Best Vanguard funds are wise options for new investors. Usually investing in mutual funds is quite easy. But, the sole challenge of investing in Vanguard funds is the abundance of excellent investments. Hence, it can be a difficult task to identify which fund is the best for you.
we’ve made a list of Vanguard funds. These funds can be suitable for both new and experienced investors
The selected funds are Vanguard Total Stock Market (VTI), Vanguard Target Retirement 2050 Fund (VFIFX), Vanguard 500 Index Fund (VFIAX), Vanguard REIT Index Fund (VGSLX), Vanguard Growth Index Fund (VIGAX), Vanguard Strategic Equity Fund (VSEQX), Vanguard Total International Stock Index Fund (VGTSX) and Vanguard Total Bond Market (BND). You may have a lot of questions. E.g., is it possible to invest in a single mutual fund? Or, which vanguard fund is best for investors who’re aggressive? Which Vanguard fund is best for newbies?
You’ll get the answers to these questions here.
Understanding Index Fund
An index fund is a kind of mutual fund with a portfolio developed to match the elements of the market index. Such a fund gives extensive market exposure, low portfolio turnover, and small operating expenses. An index fund adheres to specific standards or rules which are consistent irrespective of the state of markets.
“Indexing” is a passive kind of fund management. It has successfully outperformed many actively managed mutual funds
The most famous index funds track the S&P500. But, many other indexes are also extensively used for index funds. These include DJ Wilshire5000, Russell2000, MSCI EAFE and Barclays Capital Aggregate Bond Index.
Index Funds vs. Actively Managed Funds
Investment in an index fund is a type of passive investment. The main benefit of this strategy is the reduced admin expense ratio on a fund. Plus, most MFs are unable to beat broad indexes like the S&P500. Index funds are seen as perfect core portfolio holdings for retirement accounts, like 401(k) and IRAs.
The money managers of an index fund are merely matching a benchmark index’s performance. Hence, they don’t need the research analysts to help with the process of stock selection. On the contrary, actively managed funds require the services of a research team. In such events, the additional cost of fund management is seen in the expense ratio. And, this is passed on to the shareholders.
As expense ratios are reflected in the funds’ performance, actively managed funds have a disadvantage. Resultantly, several active funds fail to match their benchmarks. For the 5-year term ending 2015, 84% of large-cap funds produced a return below the S&P500. In the 10-year time ending 2015, 82% large-cap funds were unable to match/beat the index.
Funds Flows to Index Funds
As index funds outperform actively managed funds, asset flows have increased manifolds in the former. In the 1-year term ending May 2016, investors put in over $375bn in index funds. This was across all asset groups. Much of this money came at the cost of active funds. Active funds saw outflows of nearly $308bn during the same period.
Best Vanguard Funds: Ideal for Your Portfolio?
Vanguard is among the most significant investment firms in the world. It manages over $3 trillion assets in over 200 funds. Vanguard’s name for low-cost investing is surpassed only by one thing.That is, it’s track record of generating highly-rated funds which comprise all the best funds to hold. Find why Vanguard funds should be in your portfolio.
Reason #1: Fees Matter
John Bogle is the founder of Vanguard. He’s also one of the first industry leaders to establish a direct link between an investment’s performance and expenses. Many studies show that high management fee impedes the long-term performance of an investment. Vanguard has always provided no-loan funds with very low expense ratios. If you’re eligible for its Admiral group of funds the expense ratio further reduces. The Admiral class requires a minimum investment of $10,000.
Vanguard secures its leadership status as a low-cost provider through its ownership structure. Unlike other fund companies, that’s owned by 3rd-party-firms, Vanguard’s ownership is with mutual funds. Hence, all profits get reinvested to keep the cost down for the MF shareholders.
Reason #2: King of Low-Cost Index Funds
Bogle also pointed out that the broad class of active funds can’t beat market indexes. His underlying philosophy was – “if you’re unable to beat the market, you must become the market. Plus, if you do it at the least possible cost, you may beat most active fund managers.” Vanguard led index investing in the 1990s. It now provides the most comprehensive variety of funds linked with every market index out there. So, if you’re a passive investor, Vanguard is your go-to place. Because you won’t get a more extensive portfolio diversification anywhere other than Vanguard.
Reason #3: Portfolio Design to Suit All Situations
Vanguard’s low-cost active funds will help you find your way through rough waters. Its funds offer you a perfectly-balanced portfolio which saves you from market volatility. Regardless of your objectives or needs, you may pick from 300 funds and ETFs.
If you want help building the ideal portfolio, Vanguard gives an online screening tool. This tool suggests an asset allocation depending on your financial goals & status, and risk tolerance. If you invest over $50,000, you can access Vanguard’s Personal Advisor Services. This service gives both a robo-advisor and a live personal advisor too.
Reason #4: If You Want Only One Fund in Your Portfolio
It is usually not the most recommended strategy to invest. But, if you want to streamline the portfolio and keep only a single fund, we have a find. Vanguard Total Stock Market Index fund could be your choice. It’s the biggest index fund of Vanguard, representing the core philosophy of Bogle. It offers exposure to the whole US stock market. There is extensive diversification among small-, mid- and large-cap firms in both value and growth terms. Since it’s a passively managed fund, hence its expenses are only .17%. Due to its portfolio turnover, the fund is tax-efficient. Thus, it’s the ideal fund for taxable accounts.
