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Analyzing Vanguard 500 Index

Free «Analyzing Vanguard 500 Index» Essay Sample

Vanguard 500 Index is boost of hosting stock for the leading 500 hundred companies in America. The company has total holdings of over $128.7 billion. The performance of the company has been market relatively stable over the last three years.  Diversification in the stock market involves multiplying the number of securities in a fund. A company with increased and ample number of securities in a fund is said to be highly diversified. Ideally, diversifications avoid mammoth influence on the volatility concept, when there are changes in prices in the fund securities. Diversification is also determined by the scale and nature of companies investing in a given investment firm.  Vanguard 500 Index is believed to have attracted the largest companies in USA. The index fund in this case is highly probable to be rested on a few core companies. Therefore, diversification is reduced in such cases, which opens up the door for escalated rates of volatility (U.S. News & World Report, 2012).

The fact that Vanguard 500 Index Company invests the fund in large-cap stock raises the investment risk. The fund’s Value Line Risk Rank for Vanguard is rated at 3 in a scale of 1 to 5 (U.S. News & World Report, 2012). This represents a volatility level higher above the average mark. Therefore, the company scores poorly in diversification.

The first risk that an investor, in Vanguard, may suffer is asset backed risk which is tied to the security level of funds. When the security is poor, the investor risks suffering from uncertainty of interest and prepayment risk. Investors in Vanguard are exposed to market value risk due to the vulnerability price fluctuation. Market value risk is influenced by factors such as interest rate, stock price, commodity price and foreign currency rate (U.S. News & World Report, 2012).

Before investing in Vanguard 500 Index, the investor has to consider the inflation rate and consequences accrued to this issue. This is because; inflation reduces the value of the dollar in the market thereby lowering your market command. Another factor to consider is the competition level and the stability of the market. This will determine the level of realizing the projected returns. Finally, the management of the company is worth giving consideration with the aim of understanding integrity, which has a profound input in trust building.

In conclusion, Vanguard has a volatility level above the average mark, qualifying it a non-diversified entity. This puts the investor at a point of incurring asset-backed risk, market value risk, and volatility risk.

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