VFTAX Review: Is This a Good ESG Mutual Fund? 

VFTAX, or Vanguard FTSE Social Index Fund Admiral, is a mutual fund from Vanguard. This mutual fund allows investors to gain exposure to stocks from companies with strong environmental and social policies.

Is VFTAX a good addition to your portfolio? Read on to learn more about the composition of this fund, how it performs, and whether it makes sense for your financial goals.

Our VFTAX Review Methodology

We used data available on the official Vanguard website to learn more about the composition of the VFTAX mutual fund. We also used market data and used historical performance data from different sources.

Because VFTAX replicates a social index, we looked at the philosophy behind it and the ESG criteria companies have to meet for the social index to include them.

We weighed the pros and cons of this mutual fund as part of a diversified portfolio. We also considered different investor profiles to assess factors like risk tolerance and financial goals to determine who this mutual fund could be a good fit for.

What Is VFTAX?

VFTAX, or Vanguard FTSE Social Index Fund Admiral, is a mutual fund with 494 stocks. If you’re unfamiliar with mutual funds, you should know that they pool capital and invest it into a group of stocks.

While a stock will expose you to a single company, a mutual fund can help you get exposure to an entire industry or market. In the case of VFTAX, you can get exposure to a group of companies that meet high ESG standards.

Vanguard, the index sponsor, created this mutual fund to reflect the performance of the FTSE4Good US Select Index. This index aggregates different companies with good ESG practices to track their performance.

VFTAX is part of the Vanguard product family. Vanguard is a financial company that has been around since 1975 and that offers mutual funds, ETFs, and other financial products.

Vanguard is a major financial company with $7.2 trillion in assets under management and more than 200 US funds.

VFTAX Review: A Summary

Many investors want to avoid investing in companies with unethical practices. VFTAX is an exciting option for these investors since this mutual fund uses strict ESG criteria to select companies with good environmental, social, and corporate governance and social practices.

Plus, this mutual fund excludes some industries like tobacco or firearms. It’s also a good option for investors who want to avoid fees. VFTAX has a meager expense ratio, and you will still benefit from the management of an experienced team at Vanguard.

Despite these benefits, VFTAX is not a good option for everyone. There is a minimum investment of $3,000, which represents a significant commitment.

Historical data shows a solid performance in the long term, but VFTAX recently lost value. This recent performance reflects overall market trends, but this mutual fund might not be a good option for investors who want to avoid fluctuation.

The fund composition is also an important consideration. There are some pros and cons that we’ll discuss in detail below. Remember that you should assess the fund composition based on your investment goals and the current composition of your portfolio.

See Related: Worst ESG Companies

Pros and Cons of VFTAX

VFTAX remains a strong investment option for those seeking exposure to companies with good ESG practices. Here is why you should think about adding VFTAX to your portfolio.

• It’s a low-cost investment vehicle. The expense ratio is only 0.14%. To give you an idea, the average expense ratio for mutual funds is 0.50%.
• VFTAX replicates a social index. It’s a passive strategy that reduces human errors when picking stocks for the fund. It’s not a fund where the composition will often change, which makes it easier to predict performance for the long term.
• A major draw for investors is that VFTAX replicates the FTSE4Good US Select Index. This index tracks the performance of several companies that meet strict ESG criteria. If you want to invest with a purpose and don’t want to support industries that don’t align with your values with your investment dollars, VFTAX is a great option.
• Vanguard is a reputable financial company. You can easily open a brokerage account with Vanguard to invest in VFTAX or purchase this fund through different brokers.
• VFTAX focuses on medium and large-cap stocks. A large-cap stock is stock from a company with more than $10 billion in valuation. These companies are typically stable and represent mature investments. Large-cap stocks are great for investors with a low tolerance for volatility.
• The fund composition is varied, and investing in VFTAX will expose you to different industries. It’s a good option for investors who want to diversify their portfolios while gaining exposure to many major companies in the US market.

There are a few downsides to consider before investing in VFTAX:

• The minimum investment is $3,000. With the average 20-something-year-old having only around $10,000 in their non-retirement investment account, VFTAX will not be a viable option for everyone.
• There is historical data that shows good performance for VFTAX. The fund yielded 11.64% in returns in 2021, consistent with previous years. However, recent data shows a dip in the fund’s value, with VFTAX losing 9.83% in January 2022.
• The fund composition can feel imbalanced in some areas. Sectors like tech and consumer discretionary spending have a strong presence, but the fund has limited exposure to other industries like utilities, telecommunications, or the energy sector.
• Ten companies represent around a third of the assets in management. These ten companies include the five tech giants: Google, Apple, Facebook, Amazon, and Microsoft. It’s important to consider how much diversity VFTAX will bring to your portfolio since you probably already have exposure to these major companies.

