Over the years, investing in Vanguard mutual funds and ETFs has been a top choice for millions of investors given their low fees and competitive long-term performance. In fact, they boast more than 30 million investors.
Vanguard has about 425 mutual funds and ETFs to choose from. That’s plenty of options to wrap your head around. Their stability and low-cost has earned them many fans. Even Warren Buffett famously mentioned them in his 2014 shareholder letter.
Many folks buy and hold index funds to help them build their retirement nest egg and increase their net worth. Others do so to save more or help them manage debt.
So which are the best Vanguard funds to buy right now? Here are my favorite ones presented in no particular order:
| Vanguard Fund or ETF | Morningstar Rating | Lipper Rating |
|---|---|---|
| Balanced Index Admiral Shares | 5 stars | 5 stars |
| 500 Index Fund Admiral Shares | 5 stars | 5 stars |
| Real Estate ETF | 3 stars | 4 stars |
| Total Stock Market Index Fund Inv. Shares | 4 stars | 5 stars |
| Target Retirement 2055 Fund | 4 stars | 4 stars |
| Utilities ETF | 4 stars | 5 stars |
| Total Bond Market Index Fund Adm. Shares | 4 stars | 3 stars |
| Consumer Discretionary ETF | 4 stars | 5 stars |
| Wellington Fund Investor Shares | 4 stars | 5 stars |
| STAR Fund | 4 stars | 5 stars |
| Tax-Managed Balanced Fund Adm. Shares | 5 stars | 5 stars |
| US Growth Fund Admiral Shares | 5 stars | 5 stars |
The Morningstar and Lipper ratings shown above are overall ratings based on a weighted average of the 3-, 5-, and 10-year ratings of the fund, when available. What do these ratings mean?
Morningstar’s rating looks at the fund’s return in proportion to the risks it takes. The rating range is 1 to 5, where 5 is best. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the following 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star.
Lipper’s rating is based on total return and reflects the rated fund’s historical total return performance relative to its peers. The range is also 1 to 5, where 5 is also best. The highest 20% of funds in each peer group are named Lipper Leader and have a score of 5, the next 20% receive a score of 4, the middle 20% are scored 3, the next 20% are scored 2, and the lowest 20% receive a score of 1. Lipper ratings are subject to change every month.
What is Vanguard?
Vanguard is one of the largest investment companies in the world with about $6.2 trillion in assets under management. It began operations in 1975 and offers a large selection of low-cost funds. Their low cost is reflected in their average expense ratio of 0.10% which is well below the industry average of 0.45% (or 0.57% if you exclude Vanguard).
They’re a different type of investment company. Its founder, John C. Bogle, structured Vanguard as a client-owned mutual fund company without any outside owners. That means that fund shareholders own the funds that own Vanguard.
What’s the expense ratio of a fund?
It’s the cost of operating the fund on a yearly basis calculated as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but excludes the transaction costs of buying and selling portfolio securities.
What is an index fund?
Vanguard introduced index funds to individual investors several decades ago, so who better than Vanguard itself to define what an index fund is:
“An index mutual fund or ETF (exchange-traded fund) tracks the performance of a specific market benchmark—or “index,” like the popular S&P 500 Index—as closely as possible. That’s why you may hear people refer to indexing as a “passive” investment strategy. Instead of hand-selecting which stocks or bonds the fund will hold, the fund’s manager buys all (or a representative sample) of the stocks or bonds in the index it tracks.” Source: Vanguard.
For example, the Vanguard 500 Index Fund uses an indexing investment approach to track the performance of the Standard & Poor’s 500 Index. That is, the fund tries to replicate the returns of the S&P 500 by investing all, or almost all of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
What’s the difference between Vanguard investor, admiral and institutional shares mutual funds?
Vanguard’s mutual funds are available in investor, admiral and institutional shares. Each share class has different minimum initial investment requirements and fees as follows:
» Investor shares: This share class has a minimum investment of $1,000 for Vanguard Target Retirement Funds and Vanguard STAR Fund. It then increases to $3,000 for most actively managed funds. Their average expense ratio is 0.27%.
» Admiral shares: The minimum initial investment is $3,000 for most index funds in this class and $50,000 for most actively managed funds. The average expense ratio for Admiral shares is 0.14%.
» Institutional shares: These are available to institutional investors and require a minimum initial investment of $5 million. Their average expense ratio is 0.08%.
The above minimum investment requirements do not apply to ETFs. You can invest in Vanguard’s ETFs with a minimum investment starting at the price of one share. For example, if the share price of a given ETF is $50, then the minimum investment is $50. You can only buy ETFs in full shares and not fractions.
1. Vanguard Balanced Index Admiral Shares (VBIAX)
- Ticker: VBIAX
- 10-yr return: 10.56%
- Expense ratio: 0.07%
- Minimum investment: $3,000
- Category: Moderate allocation
- Morningstar
This fund invests approximately 60% of its assets in stocks and 40% in bonds using a broad diversification approach. On the equity side, it seeks to track the performance of a benchmark that measures the investment return of the overall U.S. stock market. That includes large-cap, mid-cap, small-cap, and micro-cap stocks regularly traded on the New York Stock Exchange and Nasdaq.
