Vanguard balanced index fund tracking error

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. For stock market allocations  how close the fund manager tracks the index benchmark is determined by how well the manager uses index futures, cross trading, block trading and manages trading around index reconstitution. Vanguard, in its attempt to closely track index returns, states that it utilizes the following trading policies:

  1. Rebalance each portfolio every business day to eliminate or reduce risk factor differences between funds and indexes.
  2. 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.
  3. Trade carefully, matching execution prices to fund share valuation.
  4. Leverage cross-trading opportunities with Vanguard’s many other investment funds, reducing or eliminating commissions and transaction charges.
  5. Maintain tight controls over commissions, bid-ask spreads, and market impact. For example, proprietary portfolio systems establish minimum trade sizes to control transaction costs.

Since bond indexes can include huge numbers of illiquid bonds, replicating an index is often very costly. Vanguard, in an attempt to control costs, samples securities in their bond index funds. The sampling attempts to match the sector and risk metrics of the underlying bonds in the index. Because a sampled index fund does not hold all of the securities in the underlying index, its returns may vary somewhat from those of the index. Such performance variance is termed “sampling error.

Balanced index

The Balanced Index Fund consists of a 60% total US stock market allocation and a 40% total US bond market allocation. Historical annual tracking error for investor and admiral shares:

Index changes:

  • The fund made a change of benchmark on January 15, 2013 form the MSCI U.S. Broad Market Index to the CRSP US Total Market Index.
  •  The fund made a change of benchmark on 01/02/2009 moving from the Bloomberg Barclays U.S. Aggregate Bond Index to the  Bloomberg Barclays U.S. Aggregate Float Adjusted Index
  •  The fund made a change of benchmark on 06/01/2005, moving from the Dow Jones Wilshire 5000 Index to the MSCI U.S. Broad Market Index.

Tax-Managed Balanced

The Tax- Managed Balanced fund targets an allocation of 50 US large cap stocks and 50% US intermediate term tax-exempt bonds. Historical annual tracking error:

Index changes:

  • The fund changed benchmarks on February 2, 2002 moving from a 50% Russell 1000 Index and 50% Bloomberg Barclays 7 Year Municipal Bond Index benchmark to a Russell 1000 Index and 50% Bloomberg Barclays 1–15 Year Municipal Bond Index benchmark.

Life Strategy Growth

The Life Strategy Growth fund allocates 80% of the portfolio in US and non-US total stock indexes and 20% of the portfolio in US and non-US total bond indexes. Historical annual tracking error:

Index changes:

  • Weighted 48% CRSP US Total Market Index, 32% FTSE Global All Cap ex US Index, 14% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, and 6% Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index as of July 1, 2015.
  •  56% CRSP US Total Market Index, 24% FTSE Global All Cap ex US Index, 16% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, and 4% Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index through June 30, 2015.
  • 56% MSCI US Broad Market Index, 24% MSCI ACWI ex USA IMI Index, and 20% Bloomberg Barclays U.S. Aggregate Float Adjusted Index through June 2, 2013.
  • 65% MSCI US Broad Market Index, 20% Bloomberg Barclays U.S. Aggregate Bond Index (with the Bloomberg Barclays U.S. Aggregate Float Adjusted Index used after December 31, 2009), and 15% MSCI EAFE Index through December 15, 2010.
  • 65% Dow Jones U.S. Total Stock Market Index, 20% Bloomberg Barclays U.S. Aggregate Bond Index, and 15% MSCI EAFE Index through April 22, 2005. International stock benchmark returns are adjusted for withholding taxes.

Life Strategy Moderate Growth

The Life Strategy Moderate Growth fund allocates 60% of the portfolio in US and non-US total stock indexes and 40% of the portfolio in US and non-US total bond indexes. Historical annual tracking error:

Index changes:

  • Weighted 36% CRSP US Total Market Index, 28% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 24% FTSE Global All Cap ex US Index, and 12% Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index as of July 1, 2015.
  •  42% CRSP US Total Market Index, 32% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 18% FTSE Global All Cap ex US Index, and 8% Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index through June 30, 2015.
  • 42% MSCI US Broad Market Index, 40% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, and 18% MSCI ACWI ex USA IMI Index through June 2, 2013.
  • 50% MSCI US Broad Market Index, 40% Bloomberg Barclays U.S. Aggregate Bond Index (with the Bloomberg Barclays U.S. Aggregate Float Adjusted Index used after December 31, 2009), and 10% MSCI EAFE Index through December 15, 2010.
  • 50% Dow Jones U.S. Total Stock Market Index, 40% Bloomberg Barclays U.S. Aggregate Bond Index, and 10% MSCI EAFE Index through April 22, 2005. International stock benchmark returns are adjusted for withholding taxes.

