Wallet Hacks

The 10 Best Vanguard Funds

I love Vanguard.

The bulk of my investments are there, minus a few dividend growth stocks I hold in an Ally Invest account (formerly TradeKing).

I'm not the only one.

Of the top 25 largest mutual funds by assets, sixteen are from Vanguard (source).

A clarification – many of the funds on the Marketwatch list are repeats. We don't have any repeats. Vanguard offers two classes of mutual funds to individuals (they offer an “institutional” version too) – Investor and Admiral Shares. They're identical except Admiral shares have a $10,000 minimum and a lower expense ratio. In some cases, there is also an ETF version that shares the Admiral shares' low cost fee structure without the minimum. In our list below, when available we list the ETF version and you can read about the differences here

When I say “best Vanguard funds,” that's not to say that there are good ones and bad ones. Every fund as its place and Vanguard's funds are all very good because they do the job and they're very inexpensive. When it comes to something like an index fund, which tracks a specific thing, one of the biggest factors is cost. The best index fund is the low cost index fund. 🙂

Another important factors with index funds is tracking error, which is how much the fund deviates from the index itself. Indices change and funds have to adjust to match them, but Vanguard's funds have some of the lowest tracking errors. They're very efficient.

These are the ones I like the most (no particular order).

Fund Ticker Expense
1. Total Stock Market ETF VTI 0.04% ⭐⭐⭐⭐
2. Total International Stock ETF VXUS 0.11% ⭐⭐⭐
3. S&P 500 ETF VOO 0.04% ⭐⭐⭐⭐⭐
4. Target Retirement 2050 VFIFX 0.16% ⭐⭐⭐⭐
5. REIT ETF VNQ 0.12% ⭐⭐⭐
6. Total Bond ETF BND 0.05% ⭐⭐⭐
7. Wellington VWELX 0.25%/0.16% ⭐⭐⭐⭐⭐
8. High-Yield Tax-Exempt Fund VWAHX 0.19%/0.09% ⭐⭐⭐⭐⭐
9. STAR Fund VGSTX 0.32% ⭐⭐⭐⭐
10. Windsor Fund VWNDX 0.30%/0.20% ⭐⭐⭐⭐

Vanguard Total Stock Market ETF (VTI)

Quick Fund Stats:

  • Ticker: VTI
  • Expense Ratio: 0.04%
  • Asset Class: Domestic Stock – General
  • Category: Large Blend
  • Minimum Investment: No Minimum

The Vanguard Total Stock Market is exactly what it sounds like, the entire market including large, mid and small-cap companies in the United States. VTI is the bomb dot com (does anyone still say that?). The expense ratio, as of January 2018, is a mere 0.04%.

When Vanguard says Total Market, they're trying to track the CRSP US Total Market Index. CRSP stands for the Center for Research in Security Prices and their index includes 4,000 companies.

Vanguard Total International Stock ETF (VXUS)

Quick Fund Stats:

  • Ticker: VXUS
  • Expense Ratio: 0.11%
  • Asset Class: International/Global Stock
  • Category: Foreign Large Blend
  • Minimum Investment: No Minimum

The Vanguard Total International Stock ETF is like the VTI except we're going international. It is also an index fund and seeks to track the FTSE Global All Cap ex US Index, which includes all publicly traded companies located outside the United States. The expense ratio of 0.11% puts it, like its many other index fund friends, in the “very low” category compared to its peers.

Vanguard S&P 500 ETF (VOO)

Quick Fund Stats:

  • Ticker: VOO
  • Expense Ratio: 0.04%
  • Asset Class: Domestic Stock – General
  • Category: Large Blend
  • Minimum Investment: No Minimum

The Vanguard S&P 500 ETF is an index fund that mirrors the S&P 500 index. With a 0.04% expense ratio, it's one of the cheapest S&P 500 index funds (Fidelity's 500 Index Fund – Premium Class boasts a 0.035% expense ratio but requires a $10,000 minimum).

The S&P 500 index consists of 500 large cap U.S. companies and considered the best gauge of large cap US companies – it consists of approximately 80% of the available market capitalization.

Vanguard Target Retirement 2050 Fund (VFIFX)

Quick Fund Stats:

  • Ticker: VFIFX
  • Expense Ratio: 0.16%
  • Asset Class: Life-Cycle
  • Category: Target-Date 2046-2050
  • Minimum Investment: $1,000

Target date retirement funds are popular options because they offer a diversified portfolio without all of the work. The idea is that they will adjust their allocations to meet the needs of someone looking to retire at the retirement date. The 2050 Fund is meant for people retiring between 2048 and 2052.

The expense ratio of 0.16% (as of January 2018) is quite modest.

