- The difference between an Index Fund (ETF) and a Mutual Fund
- 1. Total Stock Market (ETF) - VTI
- 2. Target Retirement 2050 Fund (Investor Shares) - VFIFX
- 3. 500 Index Fund (Admiral Class) - VFIAX
- 4. REIT Index Fund (Admiral Shares) - VGSLX
- 5. Growth Index Fund (Admiral Shares) - VIGAX
- 6. Strategic Equity Fund (Investor Shares) - VSEQX
- 7. Total International Stock Index Fund (Investor Shares) - VGTSX
- 8. Total Bond Market (ETF) - BND
- Your 401k and TSP deserve some love too
We’re big fans of Vanguard, but admittedly, investing in Vanguard funds is a bit more complicated than using a Robo Advisor. In this article, we break down what we think of Vanguard’s 8 best funds while balancing both performance and cost.
If you’re looking for a deeper dive on our logic as well as some colorful commentary than check out the podcast episode we did on this:
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Before we jump in, it’s important to mention why we are focusing so heavily on fees here. Due to their exponential nature, fees of just 1% can cause you to lose up to 25% of your earnings. That’s pretty horrendous and often what turns investors on to Vanguard in the first place.
I also highly suggest you check the fees on your accounts via the free Personal Capital fee analyzer. In addition to running simulations, the analyzer pinpoints all of the overly fee-hungry funds across your accounts – retirement or otherwise.
The difference between an Index Fund (ETF) and a Mutual Fund
First, let’s quickly discuss what an Index Fund (ETF) and a Mutual Fund are. Who better to ask then Vanguard themselves?
A Mutual Fund is very similar to an ETF with one crucial difference:
You can set up automatic investments and withdrawals into and out of mutual funds based on your preferences.
Source: Vanguard on ETF vs. Mutual Fund
In other words, if you want to automate your investing, then you use a Mutual Fund. If you want cheaper fees over time and don’t mind making contributions every month, then you should choose an ETF. I use ETFs because I don’t mind making investments manually and fees are the worst.
We often get asked how much you need to invest in Vanguard. If you’re investing in an ETF, then all you need is $1. If you’re investing in a Vanguard Mutual Fund then you’ll minimum initial investment is between $1,000 and $3,000.
1. Total Stock Market (ETF) – VTI
This ETF is Vanguard’s flagship fund and in our opinion, their best. It’s a blend of Large, Mid and Small cap companies in the US. It’s the lowest fee we’ve ever seen on a fund, and it’s mostly because the fund tracks a few smaller indexes allowing it to be largely automated.
Often when people mention that they invested in Vanguard, they are referring to this fund. Since 92%+ of fund managers can’t even beat this, I’d be very skeptical if anyone suggested they can perform better after-fees than this fund. Even Warren Buffet agrees. Of course, it would be shrewd to invest in more than just VTI. It’s amazing, but it’s not all things.
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2. Target Retirement 2050 Fund (Investor Shares) – VFIFX
This fund is a lifecycle fund, so it starts out with most stocks and slowly tapers into bonds over time. The point is you take on risk now while you’re young and slowly reduce risk as you reach retirement age, so big market swings don’t wipe out your retirement money.
While this fund isn’t their best regarding the fee, it covers a much-needed gap in most people’s portfolio. As you know, we’re big fans of buy and hold, and this fund fits in there perfectly.
The number in the fund name, like “2050”, corresponds to your “typical” retirement date – usually, that’s when you’re 59 1/2. We often find ourselves picking funds with dates well past typical retirement age, so we get something a bit more growth-focused early on.
3. 500 Index Fund (Admiral Class) – VFIAX
This fund was the industries first for individual investors. Invest in 500 of the biggest, baddest companies based in the US. By definition, this fund is filled with the best Large Cap companies, and since it focuses on the biggest companies in the US, it’s the closest to tracking the US economy.
4. REIT Index Fund (Admiral Shares) – VGSLX
Why own a property and rent it when your money gets stuck in the home, and there is so much work to be done? Instead, invest in a REIT and take rental profit and liquidity. This index fund is not just a REIT but a fund of many REITs, so you’re heavily diversified in the rental game.
Note: You won’t find much yield here which is a bit of a drag considering real estate is a solid income play. As a replacement for the income portion of your portfolio, we recommend Fundrise. Currently, their yield is 2.196x that of the Vanguard REIT.
Compared to VGSLX, Fundrise sticks to mid-size deals overlooked by huge funds and as a result, provides a markedly higher return. You can also opt to concentrate on income or appreciation focused funds.
5. Growth Index Fund (Admiral Shares) – VIGAX
With the Growth Index, Vanguard picks high-growth companies that will knock it out of the park for you. It’s a bit riskier, but the returns are solid.
Even though the focus is on high growth companies, the fund follows a buy and hold approach where once they locate a stable company they stay invested in them for awhile.
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6. Strategic Equity Fund (Investor Shares) – VSEQX
Like the Growth Index fund but smaller companies, potentially higher growth and a large portion of the fund’s composition is chosen by a computer. The fee is the highest here because proportionately the most amount of work goes into running this fund. 0.29% isn’t a big fee by a long shot, but I do think it’s important to note.
Also, again, this one’s the riskiest of the bunch. Of your Vanguard investments, we wouldn’t recommend making this one more than 10% of the total amount you invest.
7. Total International Stock Index Fund (Investor Shares) – VGTSX
Similar in approach to our #1 choice, VTI, only this fund focuses only on companies outside the US. The fund covers both developed and emerging markets.
It’s pretty volatile, so we keep it as a small portion of our portfolio to help offset our heavy US exposure.
8. Total Bond Market (ETF) – BND
Any well-balanced portfolio has bonds in it. They’re much less sexy than stocks but are also much less risky. When you’re young, 10% of your portfolio should be in something similar to BND, and as you get older, you’ll increase that percentage significantly. Not coincidentally, this approach is very similar to what is already baked into a lifecycle fund (fund #2). This ETF is by far the best bond fund that we have seen for the price.
All the bonds that are in this fund are investment grade and you should aim to hold this fund in the medium to long term based on its contents.
Your 401k and TSP deserve some love too
While most people are looking to stick some Vanguard funds into their IRA accounts (and for good reasons), the 401k often gets overlooked. So much so that we’ve added this in to help stem the constant flow of emails we get specifically around 401k fund picking.
The sad reality is that your 401k fund choices are often limited, don’t include Vanguard as an option, and are chosen by HR which might not always be the most qualified to make these decisions. As a result, 401k accounts have more wealth destroyed due to fees than any other investment account. As a result, it is no accident people often suggest you rollover old 401ks to an IRA.
Since we know that 1% in fees can eat 25% of your gains over 30 years, fixing this is pretty urgent. That’s why we highly recommend Blooom. They’re a fixed-fee ($10/month) service that will help you sell fee-ridden funds, selects appropriate funds for your age (time till retirement), and make sure the allocation is appropriate for you in the long-term. They also provide open-ended fiduciary grade advice. It’s a pretty wicked deal.
Did I mention it’s only $10 no matter how much you have in your retirement account? That’s a fee structure we can actually get behind. You’re welcome.