See Related: Best 5G Stocks to Invest in Today

Key Features of VFTAX

Let’s take a closer look at the different features of VFTAX to help you make an informed investment decision.

Investing for Good

VFTAX is a mutual fund that tracks the FTSE4Good US Select Index. This index is part of a series of social indexes developed by FTE Russel. The purpose of these social indexes is to measure how companies with good ESG practices perform. You can’t invest directly in an index since it’s a tool for research.

Vanguard created the VFTAX fund to track the FTSE4Good US Select Index. The fund managers recreate the performance of this index by investing in stocks that belong to this index.

Companies must meet strict Environmental, Social, and Governance criteria to qualify for the benchmark index. The index also excludes companies linked to tobacco, weapon, fossil fuel, gambling, adult entertainment, alcohol, and nuclear power industries.

Additional requirements include not violating human rights and adopting certain practices to create a diverse workplace. With 85% of investors considering ESG when picking stocks, there is a growing awareness that anyone can make a difference when investing.

Your choices matter, and it’s possible to build a portfolio that aligns with your values to feel good about the companies you decided to support with your investment dollars.

ESG is one of the areas where VFTAX stands out. It’s a great option for investors who want to do well because little due diligence is required to confirm that the stocks in the mutual fund come from companies with good ESG practices.

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VFTAX Fund Management

VFTAX is a passively managed fund. Unlike other financial products, where a fund manager will review the fund performance regularly and add or remove stocks, the fund composition doesn’t change much over time.

VFTAX has a turnover of only 4% for its composition. Because the fund aims to replicate a specific index’s performance, there is no need to add or remove stocks regularly.

This approach has some pros and cons. It’s good to have a stable fund composition with no sudden changes that could affect how the fund performs.

Advantages of Passively Managed Funds

If you’re looking for investment vehicles to add to your portfolio and check occasionally, VFTAX is a great option.

You won’t have to worry about volatility and drastic changes in performance thanks to the low turnover of the fund and the fact that you’re getting exposure to a mix of medium and very large, and mid-cap stocks.

Rebalancing a fund to seek higher profits can increase the risks of human errors and bad decisions. Active management is not always good since fund managers can add stocks that perform poorly and sell positions that would have turned into a profit.

Since the pandemic, the stock market has been especially volatile, and it’s difficult for fund managers to pick stocks that yield a short-term return. Passively managed products are a good alternative for investors who seek long-term returns.

Passive management also means that the fund is an affordable product. Actively managed funds tend to have higher expense ratios that can destroy your returns. With a 0.14% expense ratio, VFTAX is a low-cost option.

Drawbacks of Passively Managed Funds

However, passive management can be a drawback for some investors. You might miss out on some opportunities. More businesses are adopting ESG practices and are worth investing in to build a portfolio around an ethical investment management strategy.

Unless FTSE Russell updates its index, you won’t get exposure to many new companies or existing businesses taking steps to improve their ESG program. It’s not a major issue since VFTAX is a diversified fund, but keep in mind that it can be interesting to grow your portfolio by adding new companies to your asset mix over the years.

There is another drawback to this passive management approach. The fund managers won’t rectify their position if the fund loses value. It’s not a major concern since VFTAX focuses on medium and large-cap stocks that aren’t likely to experience extreme volatility.

Still, there are situations where an active management strategy can preserve earnings when the market slows down.

How to Buy VFTAX

You can invest in VFTAX through Vanguard and several financial companies that act as brokers for Vanguard products. One of the advantages of VFTAX is that Vanguard is a reputable financial company, and if you don’t have a brokerage account, Vanguard is an option worth considering.

Different options are available if you need to open an account to invest in VFTAX. You can open an IRA to start investing for retirement, create a brokerage account for other investment goals, or even start a 529 fund to save for college. Vanguard also offers brokerage accounts for businesses and organizations.

You can also invest in VFTAX through brokerage or IRA accounts offered by TD Ameritrade, E-Trade, and other financial companies. However, there might be additional fees when you purchase shares of VFTAX through one of these brokers.

However, there are no investment options for purchasing fractional shares of VFTAX, and there is a minimum investment of $3,000. Investing $3,000 into a single financial product is an important decision, and there might be other funds in a similar price range that better match your financial goals and risk tolerance.

VFTAX is worth considering because you’re getting exposure to large-cap stocks with low risks, and you’re also getting exposure to major tech companies as part of a moderately diversified asset mix.

For investors who already have the five tech giants in their portfolio, VFTAX might feel redundant. There might be other options for investing $3,000 to add more diversity to the existing portfolio.

See Related: Best Tesla Financing Rates in the Market

VFTAX Fund Composition

Speaking of diversifying a portfolio, let’s look at the fund composition for VFTAX and how much diversity this investment vehicle will add to your current asset mix.

