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Active vs. Passive management:
Active management is an investment approach that seeks to exceed the average returns of a particular financial market or market segment. In selecting securities to buy and sell, active managers may rely on, among other things, research, market forecasts, quantitative models, and their own judgment and experience.
Passive management refers to index- and exchange-traded funds (ETFs) which have no active manager and typically lower fees.
Investment options that seek to maintain a stable asset allocation (such as 20% stock, 80% bond) are reviewed by fund managers on a daily basis to ensure target allocation remains consistent. Some investment options, such as target retirement accounts, may change allocation over time based on long-term goals and strategies.
Environmental, Social, and Governance (ESG) considerations are indicators of sustainable and responsible business practices. Environmental criteria indicate how a company performs as a steward of the natural environment. Social criteria examine how a company manages relationships with its employees, suppliers, clients, and communities. Governance criteria include a company’s board and leadership, executive pay, financial and other controls, and shareholder rights. There are several types of activities associated with ESG investing.
Portfolio screening: Exclusionary screening: The exclusion of certain sectors, countries, and securities from an investment universe based on specific ESG-related criteria.
Proactive investment in sectors or companies selected for higher ESG ratings relative to industry peers or other investment opportunities.
Norms-based screening: A form of exclusionary screen that sets minimum standards criteria for business practice based on companies’ adherence to international norms (e.g., human rights, corruption).
Exchange-traded funds (ETF):
An exchange-traded fund, or ETF, is a security that tracks the value of an index, commodity, or basket of assets in the same way as a mutual fund does, except it trades like stock on stock exchanges.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities. Vanguard Charitable is able to offer a direct pass-through of Vanguard expense ratios and does not add additional fees for investing.
Indexing is an investment strategy for tracking the performance of a specified market benchmark, or “index.” An index is a group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets—such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments—such as small-capitalization stocks or short-term bonds. The index sponsor determines the securities to include in the index, the weighting of each security in the index, and the appropriate time to make changes to the composition of the index. One cannot invest directly in an index.
Index funds typically have the following characteristics:
• Variety of investments. Index funds generally invest in the securities of a variety of companies and industries.
• Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks.
• Low cost. Index funds are generally inexpensive to run compared with actively managed funds. They have low or no research costs and typically keep trading activity— and thus brokerage commissions and other transaction costs—to a minimum compared with actively managed funds.
Net asset value (NAV):
Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. The NAV per share is computed by dividing the total assets, minus liabilities, of the Fund by the number of Fund shares outstanding. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Fund does not sell or redeem shares. However, on those days the value of the Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).
Share classes are a common way of offering the same investment at different cost. With mutual funds, the higher the minimum initial investment, the lower the expense ratio. The investment objective and strategy, portfolio manager, and underlying investments are identical across share classes. That means you get the same high quality regardless of which share class you choose. A share class is Vanguard Charitable donors typically have access to Vanguard Admiral, Institutional, and Institutional Plus share classes. (note: this is linked to investors site, should it link to institutional if there is an equivalent page?)
Additional resources for investment education: