Since introducing the first index fund for individual investors in the United States in 1976, Vanguard has developed a reputation for tight index tracking, rigorous risk controls and low costs. Today, millions of investors around the world rely on us for our high-quality index investments.
Indexing at Vanguard
Our index ETFs are designed to work as part of a core indexing strategy that targets major asset classes.
In Canada, we offer a suite of market-capitalization-weighted index ETFs that cover Canadian, U.S. and international equities and Canadian and global investment-grade bonds. These ETFs benefit from the same management expertise and benchmark construction best practices that made us a global indexing leader.
Potential advantages of indexing
Index investments don't require highly paid teams to analyze and select stocks. Instead, they hold securities until the index itself changes. As a result, they generally have low management and transaction costs. Research has shown lower-cost funds tend to outperform higher-cost funds over the long term.
Index investments generally hold most or all of the securities in their target indexes, and some provide exposure to thousands of securities. Investing in many or all key market segments ensures some participation in stronger areas while also mitigating the impact of weaker areas.
Most index investments have a precise, easily understood objective: to track the performance of a specific index (before fees and expenses).
Index investments may provide a tax advantage relative to open-end, actively managed funds because their management tends to require less portfolio turnover. Lower turnover can minimize capital gains distributions, which can, in turn, improve long-term after-tax performance.
Low-cost, well-managed index investments can be an effective way to achieve competitive returns over the long run.
What we look for in benchmarks
Index products and the benchmarks they seek to track have proliferated. But index providers' methodologies vary, so two benchmarks tracking the same market segment may deliver very different results. Selecting an appropriate benchmark is crucial to providing a best-in-class index ETF.
Many index providers use benchmark construction best practices that Vanguard has promoted for years. We believe equity and fixed income benchmarks should:
- Be based on objective rules, not subjective judgment.
- Include only shares and bonds that are available on the open market.
- Reflect market size and style changes through orderly rebalancing.
Additionally, equity benchmarks should use multiple criteria to categorize growth versus value stocks and use buffer zones so that market-capitalization divisions can overlap, with no hard cut-off points, to limit unnecessary turnover.
Benefits of well-designed benchmarks
Using best practices to construct benchmarks can deliver benefits to investors, including.
- Low portfolio turnover, which leads to lower transaction costs and potentially greater tax-efficiency.
- Better reflection of targeted markets, which can make index ETFs efficient asset allocation tools.
- Ability to compare among index products, allowing investors to choose benchmarks based on preference, cost and accessibility.
This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.
This material 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.
In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.
All investments, including those that seek to track indexes, are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While ETFs are designed to be as diversified as the original indexes they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.