What is diversification?
In the context of investing, diversification means that changes in the price of a few holdings shouldn’t have a sizable impact on the overall portfolio. A broad diversification may provide less volatility when markets are choppy and improve returns for a given level of risk.
With respect to 40% of its assets, the VBIAX seeks to track the performance of a broad, market-weighted bond index known as the Bloomberg Barclays U.S. Aggregate Float Adjusted Index.
This fund is a good fit for those who want capital appreciation (growth) and income in their portfolios and are buy-and-hold investors with a long-term horizon. You can find additional information in the VBIAX prospectus.
2. Vanguard 500 Index Fund Admiral Shares (VFIAX)
- Ticker: VFIAX
- 10-yr return: 15.13%
- Expense ratio: 0.04%
- Minimum investment: $3,000
- Category: Large Blend
- Morningstar
The Vanguard 500 Index is one of the cheapest funds in the U.S. large blend category in terms of expense ratio. It seeks to track the performance of its benchmark, the S&P 500, by using an indexing investment approach. And it’s one of the best Vanguard funds you can buy now.
This fund has a volatility similar to that of the broader market. So when the overall market goes up or down, the fund swings up or down at similar rates. In market speak, the fund’s beta is one.
What is beta?
It’s a measure of volatility compared to the overall stock market. A beta of one implies that an investment moves at a similar rate as the market.
If you want to start investing, but don’t have the $3,000 minimum required, the VFIAX is also available as an ETF. Its minimum investment is the price of one share. For more information, refer to the VFIAX prospectus.
3. Vanguard Real Estate ETF (VNQ)
- Ticker: VNQ
- 10-yr return: 9.26%
- Expense ratio: 0.12%
- Minimum investment: No minimum
- Category: Real estate
- Morningstar
This ETF tracks the performance of publicly traded equity REITs and other real estate related investments through its benchmark index. It seeks to provide high levels of income and some capital growth. The fund is managed passively using an indexing approach.
What are REITs?
REITs are real estate investment trusts that own or finance income-producing real estate in various sectors. They provide access to dividend-based income and total returns to their investors.
If you only own stocks and bonds in your portfolio, owning real estate can help further diversify your holdings.
4. Vanguard Total Stock Market Index Fund Investor Shares (VTSAX)
- Ticker: VTSAX
- 10-yr return: 14.49%
- Expense ratio: 0.04%
- Minimum investment: $3,000
- Category: Large blend
- Morningstar
This fund seeks to track the performance of the CRSP US Total Market Index: a benchmark affiliated with the University of Chicago that measures the investment return of the overall stock market. VTSAX uses an indexing investment approach and invests by holding a collection of securities that approximates the Index.
The fund provides exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks. It’s one of the lowest-cost ways to gain broad exposure to the equity market and one of the best core funds available.
What is a core fund?
A core fund is a central investment of your portfolio and its aim is to provide long-term stability to your holdings. In that sense, it should be “boring,” and provide reliable returns.
VTSAX is a low-fee fund that’s also available in ETF form starting at the price of one share.
5. Vanguard Target Retirement 2050 Fund (VFIFX)
- Ticker: VFIFX
- 10-yr return: 10.86%
- Expense ratio: 0.15%
- Minimum investment: $1,000
- Category: Target-date 2050
- Morningstar
Vanguard’s target retirement funds give you a simple answer to the question: how to invest for retirement effectively. This family of funds seeks to grow your nest egg while managing overall risk. To do this, the fund’s asset allocation takes a more conservative stance as you approach retirement, shifting its percentage of assets to fewer stocks and more bonds.
The Vanguard Target Retirement 2050 is a fund-of-funds with an allocation strategy designed for investors planning to retire in or within a few years of 2050. The fund invests in US and international equity markets and in US and international bonds through the following Vanguard Total funds:
- Stock Market Index Fund
- International Stock Index Fund
- Bond Market II Index Fund
- International Bond Index Fund
6. Vanguard Utilities ETF (VPU)
- Ticker: VPU
- 10-yr return: 10.90%
- Expense ratio: 0.10%
- Minimum investment: No minimum
- Category: Utilities
- Morningstar
This ETF Includes stocks of independent electricity producers and businesses that distribute electricity, water, or gas. With a beta of 0.37, the Utilities ETF is less volatile and traditionally more resistant to fluctuations in the market.
The Fund seeks to track the performance of a utilities stock benchmark index and uses an indexing investment approach.
7. Vanguard Total Bond Market Index Admiral Shares (VBTLX)
- Ticker: VBTLX
- 10-yr return: 3.58%
- Expense ratio: 0.05%
- Minimum investment: $3,000
- Category: Intermediate-term bond
- Morningstar
A well diversified investment portfolio should include a solid bond fund to help offset the risk of stock funds. The Total Bond Market Index is a great core investment grade bond fund. At 0.05%, it has one of the lowest expense ratios in the Vanguard family of bond funds and seeks to track the performance of a broad, market-weighted bond benchmark. The fund holds a diversified collection of bonds that, overall, approximates the full Index.
What is an investment grade bond?