Life Strategy Conservative Growth

The Life Strategy Conservative Growth fund allocates 40% of the portfolio in US and non-US total stock indexes and  60% of the portfolio in US and non-US total bond indexes. Historical annual tracking error:

Index changes:

  • Weighted 42% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 24% CRSP US Total Market Index, 18% Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, and 16% FTSE Global All Cap ex US Index as of July 1, 2015.
  • 48% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 28% CRSP US Total Market Index, 12% Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, and 12% FTSE Global All Cap ex US Index through June 30, 2015.
  • 60% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 28% MSCI US Broad Market Index, and 12% MSCI ACWI ex USA IMI Index through June 2, 2013.
  • 40% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 28% MSCI US Broad Market Index, 20% Bloomberg Barclays U.S. 1–3 Year Credit Bond Index, and 12% MSCI ACWI ex USA IMI Index through November 30, 2011.
  •  40% Bloomberg Barclays U.S. Aggregate Bond Index (with the Bloomberg Barclays U.S. Aggregate Float Adjusted Index used after December 31, 2009).
  • 35% MSCI US Broad Market Index, 20% Bloomberg Barclays U.S. 1–3 Year Credit Bond Index, and 5% MSCI EAFE Index through December 15, 2010.
  • 40% Bloomberg Barclays U.S. Aggregate Bond Index, 35% Dow Jones U.S. Total Stock Market Index, 20% Bloomberg Barclays U.S. 1–3 Year Credit Bond Index, and 5% MSCI EAFE Index through April 22, 2005.
  • 40% Bloomberg Barclays U.S. Aggregate Bond Index, 35% Dow Jones U.S. Total Stock Market Index, 20% Citigroup 3-Month Treasury Bill Index, and 5% MSCI EAFE Index through August 31, 2003. International stock benchmark returns are adjusted for withholding taxes.

Life Strategy Income

The Life Strategy Income fund allocates 20% of the portfolio in US and non-US total stock indexes and 80% of the portfolio in US and non-US total bond indexes. Historical annual tracking error:

Index changes:

  • Weighted 56% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 24% Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, 12% CRSP US Total Market Index, and 8% FTSE Global All Cap ex US Index as of July 1, 2015.
  • 64% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 16% Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, 14% CRSP US Total Market Index, and 6% FTSE Global All Cap ex US Index through June 30, 2015.
  • 80% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 14% MSCI US Broad Market Index, and 6% MSCI ACWI ex USA IMI Index through June 2, 2013.
  • 60% Bloomberg Barclays U.S. Aggregate Float Adjusted Index, 20% Bloomberg Barclays U.S. 1–3 Year Credit Bond Index, 14% MSCI US Broad Market Index, and 6% MSCI ACWI ex USA IMI Index through November 30, 2011.
  • 60% Bloomberg Barclays U.S. Aggregate Bond Index (with the Bloomberg Barclays U.S. Aggregate Float Adjusted Index used after December 31, 2009) 20% MSCI US Broad Market Index, and 20% Bloomberg Barclays U.S. 1–3 Year Credit Bond Index through December 15, 2010; 60% Bloomberg Barclays U.S. Aggregate Bond Index, 20% Dow Jones U.S. Total Stock Market Index, and 20% Bloomberg Barclays U.S. 1–3 Year Credit Bond Index through April 22, 2005.
  • 60% Bloomberg Barclays U.S. Aggregate Bond Index, 20% Dow Jones U.S. Total Stock Market Index, and 20% Citigroup 3-Month Treasury Bill Index through August 31, 2003. International stock benchmark returns are adjusted for withholding taxes.
About

Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog. In addition I serve as an administrator of finiki, the Canadian financial wiki, and as an administrator of the John C. Bogle Center for Financial Literacy site.

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