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mutual funds

How Vanguard Index Funds Work.

Passive Management

Passive management means the fund or ETF merely tracks the benchmark index. This is different from active management where a fund manager attempts to beat the performance of an index. 

For most active equity mutual funds, the benchmark index is the S&P 500.

Index Sampling

Vanguard uses index sampling to track a benchmark index without necessarily having to replicate the holdings in the entire index. This allows the company to keep the fund expenses low.

It is more expensive to hold every stock or bond in an index. Further, indexes do not have to allow for the inflow and outflow of funds like ETFs and mutual funds.

Expense Ratios

Vanguard funds charge expense ratios as their compensation for the management and issuance of the fund.

The expense ratio is calculated by taking the fund’s operating costs and dividing them by the assets under management (AUM).

Vanguard Total Stock Market Index Fund

As an example, let us look more closely at one of Vanguard's broad stock market index mutual funds.

The Vanguard Total Stock Market Index Fund (VTSAX) provides diversified exposure to small-, mid-, and large-cap growth and value stocks traded on the Nasdaq and New York Stock Exchange (NYSE).

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