The 2050 target fund invests in other Vanguard funds, as of September 2017, this was the mix:

  • Vanguard Total Stock Market Index Fund (Investor Shares) – 54.1%
  • Vanguard Total International Stock Index Fund (Investor Shares) – 35.9%
  • Vanguard Total Bond Market II Index Fund (Investor Shares) – 7.1%
  • Vanguard Total International Bond Index Fund (Investor Shares) – 2.9%

The minimum investment in the target funds is just $1,000 – compared to $3,000 for most other mutual funds at Vanguard.

Vanguard has a lot of these life-cycle funds – everything from a target date of 2010 (already retired) to 2060 (oh you kids).

Vanguard REIT ETF (VNQ)

Quick Fund Stats:

  • Ticker: VNQ
  • Expense Ratio: 0.12%
  • Asset Class: Stock – Sector-Specific
  • Category: Real Estate
  • Minimum Investment: No Minimum

Who doesn't like a little real estate diversification in their life? If you don't feel like getting involved in crowdsourced real estate investing, REITs are a good way to go.

Vanguard's REIT ETF is a fund of other REITs, which are publicly traded holding companies for real estate. VNQ has an expense ratio of 0.12% and its holdings consist of big companies you've probably heard of if you've looked into this space – Simon Property Group, Public Storage, etc.

This is a solid way for non-accredited investors to get involved in real estate too (accredited investors is a designation for high net worth or high income individuals). Alternatively, there are sites like Fundrise (our full Fundrise review) that run their own eREITs that give you a little more specificity in options.

Vanguard Total Bond ETF (BND)

Quick Fund Stats:

  • Ticker: BND
  • Expense Ratio: 0.05%
  • Asset Class: Intermediate-Term Bond
  • Category: Intermediate-Term Bond
  • Minimum Investment: No Minimum

What a great ticker – BND – for a solid bond market ETF. The Total Bond ETF holds U.S. investment grade bonds with an average effective maturity of 8.4 years. The bonds themselves have a smattering of all issuer types of are heavily weighted with Treasury/Agency (42.4%), Government Mortgage-Backed (21.3%), and Industrial (17.5%). There is a small slice of Foreign bonds (5.6%) so this is not a domestic bond ETF.

Vanguard has over a dozen bond ETFs, with varying maturities, bond quality, etc. This fund checks all the boxes and runs about average in all characteristics while having a very low, Vanguardian, expense ratio.

Vanguard Wellington Fund (VWELX)

Quick Fund Stats:

  • Ticker: VWELX
  • Expense Ratio: 0.25% Investor, 0.16% Admiral
  • Asset Class: Balanced
  • Category: Moderate Allocation
  • Minimum Investment: $3,000 ($10,000 for Admiral)

I was torn adding this to the list beacuse it's one of Vanguard's more expensive funds at 0.25% for the Investor Shares and 0.16% for the Admiral Shares (with a $50,000 minimum!).

I included it because it's Vanguard's oldest mutual fund having been founded in 1929. It's two-thirds stocks and one-third bonds, broad diversification, and it's been closed since mid-2016. You cannot invest in this fund if you wanted to. The fund had doubled in size over the previous three years and they closed it to try to head off any potential problems. It's hard to deploy capital and people were putting too much of it into the fund!

Maybe I find it appealing because I can't get in? 🙂

Vanguard High-Yield Tax-Exempt Fund Admiral Shares (VWAHX)

Quick Fund Stats:

  • Ticker: VWAHX
  • Expense Ratio: 0.19% Investor, 0.09% Admiral
  • Asset Class: Long-Term Bond
  • Category: High Yield Muni
  • Minimum Investment: $3,000 ($50,000 for Admiral)

This last one represents a very specific type of investment that fulfills a small need – if you want a low cost municipal bond fund with a bit of risk then the Vanguard High-Yield Tax-Exempt Fund Admiral Shares (VWALX) is a fine one. It's volatile because it's higher risk due to lower credit quality, so it's not your typical “safe” bond fund, but it's also federal tax-exempt interest.

The bulk of the credit quality is AA (17.7%), A (36.6%) and BBB (25.3%) with maturities in the 5-10 Years (10.2%), 10-20 Years (34.5%) and 20-30 Years (35.6%) range. So it's going to be impacted by interest rates pretty significantly. Average stated maturity is 17.6%.

Vanguard STAR (VGSTX)

Quick Fund Stats:

  • Ticker: VGSTX
  • Expense Ratio: 0.32% Investor
  • Asset Class: Balanced
  • Category: Moderate Allocation
  • Minimum Investment: $1,000

The Vanguard STAR Fund has a special place in my heart because when I started investing, ETFs did not exist yet. If you wanted to invest in a Vanguard fund and did not have $3,000 – the Vanguard STAR Fund and its $1,000 minimum was the only game in town. It became the best Vanguard fund for me because it was the only one I could invest in!

