Why Vanguard Social Index Fund Shouldn’t Be Called ‘Social’ (VFTAX Review)
VFTAX or Vanguard Social Index Fund is Vanguard’s largest and oldest ESG fund. We did an analysis of the fund and reveal why Vanguard Social Index is not fulfilling its social purpose.
VFTAX or Vanguard FTSE Social Index Fund Admiral Shares is Vanguard’s largest ESG fund with $8.5 billion of net assets. The mutual fund is managed by Admiral and requires a minimum investment of $3,000. Despite being a mutual fund, the TER (total expense rate) is quite low, only 0.14% per year.
According to Vanguard, the fund’s objectives are to:
- Track the performance of FTSE4Good US Select Index
- Be a market-cap-weighted index composed of US large- and mid-capitalization stocks.
- Screen for certain environmental, social, and corporate governance (ESG) criteria
- Specifically exclude stocks of certain companies in controversial industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power
- Exclude stocks of certain companies that do not meet standards of the U.N. Global Compact and companies that do not meet certain diversity criteria
- Employ a passively managed, full-replication approach
Let us review VFTAX fund to understand its investment strategy, the sustainability performance of the fund, the ESG performance of the fund holdings and potential areas of concern.
The Background of Vanguard Social Index Funds
Previously named VFTSX (Vanguard FTSE Social Index Fund Investor Shares), now the fund can be found as VFTAX – for individual investors – or as VFTNX – for institutional investors. VFTSX was created in May 2000 and in February 2019 is was moved under Vanguard’s Admiral management. VFTNX, the institutional version of the fund was established in January 2003 and requires a minimum investment of $5 million.
All three Vanguard Social Index funds have the same objective: track FTSE4Good US index performance, screen for certain ESG criteria and exclude certain companies with operations in controversial industries. In this analysis, we will focus on Vanguard FTSE Social Index Fund Admiral Shares (VFTAX), which is available for individual investors.
Vanguard Social Index Fund Analysis
At YGW, we have looked into the FTSE4Good Index family before. FTSE4Good US Select Index is no different than its counterparts. At the Ground Rules document for FTSE4Good US Select Index, no mention to ESG is made and the sustainable investment data is mainly driven by screenings for exclusions and monitoring controversies. They focus on the following exclusions:
Exclusion based on product categories
- Non-Renewable Energy (Fossil Fuel and Nuclear Power)
- Vice Products (Adult Entertainment, Alcohol, Gambling, and Tobacco)
- Weapons (Chemical &Biological Weapons, Cluster Munitions, Anti-Personnel Landmines, Nuclear Weapons, Conventional Military Weapons, and Civilian Firearms)
Exclusion Based on Company Conduct
- Controversies (based on the UN Global Compact Principles)
- Diversity practices (based on women on boards, policies, and management systems)
As previously concluded, the FTSE4Good index does not seem to be a good benchmark for sustainable investing. Its approach is limited to exclusions and it does not practice ESG integration – which could be achieved by prioritizing companies that are high performers in ESG (Environmental, Social, and Governance) criteria.
The FTSE4Good US index fact sheet provides a comparison between FTSE4Good US and FTSE USA indexes, the benchmark recommended by FTSE Russell. FTSE4Good US index has performed above its benchmark, with an accumulated return of 16.5% in the last 5 years. Regarding the number of holdings, FTSE4Good US is also less diversified (as expected due to exclusions) as FTSE USA. FTSE4Good US Index has only 270 holdings, while FTSE USA has 609.
The FTSE4GooD US index is highly exposed to the Technology sector, which make up to 40.7% of its total allocation, followed by the Financial sector with 15.0% and Health Care, with 12.9%. Oil & Gas is the sector with the lowest exposure, 0.75%, due to the exclusionary approach of the index.
