Chart of the Month—Vanguard 500 Index Fund Tracking Error

In a previous article I documented the positive tracking error (TE) of the medium- and small-cap passively-managed funds from DFA and Vanguard. At least in the case of DFA, it's due to a so-called "patient buyer" strategy.

Heeding the old adage that "those that talk don't know, and those that know don't talk," Vanguard's Gus Sauter doesn't advertise his methods. It turns out that of late Mr. Sauter has turned an even neater trick—he's accomplished a positive TE for that most efficient of all indexes, the S&P 500. Below are the 3-year trailing annualized TEs (the top plot is before expenses, the bottom plot after expenses) for the fund. The pre-1990 data is much wilder, and quite negative at points. But remember that the fund did not pass the $1 billion mark until 1989. And the trend over the past 15 years seems to be of ever-increasing relative performance:

Copyright © 2000, William J. Bernstein. All rights reserved.