The investment itself is OK, it's a mix of other Vanguard funds which explains the higher 0.32% expense ratio – some of the underlying funds have higher fees.

Here are the underlying funds as of 11/2017 (all Investor Shares):

  1. Vanguard Windsor II Fund – 14.1%
  2. Vanguard Long-Term Investment-Grade Fund – 12.3%
  3. Vanguard GNMA Fund – 12.3%
  4. Vanguard Short-Term Investment-Grade Fund – 12.3%
  5. Vanguard International Value Fund – 9.5%
  6. Vanguard International Growth Fund – 9.4%
  7. Vanguard Windsor Fund – 7.8%
  8. Vanguard PRIMECAP Fund – 6.2%
  9. Vanguard U.S. Growth Fund – 6.1%
  10. Vanguard Morgan Growth Fund – 6.1%
  11. Vanguard Explorer Fund – 3.9%

Vanguard Windsor Fund (VWNDX)

Quick Fund Stats:

  • Ticker: VWNDX
  • Expense Ratio: 0.30% Investor, 0.20% Admiral
  • Asset Class: Domestic Stock – General
  • Category: Large Value
  • Minimum Investment: $3,000 ($50,000 for Admiral)

This is the only actively managed funds on this list and it invests in out of favor large capitalization companies, like Bank of America, Citigroup, and QUALCOMM (three largest holdings as of 11/2017). For an actively managed fund, it's 0.30 expense ratio is miniscule and there are no other fees or loads (commissions).

It has performed quite well. It has returned 14.53% over the last five years and 11.45% since it's inception in 1958.

Frequently Asked Questions

How much money do you need to start a Vanguard account?

$1,000. That's the minimum amount you need for Vanguard's Target Retirement Funds and their Vanguard STAR Fund. If you have $3,000, that's the minimum for almost every other Vanguard Fund. If you are interested in Vanguard's ETFs, then the minimum is the price of a single share (~$50).

What are the fees for a Vanguard account?

They vary but Vanguard charges a $20 annual fee on brokerage accounts but you can avoid this account service fees by opting for electronic statements. If you have over $10,000 in assets, they will also waive this fee.

Why Fees Matter

Many of the Vanguard passive index funds have tiny expense ratios and no loads, which is a commission on the buying and selling of the funds.

Intuitively, we look at these fees of 1%, 0.5%, of whatever – we think it's small.

It's not.

I looked at the most important number in investing and was amazed at how a small fee difference impacted your savings. Over 30 years, a 0.65% difference in fees has a huge impact:

The difference between 0.25% annual cost and 0.90% annual cost is enormous!

It makes sense, it's just that we don't think about the magnitude when we see a small 0.95% fee.

Vanguard ETFs versus Mutual Funds?

I had a lot of misconceptions about ETFs.

What's the difference between the Vanguard ETF and the equivalent mutual fund?

First, mutual funds and exchange-traded funds are fundamentally different creatures. When you buy and sell (redeem) a mutual fund, you deal directly with the fund itself. When you buy and sell shares of an ETF, you're doing so on the open market.

Functionally, the biggest difference is that an ETF can be bought and sold when the market is open, because it's traded just like a stock. A mutual fund is transacted just once a day when the market closes.

Expense ratios are similar: With Vanguard's Mutual Funds and ETF equivalents, the expense ratios are similar. Vanguard funds have two classes – Investor and Admiral shares. The Admiral shares have a lower fee but require a higher minimum investment, usually $10,000. The ETF expense ratio mirrors the Admiral shares but has no minimum investment.

Here's a comparison of expense ratios for the Vanguard Total Stock Market Fund/ETF:

Transaction fees waived in a Vanguard account: When you buy and sell shares of an ETF, you pay a transaction fee just as you would any other stock. If you buy and sell shares of Vanguard ETFs within your Vanguard brokerage account, you do not pay a fee. If you buy and sell shares of Vanguard ETFs through another brokerage firm, you'll pay a transaction fee.

For all practical purposes, a Vanguard ETF is more flexible than the equivalent mutual fund.

What are Vanguard Admiral funds?

Vanguard mutual funds have two classes – Investor Shares (regular) and Admiral Shares. Investor Shares usually have minimum investments of $3,000 whereas Admiral Shares have higher minimums of $10,000. The Admiral Shares also come with a lower expense ratio, usually matching the expense ratio of the corresponding ETF.

For example, Vanguard 500 Index Fund Investor Shares (VFINX) has a $3,000 minimum and a 0.14% expense ratio. Vanguard 500 Index Fund Admiral Shares (VFIAX) has a $10,000 minimum and a 0.04% expense ratio. You can start with Investor Shares and when the balance exceeds $10,000, request they be converted to Admiral shares (it is a non-taxable event).