The Vanguard 500 Index Fund 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 0.04%, which is lower 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 risk 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 VFIAX.

Fund Overview

The Vanguard 500 Index Fund Admiral Shares (VFIAX) is a passively managed fund that seeks to provide investment results corresponding to the S&P 500 Index, its benchmark index. As of April 2021, the fund held 509 stocks, and total net assets of $220.5 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 Q1 2021, based on trailing three-year data, the fund maintained 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 April 2021, 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 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 April 2021, 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 VFIAX has produced more units of return in relation to units of risk and is thus 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 April 2021, based on trailing 3-year data, the Vanguard 500 Index Fund had an average annual standard deviation of 18.4%. Based on trailing 10-year data the fund's average annual standard deviation was 14.12%.

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 April 2021, based on trailing 3- and 10-year data, the fund had an up-market capture ratio of 100 and a down-market capture ratio of 100 as well, both measured against its benchmark index.

The Bottom Line

The 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 VFIAX delivers both in digestible amounts.