Portfolio Comparison: VFTAX vs. VOO
When looking at VFTAX ETF top 10 holdings we have noticed that most of the holdings are typical large-cap companies from S&P 500, including all the FAANG stocks (Facebook, Amazon, Apple, Netflix ,and Google). Therefore, it is interesting to compare the holdings of the Vanguard Social Index Fund (VFTAX) with Vanguard S&P 500 ETF (VOO), Vanguard’s largest US-based ETF with $560 billion assets under management.
|VFTAX holdings||VFTAX weight (%)||Weight difference (VFTAX minus VOO)||VOO holdings||VOO weight (%)||Is this VOO holding in VFTAX?|
|Apple Inc.||7.2%||0.8%||Apple Inc.||6.4%||yes|
|Microsoft Corp.||6.4%||0.6%||Microsoft Corp.||5.7%||yes|
|Amazon.com Inc.||5.6%||0.7%||Amazon.com Inc.||4.9%||yes|
|Facebook Inc. Class A||2.5%||0.3%||Facebook Inc. Class A||2.2%||yes|
|Alphabet Inc. Class A||1.9%||0.2%||Alphabet Inc. Class A||1.6%||yes|
|Alphabet Inc. Class C||1.8%||0.2%||Alphabet Inc. Class C||1.6%||yes|
|Visa Inc. Class A||1.3%||-||Johnson & Johnson||1.4%||no|
|Procter & Gamble Co.||1.3%||-||Berkshire Hathaway Inc. Class B||1.4%||no|
|JPMorgan Chase & Co.||1.2%||0.1%||Procter & Gamble Co.||1.2%||yes|
|UnitedHealth Group Inc.||1.2%||0.2%||Visa Inc. Class A||1.2%||yes|
|Home Depot Inc.||1.2%||0.1%||JPMorgan Chase & Co.||1.1%||yes|
|Mastercard Inc. Class A||1.1%||0.1%||UnitedHealth Group Inc.||1.1%||yes|
|NVIDIA Corp.||1.0%||0.1%||Home Depot Inc.||1.1%||yes|
|Verizon Communications Inc.||1.0%||0.1%||Mastercard Inc. Class A||1.0%||yes|
|PayPal Holdings Inc.||1.0%||0.1%||NVIDIA Corp.||1.0%||yes|
|Pfizer Inc.||0.9%||0.1%||Verizon Communications Inc.||0.9%||yes|
|Adobe Inc.||0.9%||0.1%||PayPal Holdings Inc.||0.8%||yes|
|Tesla Inc.||0.9%||0.1%||Adobe Inc.||0.8%||yes|
|Walt Disney Co.||0.9%||0.1%||Pfizer Inc.||0.8%||yes|
|AT&T Inc.||0.9%||0.1%||Netflix Inc.||0.8%||yes|
|Netflix Inc.||0.9%||0.1%||Walt Disney Co.||0.8%||yes|
|Merck & Co. Inc.||0.8%||0.1%||AT&T Inc.||0.8%||yes|
|Intel Corp.||0.8%||0.1%||Merck & Co. Inc.||0.7%||yes|
|Cisco Systems Inc.||0.8%||0.1%||Intel Corp.||0.7%||yes|
|Comcast Corp. Class A||0.8%||0.1%||Cisco Systems Inc.||0.7%||yes|
|Bank of America Corp.||0.8%||0.1%||Comcast Corp. Class A||0.7%||yes|
|PepsiCo Inc.||0.8%||0.1%||Bank of America Corp.||0.7%||yes|
|Coca-Cola Co.||0.8%||0.1%||PepsiCo Inc.||0.7%||yes|
|Abbott Laboratories||0.7%||-||Walmart Inc.||0.7%||no|
|salesforce.com Inc.||0.7%||0.1%||Coca-Cola Co.||0.7%||yes|
|AbbVie Inc.||0.7%||0.1%||Abbott Laboratories||0.7%||yes|
|Thermo Fisher Scientific Inc.||0.7%||-||Exxon Mobil Corp.||0.7%||no|
|McDonald's Corp.||0.6%||0.1%||salesforce.com Inc.||0.6%||yes|
|Amgen Inc.||0.6%||0.1%||AbbVie Inc.||0.6%||yes|
|Costco Wholesale Corp.||0.6%||0.1%||Thermo Fisher Scientific Inc.||0.6%||yes|
|Accenture plc Class A||0.6%||-||Chevron Corp.||0.6%||no|
|Bristol-Myers Squibb Co.||0.6%||0.1%||McDonald's Corp.||0.5%||yes|
|Medtronic plc||0.5%||0.1%||Amgen Inc.||0.5%||yes|
|Linde plc||0.5%||0.1%||Costco Wholesale Corp.||0.5%||yes|
|Danaher Corp.||0.5%||0.1%||Accenture plc Class A||0.5%||yes|
|Eli Lilly & Co.||0.5%||-||NextEra Energy Inc.||0.5%||no|
