It seems to me that most funds have a blurb in the prospectus that lets them use swaps, foreign currency and other contraptions where they see opportunities. Seems an institutional thing where one fund family will find something particularly tasty in arb or leverage and then all the funds use it for some part of their ready cash from inflows and expected outflows. Janus was really fond of that stuff but I dont think I've noticed any run of the mill vanguard funds putting huge amounts into them.
As far as some indexes being "better" than others, some indexes like DFA selectively leave out stuff they dont feel improves the indexes. Many others do similar "sampling" to reduce trading costs and attempt to improve returns. Some swap the equities for futures if theres an arb opportunity that makes the futures more appealing than holding the actual equities. Some time their buys and sells during index changes for price optimization.
Star Trackers Seek to Beat the Indexes - International Herald Tribune
"Broadly speaking there are three ways to track an index. The first, called "complete replication", involves buying every stock in an index, while the second two involve just buying a sample of those stocks. Thesimpler of these is "stratified sampling" which involves dividing up the stocks in the index by size and sector and just buying samples of each group. "Optimization, on the other hand, divides index stocks into yet smaller groups using extra classification like low or high income yield and again takes samples.
Gus Sauter, a vice president of Vanguard Core Management, said he used all three different systems. Portfolios using complete replication virtually matched the index, he said, but it could only be used on the very biggest portfolios. Of the two sampling techniques used for smaller portfolios he preferred optimization.
"Originally we used stratified sampling but optimization is much more sophisticated and precise." We will probably be converting our one fund that is using stratified sampling to optimization."
Judging from performance figures produced by Lipper Analytical the Vanguard 500 Portfolio only underperformed the S&P 500 Index by 0.1 per cent in 1991. Its sister fund in the Vanguard Index Trust, the Extended Market Portfolio, underperformed its target, the Wilshire 4500 Index by 1.7 per cent. That greater tracking error is partly down to the stratified sampling technique used in the Extended Market Portfolio but the Wilshire 4500 is also difficult to track because it contains so many different stocks.
In addition to these basic techniques, futures and options contracts, loosely described as bets on price movements, are sometimes used to track indexes and increasingly to beat them. David Hager, a senior partner of the U.K. consulting actuaries Bacon & Woodrow, is an expert on the use of index funds by big investors like pension funds. He said: "I think there will be some very interesting products coming."
"It is because we are getting much more skilled in the use of futures and options.""
BTW, this is an extremely old article, about 17 years old...so your homework assignment is to see whether he was right and "we" did get more skilled in the use of futures and options and produced interesting products as a result...