All about the Vanguard Index Fund
In the last few years, the US stock markets have done very well overall. The US indices have given one of the best returns. With the passive investing trend catching up, many US investors prefer to buy the entire index rather than buying an active fund or specific stocks. In this article, we will discuss all you need to know about Vanguard index fund that has the US S&P 500 Index as its benchmark. Please note that Indian investors currently don’t have the option to invest in Vanguard funds from India. But, very soon some Indian AMCs are planning to make that option available to Indian investors.
Performance of the S&P 500 Index
Before we look at the Vanguard index fund, let us look at the performance of the S&P 500 Index.
As seen in the above chart, the S&P 500 Index was trading near levels of 1,100 in September 2011. As of 15th October 2021, the S&P 500 Index is trading at levels of 4,400. So, the index has quadrupled in the last ten years.
In the last ten years, the S&P 500 Index has given a return of 16.63% CAGR (Compounded Annual Growth Rate). While the 10-year returns have been good, the last one-year return was a phenomenal 30%. Also, if we look at the calendar year performance of the S&P 500 Index from 2011 to 2020, then except for 2018 (-4.38% return), it has given positive returns every year. The best annual returns came in 2013 (32.39%).
How a US investor can invest in the S&P 500 Index?
In the above section, we have seen the performance of the S&P 500 Index in the last ten years. Let us now understand how a US investor can invest in the S&P 500 Index. Many mutual fund houses in the US offer active as well as passive funds with the S&P 500 Index as the benchmark. In this article, we will focus on the two passive funds offered by Vanguard:
- Vanguard 500 Index Fund Admiral Shares (VFIAX)
- Vanguard S&P 500 ETF (VOO)
Vanguard 500 Index Fund Admiral Shares (VFIAX)
The Vanguard 500 Index Fund Admiral Shares (VFIAX) was the first index mutual fund scheme launched in the US. It is a low-cost index fund that provides diversified exposure to the US stock market. It provides exposure to 500 of the largest US companies, which span many different industries and account for about three-fourths of the US stock market's value.
Performance of Vanguard 500 Index Fund Admiral Shares (VFIAX)
If a US investor invested USD 10,000 in the Vanguard 500 Index Fund Admiral Shares (VFIAX) in September 2011, the following is the financial performance.
As seen in the above image, the value of USD 10,000 invested in the Vanguard 500 Index Fund Admiral Shares (VFIAX) in September 2011 is worth USD 46,433. So, the VFIAX has multiplied investor wealth by 4.6 times in 10 years.
Performance of VFIAX compared to S&P 500 Index
The VFIAX has the S&P 500 Index as its benchmark. So, let us see how the VFIAX has performed as compared to the S&P 500 Index.
As seen in the above table, the VFIAX has very closely mirrored the S&P 500 Index. It is because of the low expense ratio of 0.04% for this fund. The initial minimum investment required for this fund is USD 3,000.
Vanguard S&P 500 ETF (VOO)
As discussed in the earlier section, the initial minimum investment required for the VFIAX fund is USD 3,000. It may not be possible for many US investors to start with such a big amount. An investor can get started with the Vanguard S&P 500 ETF (VOO) in such a scenario. The minimum investment for the Vanguard S&P 500 ETF (VOO) is 1 unit. The price of 1 unit of VOO as of 14th October 2021 is $406, which many investors can afford.
The Vanguard S&P 500 ETF (VOO) is an Exchange Traded Fund (ETF) that tracks the S&P 500 Index. The VOO and VFIAX are both offered by Vanguard, and both have the S&P 500 Index as the benchmark. However, the difference between the two is that VFIAX is an index fund, and the VOO is an ETF.
An US investor can buy VOO units in real-time at market prices. On the other hand, the price for the VFIAX is calculated at the end of the trading session, and the same price is applied to all investors for that day. The VOO has a lower expense ratio of 0.03% as compared to 0.04% for the VFIAX.
So, an US investor can choose either of the two Vanguard funds (VFAIX or VOO), depending on their preference, to invest in the S&P 500 Index and benefit from it. As discussed at the start of the article, the index has given superior returns in the past and has the potential to continue doing that in the future as well.
Asset allocation with Glide Invest App
International investments like the S&P 500 index fund or ETF should be a part of your investment portfolio. However, you need to follow appropriate asset allocation to diversify your investment portfolio as per your risk profile. Appropriate asset allocation includes investing in various asset classes like equity, debt, gold, real estate, alternative investments, etc. You can partner with the Glide Invest App to understand your risk profile and get recommendations for the appropriate investment products. You will get advice on how to plan and systematically invest towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved