fund is supposed to do. That is, to follow its index, warts and all.
The cited articles says that "ETF portfolio managers are expected to match at least 80% of their holdings to whatever index they're tracking, with wiggle room to allow for pricing execution, liquidity or other concerns." It is mistakenly referring to the 80% rule for fund names, which is merely a minimum requirement.
Contrast the prospectus statements: The last time Vanguard played that fast and lose (with a prospectus that allowed 15% wiggle room), its index funds underpeformed by 2% or more.
https://www.bogleheads.org/wiki/Vanguard_bond_index_fund_tracking_error#Sampling_strategies
I understand that people buying an ESG fund expect it to follow ESG standards. But people buying an index fund should understand that the fund is required to follow the index.