VFTAX Review: What’s Inside the Vanguard Social Index Fund?
With over $13.8 billion in assets, VFTAX is the most popular environmental, social, and governance (ESG) index fund. Learn if it’s good enough to be your main ESG investment.
SustainFi August 12, 2021
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What is the Vanguard Social Index Fund (VFTAX)?
- Date launched: 2003
- Assets under management: $13.8 billion
- Fee: 0.14% (Admiral Shares)
- Minimum investment: $3,000
VFTAX is a Vanguard index fund that invests in large-cap U.S. stocks and tracks the FTSE4Good U.S. Select Index. Established in 2003, this is one of the oldest ESG funds in the U.S.
According to the fund’s marketing materials, stocks in the fund are screened for “certain environmental, social, and corporate governance (ESG) criteria.” Several controversial industries like tobacco and fossil fuels are excluded.
Note: Vanguard Social Index Fund Admiral Shares (VFTAX) was previously available as Vanguard Social Index Fund Investor Shares (VFTSX). VFTSX is closed to new investors, but you can invest in VFTAX.
How does VFTAX select stocks?
VFTAX tracks the FTSE4Good U.S. Select Index. The Index invests in large and mid-cap stocks, removing many controversial sectors. The following industries are excluded:
- Adult entertainment
- Fossil fuels (except utilities)
- Nuclear power
In addition, the fund excludes “stocks of certain companies that do not meet the standards of United Nations Global Compact Principles and companies that do not meet certain diversity criteria.” It is up to the index provider, FTSE, to determine which companies meet the United Nations’ labor, human rights, environmental, and anti-corruption standards.
In addition, companies that are included in the FTSE4Good U.S. Select Index must meet two of the following diversity criteria:
- Have at least one woman on the board
- Have diversity policies in place
- Have diversity management systems in place
(It’s unclear how FTSE can verify if having diversity policies and management systems in place is effective, though.)
Regarding fossil fuels, VFTAX doesn’t invest in companies that own oil, natural gas, or coal reserves or are engaged in oil and gas exploration, transportation, or servicing. That exclusion doesn’t encompass fossil fuel burning utilities, and VFTAX owns several.
In addition, stocks are screened based on ESG ratings provided by FTSE.
What stocks does VFTAX own?
- Number of stocks: 487
- Fund assets in ten largest holdings: 31.4%
- U.S. holdings: 100%
Like other ESG mutual funds and exchange-traded funds (ETFs), VFTAX owns a lot of big tech stocks. The top five holdings are Apple, Microsoft, Amazon, Alphabet (Google’s parent company), and Facebook.
(Though it’s a matter up for debate, many ESG investors don’t think that Amazon, Facebook, or JPMorgan should be included in ESG funds. However, if you hadn’t invested in Amazon or Facebook over the past decade, your returns would have suffered a lot versus the market.)
Here are the industries the fund invests in. Unsurprisingly, technology is the largest sector.
Data as of 6/30/2021
Here are the fund’s top ten holdings:
|Holdings||% of Fund|
|JPMorgan Chase & Co.||1.4%|
|UnitedHealth Group Inc.||1.2%|
Data as of 6/30/2021
What are VFTAX’s ESG ratings?
- Fossil Free Funds Rating: B
- Fund assets in fossil fuels: 0.62%
- MSCI ESG Rating: Average (A on a scale from AAA to CCC)
- Holdings’ carbon intensity: Low (62.4 tons of CO2 / $ million in sales)
- Revenues from alternative energy: 5.7%
- Sustainalytics ESG Rating: 4 out of 5
Although the fund doesn’t own oil, gas, or coal companies, VFTAX has a B rating from Fossil Free Funds. Just under 1% of the VFTAX is invested in electric utility and infrastructure companies that burn or transport fossil fuels. Frankly, there is no way around that because the U.S. population needs electricity, and the supply of renewables is still limited. Utilities are also some of the top investors in renewable energy.
Some of the utility and infrastructure stocks included in the fossil fuel bucket include Consolidated Edison Inc (ED) and Sempra Energy (SRE). All-in, a B rating from Fossil Free Funds is pretty good. (In contrast, the S&P 500 gets a D score because it’s nearly 7% in fossil fuels, according to Fossil Free Funds.)
MSCI and Sustainalytics are two of the best-known ESG rating agencies.
MSCI gives VFTAX an A, which is an average sustainability score on a scale of AAA to CCC. However, the carbon intensity of the fund’s holdings is low, and nearly 6% of the revenue generated by the fund’s holdings comes from green energy. MSCI has spotted no companies engaged in the United Nations Global Compact violations, no companies engaged in very severe controversies, and no controversial weapons or tobacco businesses. Overall, MSCI thinks that VFTAX is OK.
Sustainalytics gives VFTAX 4 out of 5 globes, a high, though not a perfect rating. It assigns VFTAX good environmental scores, though it’s less positive with respect to social and governance characteristics.
How does VFTAX compare to the S&P 500?
