If you read or listen to anything related to personal finance, you have heard of Vanguard Funds. But what are Vanguard Funds and why are they so popular?
Vanguard and its founder, John Bogle, are investing legends and for a good reason. Bogle founded the first index fund, beloved of hands-off investors everywhere, in 1975. That Vanguard Fund, the Vanguard 500 Index Fund now has more than $500 billion under management.
What is Vanguard?
Vanguard is an investment advisor with more than $5.1 trillion under management. Vanguard is also the leading provider of mutual funds and second largest provider of ETFs. The founder, John Bogle, has long been a champion of offering low cost, low effort investing to the average person.
Why are Vanguard fund fees so low?
Because Vanguard is not owned by outside stockholders as most investment management companies are. Outside investors want returns, and those returns come in the form of fees charged to customers.
Vanguard has no outside investors. The company is owned by its funds, and the funds are owned by their shareholders, which is everyone who invests with Vanguard.
This structure is why Vanguard funds have low fees. Those low fees mean more money in the pockets of Vanguard’s investors/owners.
Why Fees Matter
When you see a fee of 2% (if you pay attention to investing fees at all), you think that sounds pretty good! Two percent is nothing. And that’s true. A 2% interest rate on your savings account is nothing.
Getting 2% off when you buy a dress is nothing.
But a 2% investing fee isn’t nothing. It’s something; it’s a lot of something. And that something is the money you have to live on in retirement.
If you had $100,000 invested earning 6% for 25 years and paid no fees, your $100,000 would become $430,000. If you paid a 2% fee in that same scenario, your $100,000 would become a mere $260,000. That seemingly small 2% just obliterated nearly 40% of your retirement savings!
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Why We Love Vanguard Funds
We love Vanguard, and we aren’t alone.
“According to a recent Harris Poll, which identifies and ranks the strongest brands in nearly 100 categories, Vanguard is the only financial services company in the “Top 13 Brands of the Year with the Largest Equity Increases.”
“They are also ranked as the top financial services brand in the investment category.”
Vanguard opened up investing to the masses. You no longer had to have a million dollars and a personal financial advisor to grow your money in the stock market.
Investors also love the Vanguard philosophy that a mutual fund company should be managed with the interests of the fund shareholders at the forefront.
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And low fees are in the interest of the shareholders. Vanguard funds average expense ratio is 0.19% compared to the industry average of 1.08%.
And putting paid to the myth that paying more means better performance, 86% of Vanguard funds have outperformed similar funds for the last five years and had an outperformance rate of 94% over a ten year period.
Vanguard Mutal Funds
When you invest in a mutual fund, you are invested in hundreds of individual securities at the same time. This protects your investment by lowering your risk.
All of your eggs are not in the same basket. If one basket does poorly, the other baskets can offset it.
Mutual funds are an inexpensive way to invest. You pay one expense ratio rather than paying a commission each time you buy or sell individual securities. It also makes investing easy; you can set up automatic investments.
Vanguard International Growth Investor (VWIGX)
This one invests mostly in international stocks including emerging markets. Holdings include Alibaba, TenCent Holdings, Baidu, and TAL Education Group.
The fund has an annual expense ratio of 0.45% compared to a category average of 1.19%. The fund has given returns of 43.5% for a one year annualized period. The minimum investment is $3,000.
Vanguard Selected Value Fund Investor Shares (VASVX)
Focused mostly in undervalued stocks in US-based companies, its holdings include Micron Technology, Cigna, Cardinal Health, and Microchip Technology.
The fund has an annual expense ratio of 0.39% compared to a category average of 1.16%. The fund has given returns of 20.4% for a one year annualized period. The minimum investment is $3,000.
Flavoring a portfolio with value factor funds is a key investing strategy Larry Swedroe uses in his eponymous Larry Portfolio.
This portfolio's goal is to be both high performance and low volatility. It achieves its performance by tilting your portfolio to higher-risk stocks that are underpriced. Its low volatility is due to only holding 30% in stocks while 70% goes to bonds.
Vanguard Index Funds
Index funds are a type of mutual fund with a portfolio created to match the performance of the indexes they track like the S&P 500. Index funds provide broad market exposure (reducing risk) while keeping fees low for investors.
Vanguard Total Stock Market Index (VTSAX)
The fund invests across the whole US stock market. Most assets are in stocks of big companies but also include small and midsized company’s stocks. Some of the holdings are in Apple, Microsoft, Amazon, and Facebook.
The expense ratio is 0.05%. It has returns of 15.69% for a one year annualized period. The minimum investment is $10,000.
You can use this fund to mimic the Yale investment model the way David Swensen did in the Swensen Portfolio.
A contrarian investment approach that promotes a well-diversified, equity-oriented portfolio that rewards investors who exhibit the courage to stay the course. Swensen, creator of this portfolio is the mastermind behind the Yale Endowment investment strategy.
Vanguard Developed Markets Index (VTMGX)
This one invests in developed international markets including Europe, Canada, Japan, and Australia. Holdings include Samsung, Toyota, Royal Dutch Shell, and British Petroleum.
The fund has an annual expense ratio of 0.07 %. The fund has given returns of 26% for a one year annualized period. The minimum investment is $10,000.