The great thing about Vanguard products is that this financial company is transparent about its mutual funds. It’s easy to find a list of stocks to learn more about VFTAX and track the past performance and changes made to the fund.

There is a total of 494 stocks in the fund. It includes a mix of medium and some mid-capitalization stocks and large-cap stocks, but large-cap stocks represent a significant portion of the total net assets now in management.

Tech Sector

According to data shared by Vanguard, the largest sector represented in VFTAX is the tech sector, which accounts for 35.6% of the $16.8 billion under management.

Exposure to the tech industry is a good thing. It’s no secret that major tech companies have been doing well and have a strong outlook. The emerging tech market will grow by 104% before 2023, and investing in tech companies is a viable strategy to generate long-term profits and build a nest egg for retiring.

Consumer Discretionary Sector

The consumer discretionary sector comes next with 17.20% of the fund. This sector represents non-essential goods that consumers purchase. With online shopping spending increasing by $900 billion in 2020, exposure to this market is interesting.

However, the inflation rate went up by 7% in 2021 and will continue to increase. High levels of inflation could hurt spending, especially for non-essential items.

Healthcare Sector

Healthcare represents approximately 13.60% of the fund. This sector has a strong outlook and is a great addition to your portfolio.

Financial and Industry Sectors

The financial and industry sectors represent around 10% of the fund. These two sectors are strong, but you might want to gain more exposure to these industries by adding other products to your portfolio.

Other Minor Sectors

The main issue with the VFTAX fund composition is that some important industries are underrepresented, even though there are companies with good ESG practices in these stock markets.

The energy sector represents 0.10% of the the fund’s principal value of net assets. Understandably, VFTAX doesn’t include stocks from companies that produce fossil fuels, but other investment opportunities exist in the renewable energy sector.

Real estate accounts for only 3.30% of the fund. A common strategy is to seek exposure to the real estate market to hedge against inflation. You can implement this strategy by investing in other products that expose you to the real estate sector. Still, due to the $3,000 investment minimum for VFTAX, you might have a smaller investment budget to diversify your portfolio outside the VFTAX fud.

Another area where you might want more exposure is the telecommunication sector, representing 3.30% of the fund. With the upcoming 5G rollout, it’s a sector that will grow.

Utilities only represent 1% of the fund. It’s a sector with some challenges, but progress toward modernizing the infrastructure and building cleaner utilities exists. Plus, there is a $1 trillion infrastructure bill with some provisions for improving the utility sector, so now could be a good time to invest in this industry.

Large-Cap Stocks

You should also know that VFTAX includes several mid-capitalization stocks as well as large-cap stocks. There are ten major companies that represent roughly a third of the fund. These ten companies include the five tech giants Tesla, NVIDIA, UnitedHealth Group, JPMorgan Chase &Co, and Home Depot.

Among these large-cap investments, you will get exposure to different sectors, including healthcare, financial, automotive, and retail. However rank in category alone, tech is an overrepresented rank in the category.

Performance and Ratings

There is plenty of historical data showing that VFTAX is a good investment. However, there have been some recent setbacks in the fund’s performance that reflect broader market trends. The fund yielded 0.94% as of December 2021, but its performance has been negative in 2022.

This recent data shows that the fund isn’t completely safe from volatility. It’s stable compared to other products since it focuses on large-cap stocks, but investors should know there might be other short-term fluctuations. Overall, VFTAX is a good option for those seeking long-term growth.

The good news is that Vanguard offers quarterly dividends for this fund, which is great for investors who want to reinvest dividends and dividend income regularly.

Another reason to consider investing in VFTAX is the Morningstar analyst rating for this fund. Morningstar has issued a rating of five stars for VFTAX, which strongly signals that it’s a good investment.

VFTAX Ratings

How does VFTAX compare to other options? Where does it shine, and where is there room for improvement? Here are our ratings for this Vanguard product:

• Sustainability: 5/5
• Historical performance: 4/5
• Fund composition: 3.5/5
• Management fees: 5/5
• Minimum investment amount: 2/5

Verdict

The minimum investment of $3,000 makes VFTAX a good option only for those with a significant budget for contributing to their IRA or brokerage account. We also recommend looking at the fund composition in detail to decide if it would be a good addition to your portfolio.

The US market has a good mix and large blend of medium and large-cap stocks. However, a significant portion of the fund focuses on tech. Plus, consumer discretionary stocks might not perform well as inflation goes up.

VFTAX remains a good investment because it exposes you to a wide range of assets with close to 500 stocks in the fund. It’s also an excellent option for investors who want to build a portfolio with stocks from companies with strong environmental and social policies. You’ll get exposure to mid-cap stocks as well as bankable names to diversify your portfolio.

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