A Broadly Diversified Value Portfolio at a Rock-Bottom Fee

The fund targets stocks representing the cheaper and slower-growing half of the U.S. large-cap market and weights them by market capitalization. This weighting approach promotes low turnover and skews the portfolio toward the largest value stocks, giving the fund a larger market-cap orientation than most of its peers. But the biggest stocks are not necessarily the cheapest. Market-cap weighting can actually reduce the portfolio's exposure to stocks as they become cheaper, as this typically accompanies a decline in market capitalization. The portfolio's largest holdings include mature names such as

The fund's holdings tend to have less attractive business prospects than their growth counterparts, so they are not necessarily bargains. But they could become undervalued if investors extrapolate lackluster past growth too far into the future.

Because the fund covers half the large-cap market, it includes some stocks with only modest value characteristics, which helps reduce volatility. Yet, its value orientation is similar to the large-value Morningstar Category average, as are most of its sector weightings. The fund has less overlap with its growth counterpart than rival value and growth funds based on the Russell 1000 and S&P 500 indexes. CRSP also applies more-generous buffering rules to limit turnover and mitigate transaction costs.

Low fees give the fund a durable edge against its peers. It charges a low 0.08% expense ratio, which is considerably less than the median large-cap no-load fee (0.84%). This cost advantage helped the fund outpace the open-end large-value category average by about 98 basis points annually over the trailing 10 years through August 2016, with comparable volatility.

Fundamental View Value stocks have a good long-term record in most markets studied. From December 1978 through August 2016, the Russell 1000 Value Index (which offers similar exposure to this fund) outpaced the Russell 1000 Growth Index by 1.1 percentage points annualized. This outperformance has not been consistent. Over the trailing 10 years through August 2016, the Russell 1000 Value Index lagged its growth counterpart by 3.0 percentage points annualized. While they won't always come out ahead, value stocks will likely offer a modest return edge over the long term.

Investors may demand higher expected returns to own value stocks, which have less-attractive business prospects than their growth counterparts and could be riskier. Value stocks tend to be less profitable, grow more slowly, and are less likely to enjoy sustainable competitive advantages than growth stocks. For example, over the trailing 12 months through July 2016, the fund's holdings generated a lower return on invested capital (9.5%) than those in

Although these stocks often trade at low valuations for good reason, they could become undervalued if investors extrapolate past growth--or lack thereof--too far into the future. However, because most large-cap value stocks tend to be more widely owned and have more equity analyst coverage than their smaller counterparts, the market is less likely to significantly misprice them. The return advantage from tilting toward value stocks has historically been more pronounced among smaller-cap stocks, but the fund's larger-cap holdings tend to be less risky.

This is a well-diversified portfolio that includes more than 300 holdings, and the top 10 account for just over a fourth of its assets. While the portfolio includes mid-cap names, it has a larger market-cap orientation than most of its peers. Market-cap weighting skews the portfolio toward the largest value stocks, which are not necessarily the cheapest. However, this approach helps foster low turnover and reduce risk. At the end of July 2016, the fund's holdings were trading at comparable multiples of forward earnings and book value to the large-value category average.

Most of the fund's sector weightings are also similar to the category norm, though it has greater exposure to the healthcare sector and less exposure to consumer cyclical stocks. Like most of its peers, the fund tilts toward the financial-services, utilities, and energy sectors. The fund does not constrain its sector weightings or make any sector-relative valuation adjustments.

CRSP's buffering rules, coupled with market-cap-weighting, have kept turnover low. In fiscal 2014 (the first full year the fund tracked its current benchmark) and 2015, turnover fell in the single digits, which was among the lowest of all the funds in the category.

Portfolio Construction The fund employs full replication to track the market-cap-weighted CRSP U.S. Large Cap Value Index. CRSP defines large-cap stocks as those representing the largest 85th percentile of the U.S. stock market. It uses several metrics to assign composite value and growth scores to each stock. The growth metrics include projected short- and long-term earnings per share growth, three-year historical earnings and sales per share growth, current investment/assets, and return on assets. CRSP evaluates value on book/price, forward and trailing earnings/price, dividend yield, and sales/price. It fully allocates stocks with the strongest value characteristics to the value index until it represents half the assets in the large-cap market.

CRSP keeps 100% of each stock in its respective style index until it passes through a buffer zone. At that point, CRSP moves only 50% of the stock from one style index to the other. If the stock stays on the opposite side of the buffer zone at the following quarterly review, CRSP will transfer the remaining half. This approach mitigates turnover where it does not significantly affect the fund's style characteristics.

Fees Vanguard charges a rock-bottom 0.08% expense ratio for this offering, making it one of the cheapest funds in the category. Vanguard engages in securities lending, the practice of lending out the fund's underlying holdings in exchange for a fee. This ancillary revenue helps offset some of the fund's expenses. Over the trailing 12 months through August 2016, the fund lagged its benchmark by 5 basis points, less than the amount of its expense ratio.

Alternatives

Investors concerned about unintended sector bets that traditional value funds could introduce might consider

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