|Broadcom Inc.||0.5%||0.1%||Bristol-Myers Squibb Co.||0.5%||yes|
|QUALCOMM Inc.||0.5%||0.1%||Medtronic plc||0.5%||yes|
|NIKE Inc. Class B||0.5%||0.1%||Linde plc||0.5%||yes|
|Union Pacific Corp.||0.5%||0.1%||Danaher Corp.||0.5%||yes|
|Texas Instruments Inc.||0.5%||0.0%||Broadcom Inc.||0.5%||yes|
|American Tower Corp.||0.5%||0.1%||Eli Lilly & Co.||0.5%||yes|
|Lowe's Cos. Inc.||0.5%||0.0%||NIKE Inc. Class B||0.4%||yes|
|Oracle Corp.||0.5%||-||Philip Morris International Inc.||0.4%||no|
|International Business Machines Corp.||0.5%||0.1%||QUALCOMM Inc.||0.4%||yes|
|Citigroup Inc.||0.4%||0.1%||Union Pacific Corp.||0.4%||yes|
|United Parcel Service Inc. Class B||0.4%||0.1%||Texas Instruments Inc.||0.4%||yes|
|Fidelity National Information Services Inc.||0.4%||0.1%||American Tower Corp.||0.4%||yes|
|Advanced Micro Devices Inc.||0.4%||0.0%||Oracle Corp.||0.4%||yes|
|Starbucks Corp.||0.4%||0.1%||Lowe's Cos. Inc.||0.4%||yes|
|Gilead Sciences Inc.||0.4%||0.0%||International Business Machines Corp.||0.4%||yes|
|Charter Communications Inc. Class A||0.4%||-||Honeywell International Inc.||0.4%||no|
|BlackRock Inc.||0.3%||0.0%||Citigroup Inc.||0.4%||yes|
|S&P Global Inc.||0.3%||0.0%||United Parcel Service Inc. Class B||0.4%||yes|
|ServiceNow Inc.||0.3%||-||Lockheed Martin Corp.||0.3%||no|
Looking beyond the top 10 holdings, we can see that VFTAX ETF and VOO ETF have an oddly similar portfolio of stocks. Out of VOO’s ETF top 30 companies, 27 are present in the top 30 of VFTAX ETF. Not only that, but the difference in weight per stock is minimal. VFTAX has a slightly higher allocation on most of its top stocks than VOO, varying from 0.1% to 0.8%. Even when looking at the top 60 stocks, the picture does not change much. VFTAX has 51 stocks out of VOO top 60, indicating a high correlation between the ETFs.
When buying shares of VFTAX, a sustainable investor with the intention to do good for society is practically buying VOO, a broad and diversified ETF exposed to S&P 500 large caps, and paying a higher fee for that (VFTAX TER is 0.14% vs. 0.03% for VOO).
ESG Analysis of VFTAX holdings
According to MSCI ESG Ratings, VFTAX has a reasonable sustainability performance. It has a high ESG rating, low carbon intensity, and is not exposed to any controversy, as seen below:
|ETF Name||Vanguard FTSE Social Index Fund|
|MSCI ESG Rating||A|
|WACI (tCO2e/$M sales)||70.6|
|% of ESG laggards||6%|
|* WACI is the Weighted Average Carbon Intensity|
It is straight forward to notice why a few companies from VOO ETF have not been listed in VFTAX. Out of the top 60 stocks in VOO, the 9 companies excluded from VFTAX are:
- Johnson & Johnson (animal testing)
- Berkshire Hathaway Inc. Class B (fossil fuels)
- Walmart Inc. (weapons)
- Exxon Mobil Corp. (fossil fuels)
- Chevron Corp. (fossil fuels)
- NextEra Energy Inc. (fossil fuels)
- Philip Morris International Inc. (tobacco)
- Honeywell International Inc. (weapons)
- Lockheed Martin Corp. (weapons)
The list above confirms VFTAX’s exclusionary approach eliminating companies with operations in controversial areas, such as animal testing, fossil fuels, and weapons.