Keeping a single investment in the portfolio is usually not recommended because of one-sided exposure risk. A better strategy is to make Vanguard Total Stock Market Index Fund the primary holding of your diversified portfolio. This portfolio should also include other asset groups like cash, bonds, and foreign securities.
Best Vanguard Funds You Must Invest
We’re huge fans of Vanguard. But, frankly, it’s a bit more complicated than using Robo-advisors. So, here is a break-down of the best 8 Vanguard funds which balance both cost and performance.
Before we begin, it’s crucial to state why our focus is so much on fees here. Because of their exponential character, a fee of 1% can make you lose nearly 25% of your earnings. This is quite horrendous and fundamentally what shifts investors toward Vanguard in the first place.
Fund #1: Total Stock Market – VTI
NYSEARCA:VTI | Vanguard | MorningStar | Fee: 0.05% | 5yr Avg: 15.87%
This is the flagship fund of Vanguard and according to us, their best. It’s a mix of small-, mid- and large-cap firms in the USA. The fee of this fund is the lowest we’ve ever seem. This is mostly because the fund tracks smaller indexes enabling it to become automated.
Usually, when people say they’ve invested in Vanguard, they’re referring to this ETF.
Fund #2: Target Retirement 2050 Fund – VFIFX
MUTF:VFIFX | Vanguard | MorningStar | Fee: 0.18% | 5yr Avg: 12.12%
This is a lifecycle fund. Hence, it begins with stocks and gradually narrows into bonds. The idea is for you to take the risk now when you’re young. And then, to gradually reduce the risk when you near your retirement. This way, market fluctuations don’t deteriorate your retirement fund.
While this isn’t the best fund regarding the fee, it mends an essential gap in most portfolios. Like you know, we mostly prefer to buy and hold, and this fund fits correctly there.
2050 matches your “typical” date of retirement – usually when you’re 59 and a half. We typically see ourselves choosing funds having times well past the typical age of retirement. This is so that we can get something more growth-centric early on.
Fund #3: 500 Index Fund – VFIAX
MUTF:VFIAX | Vanguard | MorningStar | Fee: 0.05% | 5yr Avg: 15.67%
This was the first fund meant for individual investors. Invest in the top 500 of the biggest firms in the USA. By definition, this fund comprises of the leading Large-cap firms. Due to its focus on the biggest US firms, it’s the most accurate in tracking the American economy.
Fund #4: REIT Index Fund – VGSLX
MUTF:VGSLX | Vanguard | MorningStar | Fee: 0.10% | 5yr Avg: 9.48%
What’s the point of owning a property and renting it out if your money is stuck in a home? You need that money for so many other things too. Rather, put your money in a REIT and take home both liquidity and rental profit. This index fund isn’t merely a REIT. Instead, it’s a fund of several REITs. Hence, you become hugely diversified in the rental game.
Note: You won’t yield much here, and this is a bit of a drag knowing real-estate is usually an income play. Thus, as a substitute for the income part of your portfolio, we suggest Fundrise. At present, their yield is 2.196 times that of Vanguard’s REIT.
Unlike VGSLX, Fundrise focuses on mid-size deals which are overlooked by substantial funds. Resultantly, it offers a noticeably higher return. One can even choose to focus on appreciation or income-focused funds.
Fund #5: Growth Index Fund – VIGAX
MUTF:VIGAX | Vanguard | MorningStar | Fee: 0.09% | 5yr Avg: 16.62%
With this fund, Vanguard chooses high-growth firms. This is a little riskier, but the yield is solid.
Although the focus is on high-growth firms, the fund uses a buy-and-hold approach. Under this, once they find a secure company, they remain invested in them for some time.
Fund #6: Strategic Equity Fund – VSEQX
MUTF:VSEQX | Vanguard | MorningStar | Fee: 0.29% | 5yr Avg: 18.65%
Akin to Growth Index fund but with smaller firms, the computer picks the big chunk of the fund’s composition. The fee for this fund is the highest. This is because the majority of the work goes running the fund. Though 29% is not a huge fee, we think it’s worth noticing.
Plus, this fund is the riskiest of the list. From your Vanguard investments, we’ll not suggest making this one over 10% of your total amount.
Fund #7: Total International Stock Index Fund – VGTSX
MUTF:VGTSX | Vanguard | MorningStar | Fee: 0.22% | 5yr Avg: 5.88%
Its approach is similar to our 1st choice, VTI. But, this fund doesn’t focus on firms in the US. It focuses on firms outside the US and covers both emerging and developed markets.
This fund is quite volatile. Hence, we hold it as a small percentage of the portfolio to balance our intense US exposure.
Fund #8: Total Bond Market – BND
NYSEARCA:BND | Vanguard | MorningStar | Fee: 0.08% | 5yr Avg: 3.98%
All well-balanced portfolios comprise of bonds. They’re not as sexy as stocks but involve much less risk. During your younger years, 10% of your portfolio must’ve something akin to BND. As you age, you should raise the percentage considerably. This approach is quite similar to the one used in a lifecycle fund. BND is by far the best bond we’ve seen in this price.
All bonds in this fund are investment grade. Hence, it’s recommended to keep this fund for medium and long-term depending on its contents.
Best Vanguard funds are selected for you. Vanguard is the leader of low-cost funds for years now. It has produced several top-performing funds. One can find low-cost funds; other firms ought to compete with Vanguard. You can also get better-performing funds. But, few businesses have as many high-performance funds across different classes as Vanguard.
It’s not possible to know if you have the best funds in your portfolio. But, with Vanguard funds, at least you know they’re among the best.