Vanguard mid cap index fund tracking error

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Vanguard mid cap index fund tracking error measures Vanguard's indexing performance. Tracking error is the ultimate measure of judging an index fund manager's performance.

Since an index manager does not engage in security selection with an index fund, it is the manager's transactional skill which distinguishes performance. How well the manager uses index futures, cross trading, block trading and manages trading around index reconstitution determines how close the manager can track the index benchmark. [1] Vanguard, in its attempt to closely track index returns, utilizes the following trading policies:

  • Rebalance each portfolio every business day to eliminate or reduce risk factor differences between funds and indexes.
  • Strive to be 100% invested at all times, using futures and ETFs to equitize cash for full investment, with no cash drag and no leverage.
  • Trade carefully, matching execution prices to fund share valuation.
  • Leverage cross-trading opportunities with Vanguard's many other investment funds, reducing or eliminating commissions and transaction charges.
  • Maintain tight controls over commissions, bid-ask spreads, and market impact. For example, our proprietary portfolio systems establish minimum trade sizes to control transaction costs. [2]


Tracking error

Table 1. provides the long term average tracking errors for Vanguard's large cap index funds. (Please note we have data going back to 1993 for the Extended Market fund; the fund began operations in 1987.) With the increased availability of admiral share classes (reduced minimum investment $10,000) we provide tracking error data for both investor and admiral shares. The lower expense admiral shares produce tighter tracking of benchmark returns.

We should note that the historical tracking errors are less than the expense ratios for the funds, meaning that the index manager has provided added returns to fund investors through transactional efficiency. Detailed annual tracking error data (along with additional statistical measurement of fund returns) are provided in the footnote tables.


Table 1. Vanguard Index Fund Tracking Errors [3]
Fund Investor shares Admiral shares
Year Tracking Error Year Tracking Error
Vanguard Extended Market Index Fund [note 1]
Investor Admiral		 1993-2014 +0.10% 2001-2014 +0.08%
Vanguard Mid Cap Index Fund [note 2]
Investor Admiral		 1998-2014 -0.03% 2002-2014 -0.01%
Vanguard Mid Cap Growth Index Fund [note 3]
Investor Admiral		 2007-2014 -0.17% 2012-2014 -0.01%
Vanguard Mid Cap Value Index [note 4]
Investor Admiral		 2007-2014 -0.19% 2012-2014 -0.09%


Benchmark index changes

The Vanguard Extended Market and the Vanguard Mid cap index funds have changed benchmark tracking indices over their history. The Extended Market fund changed from Wilshire to S&P indices; the Mid index fund shifted from S&P indices to MSCI indices in 2003 and shifted to CRSP indexes in 2014. Table 2 provides a breakdown of tracking error to each benchmark index. Since the Mid Cap Index 2003 transition year provided a rather large positive tracking error over the split index tracking index, we have isolated the return in the table. The table also provides the tracking errors since the inception of admiral shares in each fund.


Table 2. Vanguard Index Fund Benchmark Tracking Errors
Fund Prior Transition
Year 2003 		Index CRSP Comparative Tracking Errors
Index Tracking Error
Investor shares		 Tracking Error
Investor shares		 Index Tracking Error
Investor shares		 Index Tracking Error
Investor shares		 Year Investor shares Admiral shares
Vanguard Extended Market Index Dow Jones Wilshire 4500
through June 17, 2005
S&P Transitional Completion
through September 16, 2005		 0.24% n/a S&P Completion -0.07% n/a n/a 2001-2014 -0.06% +0.08%
Vanguard Mid Cap Index S&P MidCap 400
through May 16, 2003		 0.30% 0.30% MSCI US Mid Cap 450
through 2013		 -0.16% CRSP Mid Cap Index -0.08% 2002-2014 -0.14% -0.01%
Vanguard Mid Cap Growth Index n/a n/a n/a MSCI US Mid Cap Growth 450
through 2013		 -0.18% CRSP Mid Cap Growth Index -0.22% 2012-2014 -0.16% 0.00%
Vanguard Mid Cap Value Index n/a n/a n/a MSCI US Mid Cap Value 450
through 2013		 -0.20% CRSP Mid Cap Value Index -0.21% 2012-2014 -0.26% -0.10%

Notes

  1. ↑ Table
    Vanguard Extended Market Index Fund
    (View Google Spreadsheet in browser, then File --> Download as to download the file.)

    Note: If the spreadsheet is blank, select a different sheet, then back to that sheet. The image will be refreshed.

  2. ↑ Table
    Vanguard Mid Cap Index Fund
    (View Google Spreadsheet in browser, then File --> Download as to download the file.)

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  3. ↑ Table
    Vanguard Mid Cap Growth Index Fund
    (View Google Spreadsheet in browser, then File --> Download as to download the file.)

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  4. ↑ Table
    Vanguard Mid Cap Value Index Fund
    (View Google Spreadsheet in browser, then File --> Download as to download the file.)

    Note: If the spreadsheet is blank, select a different sheet, then back to that sheet. The image will be refreshed.

References

  1. ↑ William Bernstein, Selection Skill, Transaction Skill, Efficient Frontier, Fall, 2000
  2. ↑ Vanguard:Passive Equity Portfolios
  3. ↑ All return data for this and all other tables is derived from the SEC Complete filings: N-CSR reports back to 2003; N-30D reports back to 1994


Statistics
Statistical concepts
Stock fund tracking error
Bond fund tracking error
US index returns
Global index returns
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