Why Vanguard Social Index Fund Shouldn’t Be Called ‘Social’ (VFTAX Review)

Published by Fernando on

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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.

Intro

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.

Vanguard Social Index Fund - Does it have a social impact?

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 holdingsVFTAX weight (%)Weight difference (VFTAX minus VOO)VOO holdingsVOO 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 A2.5%0.3%Facebook Inc. Class A2.2%yes
Alphabet Inc. Class A1.9%0.2%Alphabet Inc. Class A1.6%yes
Alphabet Inc. Class C1.8%0.2%Alphabet Inc. Class C1.6%yes
Visa Inc. Class A1.3%-Johnson & Johnson1.4%no
Procter & Gamble Co.1.3%-Berkshire Hathaway Inc. Class B1.4%no
JPMorgan Chase & Co.1.2%0.1%Procter & Gamble Co.1.2%yes
UnitedHealth Group Inc.1.2%0.2%Visa Inc. Class A1.2%yes
Home Depot Inc.1.2%0.1%JPMorgan Chase & Co.1.1%yes
Mastercard Inc. Class A1.1%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 A1.0%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 A0.8%0.1%Cisco Systems Inc.0.7%yes
Bank of America Corp.0.8%0.1%Comcast Corp. Class A0.7%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 Laboratories0.7%-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 Laboratories0.7%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 A0.6%-Chevron Corp.0.6%no
Bristol-Myers Squibb Co.0.6%0.1%McDonald's Corp.0.5%yes
Medtronic plc0.5%0.1%Amgen Inc.0.5%yes
Linde plc0.5%0.1%Costco Wholesale Corp.0.5%yes
Danaher Corp.0.5%0.1%Accenture plc Class A0.5%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 plc0.5%yes
NIKE Inc. Class B0.5%0.1%Linde plc0.5%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 B0.4%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 B0.4%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 A0.4%-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 B0.4%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 NameVanguard FTSE Social Index Fund
TickerVFTAX
MSCI ESG RatingA
Peer rank66th
Global Rank73rd
WACI (tCO2e/$M sales)70.6
% of ESG laggards6%
Brown revenue0.2%
Board diversity31.5%
Controversies0
* 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 NameVanguard FTSE Social Index FundVanguard 500 Index Fund
TickerVFTAXVOO
MSCI ESG RatingAA
Peer rank66th71st
Global Rank73rd74th
WACI (tCO2e/$M sales)70.6155.6
% of ESG laggards6%5%
Brown revenue0.2%3.0%
Board diversity31.5%31.2%
Controversies012
* 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):

MSCISustainalytics
Top10 HoldingsMSCI RatingsSustainalytics RatingsEnvironmentalSocialGovernanceIndustry Relative Ranking
Apple Inc.A23.60.51310.160%
Microsoft Corp.AAA14.90.59.45.13%
Amazon.com Inc.BBB3061311100%
Facebook Inc. Class ABBB31.41417.712.496%
Alphabet Inc. Class AAA22.80.915.912.845%
Alphabet Inc. Class C-----
Visa Inc. Class AA17.30.19.87.47%
Procter & Gamble Co.AA24.78.29.57.617%

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:

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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.

Canva Wind Turbines Under White Cloudy Sky 1 - vanguard social index

If you are looking for sustainable ETFs, check our post about iShares ESG options:

The Most Sustainable ETFs from iShares


Not an investment advice: The information provided on this website is intended for general information purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. You should conduct your due diligence and, if necessary, consult a qualified independent financial advisor before making any investment decisions.

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Categories: ESG

Fernando

Fernando created Your Green Wealth to help investors find sustainable investing options. When not writing for Your Green Wealth, he is a business developer for renewable energy projects.

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