However, after excluding those companies, VFTAX has a similar ESG performance as VOO:
|ETF Name||Vanguard FTSE Social Index Fund||Vanguard 500 Index Fund|
|MSCI ESG Rating||A||A|
|WACI (tCO2e/$M sales)||70.6||155.6|
|% of ESG laggards||6%||5%|
|* WACI is the Weighted Average Carbon Intensity|
Next we will analyze the sustainability performance of the Vanguard Social Fund. To look into the ESG performance of each company, we will use ESG ratings from MSCI and from Sustainalytics, which are openly available on their respective websites.
MSCI gives a rating from ‘AAA’ to ‘CCC’, shows the rating history, and discloses the practices that make that specific company an ESG laggard or leader. Sustainalytics take an ESG risk rating approach. The risk can be classified as negligible (0-10), low (10-20), medium (20-30), high (30-40), or severe (40+). Sustainalytics also ranks each company relative to its industry group and indicates the top material ESG issues and controversy level per company.
Here is the ESG performance of the top 10 holdings of Vanguard Social Index Fund (VFTAX):
|Top10 Holdings||MSCI Ratings||Sustainalytics Ratings||Environmental||Social||Governance||Industry Relative Ranking|
|Facebook Inc. Class A||BBB||31.4||14||17.7||12.4||96%|
|Alphabet Inc. Class A||AA||22.8||0.9||15.9||12.8||45%|
|Alphabet Inc. Class C||-||-||-||-||-|
|Visa Inc. Class A||A||17.3||0.1||9.8||7.4||7%|
|Procter & Gamble Co.||AA||24.7||8.2||9.5||7.6||17%|
At first, the ESG ratings above do not look so bad. As expected the FAANG stocks perform reasonably well in the ‘E’ of ESG. They have low carbon footprint and have constantly increased their sourcing of electricity from renewable sources.
However, from the top 10 holdings of VFTAX ETF, two companies call our attention. Amazon and Facebook have a medium rating of ‘BBB’ from MSCI. But according to Sustainalytics, they have a high ESG Risk Rating (above 30 points).
Moreover, in terms of sustainability, their relative industry ranking is extremely low. Facebook is ranked 709th out of 735 companies in the Software & Services industry. Amazon is ranked as the least sustainable company (441st out of 441) in the Retailing industry.
Beyond ESG Ratings
It is not necessary to do extensive research to find more social issues involving Facebook and Amazon when it comes to social impact. Both monopoly-like empires have not exactly been role models when it comes to customer data, labor rights, and tax contributions. Recently both companies have been to a hearing in the US congress to defend themselves from antitrust accusations, including aggressive and unfair business practices.
Facebook has a long history of problems regarding the privacy of data. The main example of this is the Cambridge Analytica scandal, where personal data of millions of accounts were compromised and, consequently, had potential implications in the US elections of 2016.
On the other hand, Amazon managed to have issues in each one of the 3 ESG elements, Environmental, Social and Governance:
- Failed to properly disclose its sustainability impact (E)
- Has issues with poor working conditions and wage inequality (S)
- Has a history of extreme tax avoidance (G).
Is VFTAX a good investment?
Vanguard Social Index Fund, VFTAX is not a good social investment option. VFTAX does not have a strong social approach and is not addressing social causes as its title might indicate. It is a simple replication of the S&P 500, with the exclusion of companies involved in controversial businesses.
Once more Vanguard fails to deliver ESG and socially responsible investment options that can really have a positive impact on the environment and society.
We conclude that Vanguard Social Index Fund (VFTAX) cannot be perceived as a valid sustainable investment alternative.
If you are looking for sustainable ETFs, check our post about iShares ESG options:
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