What Vanguard looks 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. We believe that selecting an appropriate benchmark is crucial to providing a best-in-class ETF.

Benchmark construction best practices

Many index providers use benchmark construction best practices that Vanguard has promoted for years. We believe stock and bond 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, stock benchmarks should use multiple criteria to categorize growth versus value stocks and 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.
  • Better reflection of targeted markets, which can make index funds efficient asset allocation tools.
  • Comparability among index products, allowing investors to choose benchmarks based on preference, cost and accessibility.