This fund can be used as the international developed equity component when building your Ivy Portfolio.
This portfolio attempts to diversify your money by dividing it into stocks, bonds, commodities, and real estate in a way that mirrors the Ivy League endowment funds. It doesn't attempt to mirror every move the endowment fund makes. This is more specific than the Ivy 5.
Vanguard Bond Funds
You don’t own bonds to grow your wealth but to lower the risk in your portfolio. As you near or an in retirement, bond funds become more attractive.
Vanguard Short-Term Investment-Grade Investor (VFSTX)
VFSTX invests in corporate bonds rated BBB or higher by Standard & Poors. Some of the fund is also made up of Treasuries and commercial mortgages.
The expense ratio is 0.20% and yields 2.1%. The minimum investment is $3,000.
Vanguard Limited-Term Tax-Exempt (VMLTX)
The fund invests in municipal bonds rated BBB or higher. The expense ratio is 0.19%, and the yield is 1.5%. The minimum investment is $3,000.
REIT’s allow individual investors to invest in real estate properties by pooling their money with that of fellow investors. Returns are lower than if you owned the property outright but there is less risk and no hands-on involvement.
A REIT fund invests in several real estate companies that own property which lessens the risk for investors.
Vanguard REIT ETF (VNQ)
This exchange-traded fund tracks an index of domestic companies that own and operate real estate. Holdings include Equinox Inc, Public Storage, Equity Residential, and American Tower Corp.
The expense ratio is 0.12%, and the yield is 4.42%. The minimum investment is $3,000.
Vanguard REIT Index Fund Admiral Shares (VGSLX)
The fund invests in REITs that own and operate real estate including office buildings and hotels. Holding includes Proglogis Inc, Digitial Realty Trust, Avalon Bay Communities, and Equity Residential.
The expense ratio is 0.12%, and the yield is 4.80%. The minimum investment is $10,000.
Vanguard Retirement Funds
Vanguard offers funds for investors saving for retirement and those already retired. For those already retired, the Wellesley fund can provide income, and for those saving for retirement, the Target fund is a complete portfolio, shifting allocation as an investor nears retirement.
Vanguard Wellesley Income (VWINX)
Featuring a conservative allocation, the fund is made up of two-thirds bonds and one-third stocks. Holdings include JP Morgan Chase, Cisco Systems, Pfizer, and Wells Fargo.
The expense ratio is 0.22% and the average five-year return is 5.95%. The minimum investment is $3,000.
Vanguard Target Retirement 2050 Fund (VFIFX)
This target-date fund liquidates in 2050 so it’s meant for people planning to retire near that date. The fund changes your asset allocation as you near retirement, leaning more heavily towards bonds as 2050 nears.
Because we are still a long way from 2050, the fund is nearly 90% stocks currently. Holdings include Berkshire Hathaway, Amazon, Johnson & Johnson, and Facebook.
The expense ratio is 0.15% and the average five-year return is 9.88%. The minimum investment is $1,000.
Vanguard Dividend Funds
These funds can provide investors with income by investing in dividend-paying stocks.
Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)
VDADX focuses on stocks with favorable dividend growth traits. Holdings include Walmart, PepsiCo, 3M, and Texas Instruments.
The expense ratio is 0.08%, and the five-year average return is 11.30%. The minimum investment is $10,000.
Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX)
This fund invests in domestic large-cap companies like Procter& Gamble, Intel, Wells Fargo, and Exxon Mobil.
The expense ratio is 0.15%, and the yield is 2.88%. The minimum investment is $3,000.
The Dividend Aristocrat portfolio is comprised of companies found in the S&P 500 that have increased their dividend payout to shareholders every year for the past 25 years.
This portfolio’s historical yield also outperforms the S&P 500 benchmark.
This is an index fund of the most consistent dividend-paying companies in the S&P 500. It has historically outperformed the S&P 500 long-term. Over the past 10 years, it has returned 10.98% on an average annual basis whereas the S&P 500 only returned 10.53% during that same period.
How to Track and Monitor Vanguard Funds
Manage your cash and optimize your investments in one place. With Personal Capital you can analyze your 401k to better diversify your holdings and reduce fees.
I had no idea I was paying over 1% of my assets in fees every year but with there help I was able to get it down below 0.3%.
Once you have all of your accounts linked you can also leverage their Retirement Planner to plot out exactly what your retirement would look like.
Using a Monte Carlo simulation they determine how likely it is that you’ll reach the level of income in retirement that you’re hoping for.
I’ve been using Personal Capital since 2013 and I haven’t found a better free online tool for building and managing wealth.
Who Should Invest With Vanguard?
Vanguard has investments to fit everyone’s needs from those just starting to invest to those already retired to those with small bank accounts to those with eight-digit bank accounts. The only investors Vanguard can’t serve are those with less than $1,000 to get started.
If you don’t have a $1,000 for your initial investment, you can invest with Betterment which has no minimum. And you will be investing with Vanguard anyway because Betterment uses index and ETFs from Vanguard to build its portfolios.
Vanguard offers low fees and competitive returns. That’s a good investment for anyone.
Vanguard Explained: Andrew’s blog explaining Vanguard and his picks.
Vanguard: The investment management company we talked about today.