Learn More About Vanguard Small Cap Index (NAESX)

If you're considering adding Vanguard Small Cap Index (NAESX) to your investment portfolio, here is some basic information about this mutual fund to help you determine whether it is well suited to helping you accomplish your investment goals.

DESCRIPTION

Here is a description of the fund, from the Vanguard Small Cap Index prospectus:

The investment seeks to track the performance of a benchmark index that measures the investment return of small capitalization stocks. The fund employs a passive management investment approach designed to track the performance of the MSCI US Small Cap 1750 index, a broadly diversified index of the stocks of smaller U.S. companies. It attempts to replicate the target index by investing all, or substantially all, of assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

EXPENSE RATIO

One of the most important details about any mutual fund is its expense ratio. The expense ratio tells investors how much of their investment will be lost (annually) to things like management fees and money spent to advertise and promote the mutual fund.

Obviously, the lower the expense ratio, the better.

According to 2008 Investment News data, the average expense ratio for an actively managed mutual fund (meaning the fund manager actively trades the assets in the fund's portfolio) was about 1.25%.

However, some passively managed mutual funds -- for instance, those that attempt to mirror an index, and whose assets are not traded frequently -- have expense ratios as low as about 0.15%.

The expense ratio for Vanguard Small Cap Index is 0.28%. That's 78% less than the average actively managed mutual fund.

To put that into perspective, if you were to invest $10,000 in Vanguard Small Cap Index, your annual expenses would be $28 - whereas if you were to invest $10,000 in the average actively managed mutual fund, your annual expenses would be $125.

TOP HOLDINGS

Are you curious which stocks Vanguard Small Cap Index actually holds?

Here are the top five holdings, in terms of their percentage of total assets:

• CMT MARKET LIQUIDITY RATE (0.57%)
• SEAGATE TECHNOLOGY (0.35%)
• BROADRIDGE FIN SOL (0.32%)
• GEN-PROBE INCORPORATED (0.30%)
• SYBASE INC (0.29%)

As you can see, these are not well known, blue-chip companies. Many of them are companies that might be especially risky to invest in individually, but the broad exposure of this mutual fund helps even things out.

HOW THE FUND HAS PERFORMED

Although a mutual fund's past returns do not guarantee future performance, knowing how a fund has fared recently (especially when compared with similar funds) is important information every investor ought to consider when deciding whether to add the fund to his or her portfolio.

In the past year (09/16/2008 - 09/16/2009), Vanguard Small Cap Index has gained 17.75%.

In comparison, during the same period, the Standard & Poor's 500 index has gained 11.03%.

ANALYSIS

Is Vanguard Small Cap Index right for your investment portfolio?

That depends on your investment goals.

Morningstar, the investment research firm, classifies Vanguard Small Cap Index as a "Small Blend" mutual fund. Here is Morningstar's description of Small Blend funds:

Small-blend funds favor firms at the smaller end of the market-capitalization range, and are flexible in the types of small caps they buy. Some aim to own an array of value and growth stocks while others employ a discipline that leads to holdings with valuations and growth rates close to the small-cap averages.

Thus, if you're looking for a mutual fund that offers the allure of smaller companies with potential for big growth and the wide exposure of a fund that holds both value and growth stocks, Vanguard Small Cap Index might be right for you.

DISCLAIMER

The information contained in this overview of Vanguard Small Cap Index is for information purposes only. It does not constitute, nor should it be interpreted as, legal, financial, or other advice. The mutual fund described above is not being recommended or endorsed, nor is this article making any projections or guarantees about the future returns of the fund or the suitability of any particular investment, security or investment strategy.

If you would like professional advice about mutual fund investment, please contact an independent financial adviser.