Este artículo está disponible sólo en inglés.
Index providers don’t follow the same rules
“These problems are often invisible until market volatility occurs,” said Andrey Kotlyarenko, a senior investment product manager in Vanguard’s Investment Management Group. “When turbulence hits, investors start to see that their portfolios are riskier than the market or than they intended.”
The source of this risk stems from the different criteria that providers like Standard and Poor’s, Russell, and CRSP use to classify stocks—it’s as if some providers measure in feet and others in meters. For example, S&P, Russell, and CRSP categorize the style of 46% of large-cap stocks differently.
Growth or value? It depends on the provider.
Source: Vanguard using Morningstar data as of April 30, 2025.
S&P, Russell, and CRSP all use book-to-price ratios to assess a company’s value factor. However, their models meaningfully diverge from there. CRSP’s model uses 10 total factors, S&P uses six, and Russell uses three. In addition, CRSP identifies each security as either growth or value, but the other two providers can label a subset of companies as belonging to both styles.
The upshot: The proportion of growth and value stocks differs substantially depending on the index provider. This inconsistency can lead to significant deviations in portfolio performance and increased volatility.
Different methods, different market cap results
Similarly, methodology differences lead to a range of results based on market capitalization. CRSP slices its indexes into large-, mid-, and small-cap categories by targeting specific percentages of market capitalization. For example, CRSP defines large-caps as the top 85% of the total market value. In contrast, S&P and Russell use static stock counts (the largest 1,000 stocks, for example) to classify stocks based on size. As a result, the Russell 1000 covers 94% of total market capitalization and the S&P 500 covers 87.5%.1
These differences have ripple effects. For static stock count indexes, the market capitalization percentage can fluctuate over time. Furthermore, S&P’s method has a few distinctive traits. It uses a quality tilt, excluding companies that don’t show a profit for four consecutive quarters. It also relies on a committee at S&P that has the final say on whether a company merits inclusion, which is a more subjective criterion than those used by other providers.
As a result of these variations, market cap categories differ significantly among providers.
Note: CRSP and Russell methodologies combine mega-cap and mid-cap into one category that they both refer to as large-cap.
Sources: Vanguard calculations using FactSet data as of March 1, 2025
Investors and advisors often have good reasons for using index funds as portfolio building blocks. This approach can provide flexibility to enhance existing portfolios or create intentional tilts toward growth or value, among other strategies. However, mixing index providers can increase risk factors exposure, tracking error, and volatility, potentially leading to poorer performance.
Keeping index portfolios on track
Understanding the nuances of index construction methodologies and how well funds align with each other can help reduce unintended active risk. The fund name or classification is only the start of the story. A small-cap fund following one index provider may include a surprising number of companies that a different provider considers large-cap.
Assessing the tradeoffs in using funds from multiple index families instead of just one can help investors maximize market rewards. Conducting this research before investing may prevent the tax headaches that can result from restructuring existing portfolios. One option is to stick with a single index provider, said William A. Coleman, head of Vanguard’s U.S. ETF Capital Markets team.
“Index ETFs can serve as high-quality, flexible building blocks for portfolios,” Coleman said. “Carefully selecting them with attention to whether the indexes complement each other and help achieve financial goals is essential to giving investors the best chance for investment success.”
Notes:
For more information about Vanguard funds and ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.
Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
This document is not intended to provide tax advice or make and exhaustive analysis of the tax regime of the securities described herein. We strongly recommend seeking professional tax advice from a tax specialist.
Data provided by Morningstar is property of Morningstar and Morningstar’s data providers and it should therefore not be copied or distributed. Morningstar and its data providers are not responsible for any certification or representation with respect to data validity, certainty, or accuracy and are therefore not responsible for any losses derived from the use of such information.
Vanguard Mexico is not responsible for and does not prepare, edit, or endorse the content, advertising, products, or other materials on or available from any website owned or operated by a third party that may be linked to this email/document via hyperlink. The fact that Vanguard Mexico has provided a link to a third party's website does not constitute an implicit or explicit endorsement, authorization, sponsorship, or affiliation by Vanguard with respect to such website, its content, its owners, providers, or services. You shall use any such third-party content at your own risk and Vanguard Mexico is not liable for any loss or damage that you may suffer by using third party websites or any content, advertising, products, or other materials in connection therewith.