Investment grade is a credit rating level for securities that indicates that they carry a minimal default probability or risk to investors. This assessment is determined by independent rating agencies.
The bonds in the fund may include government and agency securities. The VBTLX prospectus indicates that at least 80% of the fund’s assets will be invested in bonds held in its benchmark index which is the Bloomberg Barclays U.S. Aggregate Float Adjusted Index.
This fund is also available as an ETF.
8. Vanguard Consumer Discretionary ETF (VCR)
- Ticker: VCR
- 10-yr return: 19.43%
- Expense ratio: 0.10%
- Minimum investment: No minimum
- Category: Consumer discretionary
- Morningstar
This fund invests in consumer stocks such as Amazon, Nike and McDonald’s and seeks to track the MSCI U.S. Investable Market Consumer Discretionary Index. The benchmark includes stocks of large, mid, and small size U.S. companies within the consumer discretionary sector.
The Vanguard Consumer Discretionary ETF is sector-focused, and as such it’s more volatile than other funds offering broader market coverage. Because of its narrow focus, this fund is best suited as a supplement of a well-diversified investment portfolio.
9. Vanguard Wellington Fund Investor Shares (VWELX)
- Ticker: VWELX
- 10-yr return: 10.40%
- Expense ratio: 0.25%
- Minimum investment: $3,000
- Category: Moderate allocation
- Morningstar
Vanguard’s Wellington Fund is a broadly diversified fund that’s been around since 1929. In fact, it’s Vanguard’s oldest fund and the first balanced fund in the US. The fund offers exposure to stocks and bonds in broad economic sectors and is actively managed.
It’s a fund for buy-and-hold investors who aim to preserve their capital, but seek reasonable capital appreciation and income without undue risk. It invests 60% to 70% of its assets in common stocks and 30% to 40% in bonds.
10. Vanguard STAR Fund (VGSTX)
- Ticker: VGSTX
- 10-yr return: 10.07%
- Expense ratio: 0.31%
- Minimum investment: $1,000
- Category: Moderate allocation
- Morningstar
The Vanguard STAR Fund is a fund of funds that invests in ten other Vanguard funds and seeks growth and income. The VGSTX is designed specifically for tax-advantaged accounts such as IRAs and Keogh plans.
The STAR Fund is a well-regarded investment product that provides exposure to domestic and international stock funds and U.S. bond funds. It seeks long-term capital appreciation and income.
It takes a balanced investment approach by allocating 60% to 70% of its assets in eight stock funds, and 20% to 30% in bonds through two bond funds. The remaining 10% to 20% of its assets are in a short-term bond fund.
11. Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX)
- Ticker: VTMFX
- 10-yr return: 9.26%
- Expense ratio: 0.09%
- Minimum investment: $10,000
- Category: Moderate allocation
- Morningstar
This fund invests 50-55% of its assets in municipal bonds and the balance in stocks. VTMFX seeks to provide a tax-efficient investment return, consisting of federally tax-exempt current income, long-term capital growth and a modest amount of taxable current income.
What does the “market” mean?
When referring to the stock market, the “market” is generally represented by the S&P 500, which is a market-weighted index of the 500 largest publicly traded companies in the US.
Historically, VTMFX has been less volatile than the market, fluctuating with it, but to a lesser degree, given its fixed income component.
12. Vanguard U.S. Growth Fund Admiral Shares (VWUAX)
- Ticker: VWUAX
- 10-yr return: 20.12%
- Expense ratio: 0.28%
- Minimum investment: $50,000
- Category: Large growth
- Morningstar
The Vanguard U.S. Growth Fund invests in large, well-established US companies with above-average earnings. It seeks long-term capital growth by investing in reasonably priced equity securities of these corporations.
Established in 2001, this is Vanguard’s oldest growth fund and focuses on well-known blue-chip companies such as Microsoft, Apple, Alphabet and Visa. To buy it, you’ll need a large minimum investment of $50,000. But a lower minimum amount of $3,000 is available as an Investor Shares mutual fund.
Why do fees and expenses matter?
The expense ratios charged by an investment company matter because over time, they affect your bottom line. The best way to see this is through a hypothetical example.
Assume you have two funds A and B that perform equally well, producing an annual return of 6% every year, but with an expense ratio of 0.06% for A and 0.25% for B. If you start with an initial investment of $10,000, fund A would save $336 in expenses over 10 years, $1,183 over 20 years and $3,130 over 30 years.
In addition, since the fees are deducted from your account balance whether you redeem your investment or not, fees will have an effect on your overall investment returns.
The impact can be large: you lose both the amount paid as expenses and the foregone returns of those costs because it’s money that’s no longer invested and compounded. For example, fund B above cost $1,566 over 20 years.
But what if instead of 0.25%, you invested in a fund that charged 2%?
The chart below shows you how much that higher fee can eat away at your investments assuming the same 6% annual return over a period of 20 years.
The fund that charges 2% would end up costing you $10,660 over 20 years. That’s almost a 30% difference in overall investment performance when compared with a fund that charges 0.25%.
Luckily, Vanguard has your back with low cost funds, some of which are the best in their class.