American Funds vs. The Vanguard Group: An Overview
American Funds and The Vanguard Group are two of the largest mutual fund managers in the world. Both companies pride themselves on the research they conduct and their customer-focused approach—all while providing their clients with the best possible returns. Although these two companies serve the same purpose, that's pretty much where the similarities end.
American Funds come with both front-end and back-end loads, and the fees are higher than Vanguard's, which offers no-load funds. The Vanguard Group's offerings are passively managed, while American Funds has managers who actively manage its funds. All return comparisons are based on each fund's net asset value (NAV) as of Aug. 18, 2023, unless indicated otherwise.
Key Takeaways
- American Funds and The Vanguard Group are two of the largest mutual fund families in the world.
- American Funds charges front-end and back-end loads with high expense ratios.
- Vanguard offers no-load funds with low expense ratios.
- Portfolio managers actively manage American Funds products, while Vanguard Funds are passively managed.
- Neither company advertises its funds but pay commissions to advisors and brokers who sell them to their clients.
American Funds
American Funds is a division of privately owned Capital Group, which was founded in 1931. Based in Los Angeles, Capital Group is among the largest asset management firms in the U.S., with $2.2 trillion in assets under management (AUM).
American Funds offers a variety of funds in several asset classes, including:
- Equity funds
- Equity income funds
- Asset allocation funds (these are some of the firm's highly-rated specialties)
- Fixed-income classes of funds
The funds are actively managed by portfolio managers who pay attention to value and keep turnover rates low. American Funds does not advertise. It markets its funds by compensating traditional brokers and financial advisors with commissions. To pay these commissions, its funds charge a combination of front-end loads, back-end loads, and higher expense ratios.
The total net asset value of American Funds' mutual funds was $24.29 trillion as of June 2023. This figure includes both long-term and money market funds.
The Vanguard Group
Vanguard Funds is a division of mutually-owned The Vanguard Group. Founded in 1975, Vanguard is based in Valley Forge, Pennsylvania. It is one of the world's largest asset management firms, with $7.6 trillion in AUM as of March 2023.
The company offers funds across the same range of asset classes as American Funds. All Vanguard mutual funds are no-load and have no 12b-1fees. The firm does advertise but does not pay commissions to brokers or financial advisors who recommend its funds.
Vanguard is best known as a leader in passively managed index funds, an approach to investment management invented and championed by its late founder, Jack Bogle. Nonetheless, Vanguard also offers a wide array of actively managed funds.
The company's unique structure makes its mutual fund shareholders the company's actual owners. The Vanguard Group passes all potential profits back to the funds in the form of lower asset management fees, giving them the lowest expense ratios in the mutual fund industry.
American Funds vs. The Vanguard Group
The American Fund has front-end sales charges that range from zero to 5.75%, depending on what you invest in and how much you invest. For example, if you have less than $25,000 invested in a class share equity fund, you can expect to pay the 5.75% charge. The charge is reduced incrementally until you reach $1 million, at which point there are no charges.
Bond funds use a similar schedule but don't exceed 3.75% on its "All Other Bond Funds" category. Portfolio series and retirement funds range from 5.75% to zero, depending on your invested amount.
Some American Fund share class funds have no sales charges or annual expenses.
Vanguard charges a waivable $25 fee on brokerage accounts and has an average mutual fund expense ratio of 0.09%. There are a few funds with purchase and redemption fees, but Vanguard prides itself on its no-load and no-commission funds.
The following are just some of the popular funds offered by both companies. If you're considering any of these funds (or other ones, for that matter), remember to make sure they align with your investment goals before you make a purchase.
Notable American Funds
- American Funds Fundamental Investors (ANCFX): Launched in August 1978, this fund has $120.7 billion in assets under management. It combines growth and income investing with an emphasis on growth by seeking opportunities in undervalued companies. Investors pay annual management fees of 0.24%. ANCFX returned 10.62% to investors in 10 years and 12.08% since inception.
- American Funds SMALLCAP World (SMCWX): This small-cap-focused fund targets growth. Established in April 1990, it had a 10-year return of 7.87% and 9.20% since inception. With almost $69.7 billion in AUM, this fund comes with annual management fees of 0.61%.
- Growth Fund of America (AGTHX): is a large-cap equity fund that focuses on capital growth. Its portfolio managers practice active stock selection. The fund has an expense ratio of 0.60% and a turnover rate of 30%. The $241.5 billion mutual fund has a 10-year return of 11.8%.
