The Vanguard 500 Index Fund Investor Shares (VFINX) was the first index fund for individual investors, created on Aug. 31, 1976. It requires a minimum investment of $3,000 and charges a low annual net expense ratio of 0.14%, which is 85% less than the average expense ratio of large-cap no-load funds. When considering mutual funds, investors should focus on the objectives, principal investment strategies and risks statistics of the fund. Using common risk and modern portfolio theory (MPT) statistics such as beta, alpha, Treynor ratio, volatility, Sharpe ratio, and upside and downside capture ratio, investors can make a more informed decision about investing in VFINX. 

Fund Overview

The Vanguard 500 Index Fund Investor Shares is a passively managed fund that seeks to provide investment results corresponding to the S&P 500 Index, its benchmark index. As of October 2018, the fund held 505 stocks, and total net assets of $459.3 billion. The fund implements a replicating strategy, investing all, or a large portion, of its total net assets in common stocks included in the Index. The fund holds each security with approximately the same weighting as the index, which it mimics. 

Risk vs. Return

One of the most widely used MPT statistics is the beta of a security. Beta measures the degree of volatility a security has in relation to a major market index. Since the Vanguard 500 Index Fund's benchmark index fund is the S&P 500 Index – the main performance tracker of U.S stocks – the fund's beta is calculated relative to its benchmark index. As of October 2018, based on trailing three-year data, the fund had a beta of 1, indicating that it theoretically has the same degree of volatility as the S&P 500 Index. The fund's beta has maintained this value over five-, 10- and 15-year periods.

Alpha, on the other hand, indicates how well a security has performed against a benchmark index on a risk-adjusted basis. Since the Vanguard 500 Index Fund is a passively managed and fully replicating index fund, it has experienced slightly negative alphas. In October 2018, based on trailing five-year data, it had an alpha of -0.14.. Its trailing 15-year alpha was the same. In theory, the fund should have an alpha of 0. However, its expenses drag down performance by a small margin, which causes the negative alpha over sustained periods. 

The Treynor ratio is a Modern Portfolio Theory statistic that measures a security's risk-adjusted returns. The ratio is calculated by subtracting the average risk-free rate of return from the average return of a portfolio, and then dividing the result by the beta of the portfolio over a specified period. As of Feb. 29, 2016, based on trailing three-year data, the fund had a Treynor ratio of 16.23. Its Treynor ratio over the past 15 years was 8.22. Since a Treynor ratio will turn negative if the return is not favorable versus a no-risk investment, the positive ratio of VFINX has produced more units of return in relation to units of risk, and is therefore considered risk-favorable. 

Historical Volatility

Volatility, or standard deviation, is a statistic that measures a security's dispersion of returns. Therefore, the higher a security's volatility, the larger the deviation from the mean return. The opposite is true for a security with low volatility. As of October 2018, based on trailing five-year data, the Vanguard 500 Index Fund had an average annual standard deviation of 9.55%. Based on trailing 15-year data – which included returns in the high volatility environment during the 2008 financial crisis – the fund's average annual standard deviation was 13.19%.

Upside and Downside Capture Ratio

The upside and downside capture ratio indicates the overall performance of a company's portfolio during up-markets and down-markets. If a portfolio has an up-market capture ratio greater than 100%, the ratio indicates the portfolio has outperformed the benchmark index during up-markets. Conversely, if a portfolio has a down-market capture ratio less than 100%, the ratio indicates the portfolio outperformed the benchmark during down-markets.

The Vanguard 500 Index Fund has an up-market capture ratio and down-market capture ratio near 100% due to its fully replicating strategy. As of October 2018, based on trailing five-year data, the fund had an up-market capture ratio of 99.47 and a down-market capture ratio of 100.45, both measured against its benchmark index. Based on trailing 15-year data, it had an upside capture ratio of 99.59, and a downside capture ratio of 100.23. The slight underperformance in up-markets and down-markets can be attributed to the fund's expense ratio.

The Bottom Line

Vanguard 500 Index Fund Investor Shares is a solid investment choice for those looking to balance their portfolio with a fund that tracks a major U.S. benchmark, the S&P 500. When an investor studies risk, they are also concerned about return, and VFINX delivers both in digestible amounts.