When comparing VFTAX to the S&P 500 (using VOO, a Vanguard fund that tracks the S&P 500), you can see that VFTAX has materially better environmental scores, including fossil fuel ownership and carbon intensity. According to MSCI, VOO contains companies that produce controversial weapons, sell tobacco, and have been involved in severe controversies.
|Fund||Expense Ratio||Holdings||Fossil Free Funds Rating||% Fund in Fossil Fuels||Carbon Intensity (tons CO2/$m sales)||MSCI Rating||Sustainalytics Rating|
|Vanguard Social Index Fund (VFTAX)||0.14%||487||B||0.6%||62.4||A||4 / 5|
|Vanguard S&P 500 ETF (VOO)||0.03%||507||D||6.8%||133.4||A||3 / 5|
Data as of 6/30/2021
What types of companies does VOO/S&P500 include that VFTAX doesn’t? VOO’s top ten stocks include Berkshire Hathaway (BRK), which continues to be hostile to climate change and other ESG shareholder proposals. Johnson & Johnson (JNJ), another top ten stock in VOO, is also missing from VFTAX. The company has had product safety and quality issues, including talc and baby powder litigation.
We have found that, as of June 2021, VFTAX excluded nearly a quarter (123 in total) of the companies in VOO (and the S&P 500 index.) Excluded companies were generally involved in:
- Oil and gas (such as ConocoPhillips, Baker Hughes, Berkshire Hathaway, Chevron Corp, Diamondback Energy, Dominion Energy, DTE Energy, Duke Energy, Exxon Mobil, FirstEnergy, Halliburton Co, Marathon Oil, Marathon Petroleum, and Schlumberger)
- Tobacco (Altria Group, Philip Morris International)
- Gambling (Caesars Entertainment, MGM Resorts International, Las Vegas Sands, Penn National, Wynn Resorts)
- Alcohol (Constellation Brands, Molson Coors Brewing Co)
- Weapons (Boeing, General Electric, Eaton Corp, Honeywell International, and Lockheed Martin Corp)
- Business controversies (Johnson & Johnson, Wells Fargo)
VFTAX adds over 100 stocks that are not in the S&P500. These are generally stocks in the following sectors:
- Technology, internet and the new economy (such as Check Point Software, Cloudflare, Crowdstrike, Datadog, Dell, DocuSign, GoDaddy, HubSpot, MongoDB, Okta, Pinterest, Slack Technologies, Spotify, Square, Teladoc, Lyft, Uber, Workday, Zillow)
- Telecommunications (such as Altice, Palo Alto Networks, and RingCentral)
- Pharmaceuticals (BioMarin Pharmaceutical, Horizon Therapeutics, Jazz Pharmaceuticals, Moderna Inc)
- Clean energy (Avangrid, Plug Power, SolarEdge)
- Retail (Burlington Stores, Lululemon Athletica, MercadoLibre, Wayfair)
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Is VFTAX expensive?
- Expense ratio: 0.14% (Admiral Shares)
- Account service fee (per year): $20 (for certain fund account balances below $10,000)
With a 0.14% expense ratio ($14 annually on a $10,000 investment), VFTAX is the cheapest ESG mutual fund; it’s also very cheap compared to most ESG exchange-traded funds.
🔔 Learn about the difference between exchange-traded and mutual funds.
Most ESG mutual funds are actively managed, meaning that a portfolio manager and their team pick stocks and try to beat the market. In contrast, index funds are mutual funds that track an index like the S&P 500. It’s much cheaper to track an index than to pay a group of investment professionals, and, as a result, index funds charge investors less than actively managed funds.
Vanguard and shareholder advocacy
VFTAX is a Vanguard fund. According to FactSet, a data provider, Vanguard, BlackRock, and State Street hold nearly 20% of the S&P 500 stocks. Vanguard is among the largest shareholders in many companies. How Vanguard votes on shareholder resolutions matters.
In the past, Vanguard was criticized for voting against ESG or climate shareholder resolutions. For example, it was found that in 2018 Vanguard voted in favor of only 12% of climate-related shareholder resolutions. However, this appears to be changing.
Vanguard voted in favor of several key ESG proposals in 2021 and said that it would likely support proposals for workforce diversity disclosures and climate-risk related action plans.
How can you invest in VFTAX?
You can invest directly through Vanguard’s website. The fund has a $3,000 minimum investment.
💰 Is VFTAX a good sustainable fund?
VFTAX is a good enough option for an ESG investor. Although the fund owns a lot of big tech stocks like Amazon and Facebook (which some ESG investors find problematic), these are the stocks that generated a lot of the market’s returns over the past decade. VFTAX is close to fossil free and avoids many controversial companies like Johnson & Johnson and Wells Fargo. Instead, it invests in new tech companies like Spotify and Slack.
Alternatives to VFTAX
If you are looking to invest sustainably, consider the following alternatives to VFTAX (none of them have a minimum investment):
- iShares ESG Advanced MSCI USA ETF (USXF): this fossil free fund costs only 0.10% and has better ESG ratings than VFTAX
- The Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX): although more expensive (0.49%) than VFTAX, this fossil free fund doesn’t own big tech stocks like Facebook and Amazon
🔔 Interested in learning more about Vanguard? See our guide to Vanguard ESG funds