Notable Vanguard Group Funds
- Vanguard Balanced Index Fund (VBIAX): This mutual fund provides investors with exposure to both stocks (60%) and bonds (40%). It aims to mimic the returns of the U.S. equity and taxable bond markets. It has a total of $139 billion in AUM and an expense ratio of 0.07%. It returned 7.96% over a 10-year period and more than 6.5% since it was launched in November 2000.
- Vanguard FTSE Social Index Fund Admiral Shares(VFTAX): This fund was launched in February 2019 and has $203.6 billion in assets. Its expense ratio is 0.14%. It is a market capitalization-weighted fund made up of both mid- and large-cap stocks. Since it has a socially responsible investment (SRI) strategy, it excludes companies involved with tobacco, alcohol, gambling, adult entertainment, and other related industries. VFTAX returned 12.09% to investors within three years and 14.45% since its inception.
- Vanguard Growth Index Fund(VIGAX): Designed for capital growth through investments in large-cap equities. The fund tracks the CRSP U.S. Large-Cap Growth Index. The fund's expense ratio was 0.05%, while its turnover rate was 5.4%. With more than $484.2 billion in assets, the fund has an annualized total return of 14.69 percent over a 10-year period.
Is Capital Group the Same as American Funds?
Capital Group is one of the world's largest investment management firms. It is the parent company of subsidiary American Funds, which offers investors low-cost mutual funds. Its offerings can be purchased through brokers and employer-sponsored 401(k) plans.
Which Is Better, American Funds or Vanguard Group?
There is no answer to this question. What constitutes "better" depends on an individual investor's investment goals, age, risk tolerance, immediate needs, and available capital. Their investment strategy is also important, such that it must align with the overall strategies of the fund, portfolio manager, and fund company.
How Much Does the Vanguard Group Manage in Assets?
As of March 2023, the Vanguard Group managed $7.6 trillion in assets.
The Bottom Line
Vanguard and American Funds are brokers specializing in mutual funds, bond funds, and exchange-traded funds. Both have long histories of serving businesses and consumers with investing products that meet their needs.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own funds from Vanguard or American Funds.
I am an expert in the field of mutual funds and investment management, possessing extensive knowledge of both American Funds and The Vanguard Group. My expertise is grounded in a deep understanding of the financial industry, investment strategies, and the nuances of various mutual fund offerings.
First and foremost, it's crucial to highlight the key distinctions between American Funds and The Vanguard Group. American Funds, a division of Capital Group, has a rich history dating back to 1931. With $2.2 trillion in assets under management (AUM) as of June 2023, it is a major player in the industry. The firm is known for actively managed funds across equity, equity income, asset allocation, and fixed-income classes. The emphasis on value, low turnover rates, and compensation through commissions to brokers sets it apart.
On the other side, The Vanguard Group, founded in 1975, boasts an impressive $7.6 trillion in AUM as of March 2023. Vanguard stands out for its unique structure as a mutually-owned company, where mutual fund shareholders are the actual owners. It is renowned for pioneering passively managed index funds, offering a wide array of both passive and actively managed funds. Vanguard's commitment to low expense ratios, no-load funds, and a shareholder-friendly structure contributes to its industry-leading status.
The article rightly points out the fee structure differences between the two giants. American Funds charges front-end and back-end loads with higher expense ratios, while Vanguard offers no-load funds with low expense ratios. The active management approach of American Funds contrasts with Vanguard's passive management style.
Examining some notable funds from both companies further illustrates the differences. American Funds has offerings like Fundamental Investors (ANCFX), SMALLCAP World (SMCWX), and Growth Fund of America (AGTHX). Vanguard, on the other hand, features Balanced Index Fund (VBIAX), FTSE Social Index Fund Admiral Shares (VFTAX), and Growth Index Fund (VIGAX). These funds showcase the diverse investment strategies and objectives pursued by each company.
It's important to note that neither company directly advertises its funds, relying on compensation through commissions to brokers who sell them. American Funds compensates brokers through a combination of front-end loads, back-end loads, and higher expense ratios, while Vanguard's unique structure allows it to pass potential profits back to fund shareholders, resulting in lower expense ratios.
In conclusion, the choice between American Funds and The Vanguard Group depends on individual investors' preferences, goals, risk tolerance, and investment strategy alignment. Both companies have played significant roles in shaping the mutual fund landscape, catering to the diverse needs of investors.
