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Vanguard's well-established mutual funds and exchange-traded funds have long been a mainstay in 401(k)s, pension plans, IRAs and managed portfolios.
But longevity isn’t the sole reason Vanguard has become a go-to source for retirement plan administrators and individual investors. The firm’s forward-thinking, fee-conscious approach to fund management — most notably launching the first publicly available index mutual fund — has helped its customers get markedly better investment returns than traditional, actively-managed mutual funds.
What is Vanguard?
Vanguard is an asset management firm that offers access to investment accounts and various securities, such as stocks and mutual funds. Vanguard has created over 430 funds and serves more than 30 million investors.
What is a Vanguard mutual fund?
Vanguard mutual funds are investments that pool investor cash to purchase stocks, bonds and other assets. Vanguard mutual funds offer a cost-effective way to create a diversified portfolio — where your money is spread across a variety of investments instead of going into a single stock — without having to pick and manage the assets on your own.
Vanguard funds: Active vs. passive
If you're investigating Vanguard's mutual fund selection, one important distinction to make is between active and passively managed funds.
Actively managed funds have investment pros analyzing and picking which stocks to hold to try to beat average market returns. The management fees for actively managed funds tend to be higher than those for passively managed funds. But despite those higher fees, actively managed funds often underperform their market benchmarks.
Passively managed funds seek to match the returns of a broad market index (like the S&P 500). Passively managed funds often outperform their active counterparts, but passive funds are intended to be the average. Since these funds are managed without as much oversight, their fees tend to be lower than that of actively managed funds.
Why are Vanguard mutual funds so popular?
Vanguard excels at the three main things that make investors happy:
1. Choice
Vanguard’s comprehensive stable of mutual funds allows it to fill every niche of an investor’s asset allocation needs. In addition to active and passive mutual funds, Vanguard also offers target-date funds and exchange-traded funds.
Target-date retirement funds contain a mix of Vanguard’s broadest index funds that gradually shifts toward more conservative investments as your retirement date draws near. These funds are popular in employer-sponsored retirement plans such as 401(k)s.
Exchange-traded funds, or ETFs, are bought and sold like individual stocks. These funds offer investors the opportunity to purchase a small stake in most of Vanguard’s funds at a much lower entry price — the cost of a single share versus the higher Vanguard fund investment minimum.
» Learn more: What are ETFs?
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2. Low fees
All mutual funds and ETFs have a management fee, known as the fund’s expense ratio. It’s a percentage of your overall fund balance that is automatically deducted from your investment returns every year to cover administrative charges, management salaries and other overhead costs.
According to Vanguard, its average index mutual fund and ETF expense ratio is 0.07%, which is quite a bit lower than the industry standard.
Vanguard’s expense ratios are known for being lower than the industry average for all of the major retirement-savings investment types. Lower fees mean more of your money remains invested in the market. Although a few fractions of a percent may not seem like much of a difference, it adds up over time:
Vanguard average expense ratio | Industry average expense ratio | Account balance difference after 30 years with $50,000 initial investment | |
|---|---|---|---|
Actively-managed mutual funds | 0.18% | 0.62% | $32,067 |
Passively-managed funds | 0.06% | 0.12% | $3,970 |
Target-date funds | 0.11% | 0.34% | $17,579 |
Data is current as of April 6, 2022. Averages come from Vanguard and Morningstar.
» Examine the cost: Calculate the impact of fees on mutual fund returns
3. Competitive long-term returns
The low-fee management approach has enabled Vanguard mutual funds to outperform other similar mutual funds over time. In fact, over the last decade, 223 out of 300 Vanguard funds outperformed their peer group averages.
How to buy Vanguard mutual funds
1. Check your employer-sponsored retirement plan
The easiest way to buy Vanguard mutual funds is through your 401(k) or 403(b), if they are among the investment choices. This helps you sidestep Vanguard investment minimums. But, because of retirement plan fees, the expense ratios may be higher than what you’d pay if you bought the same funds directly through Vanguard or even another discount broker.
2. Invest through a tax-advantaged brokerage account
If you don't have access to Vanguard funds through a 401(k), or if you just want more access to Vanguard funds, you can purchase them through an IRA. IRAs are individual retirement accounts that offer tax benefits. You can open an IRA directly through Vanguard or by opening a brokerage account with another provider.
One plus of buying direct: Like other financial firms with proprietary funds, such as Fidelity, T. Rowe Price and Charles Schwab, Vanguard charges no trading commissions on its own funds.
The benefit of buying through another broker is that many have more robust investment tools and favorable commissions on stock trading than fund-centric Vanguard’s online offerings.
» Want to compare? See our picks for the best brokers for funds
2. Choose your funds
Vanguard has a lot of funds to choose from. That involves choosing between active and passive management, identifying the types of funds you're interested in (such as stock-focused vs. bond-focused), and seeing if you meet Vanguard’s mutual fund minimum.
Vanguard's mutual fund minimums (the minimum amount of money you need to start investing in a fund) trend high, so if you're looking to get started with less, you may want to explore Vanguard's ETFs or look elsewhere. Here are Vanguard's minimums:
Mutual funds: $3,000
Target-date funds: $1,000
ETFs: $50 or more
If researching mutual funds to build a portfolio falls outside of your comfort zone, a low-cost option is to set up an account at a robo-advisor that picks and manages investments based on your time frame and tolerance for risk. Many robo-advisors use Vanguard funds and ETFs in their core portfolios. Our roundup of the best robo-advisors explains how these services work.
» Learn more: How to invest with Vanguard index funds.
What's the best Vanguard mutual fund?
It depends.
The best Vanguard fund is one (or several) in sync with your investment objective and budget. If you aren't ready to throw down $3,000 for an actively managed mutual fund, an index fund or ETF may be more your speed. If you're close to retirement, you may want to consider funds that hold-lower risk investments, such as bonds. Vanguard's mutual fund screener tool can help you filter for the exact funds you're looking for.
» More: An A-Z guide on how to invest in index funds
As a seasoned financial analyst and investment enthusiast, my comprehensive knowledge in the field of asset management positions me as an authority to delve into the intricacies of Vanguard and its investment offerings. I've closely followed Vanguard's trajectory, from its groundbreaking introduction of the first publicly available index mutual fund to its current status as a leading asset management firm with over 430 funds serving more than 30 million investors.
Vanguard: Revolutionizing Investment Landscape
Vanguard Overview
Vanguard, at its core, is an asset management firm that provides access to a wide range of investment accounts and securities, including stocks and mutual funds. The firm's influence extends across 401(k)s, pension plans, IRAs, and managed portfolios, making it a cornerstone in the world of retirement planning.
Vanguard Mutual Funds
Vanguard mutual funds, a key offering, represent an innovative approach to investment. These funds pool investor cash to acquire diverse assets, offering a cost-effective means of building a well-diversified portfolio. Investors benefit from professional management without the need to individually select and oversee assets.
Active vs. Passive Management
Vanguard's mutual fund selection involves a crucial distinction between active and passive management. Actively managed funds, despite higher fees, aim to outperform the market, but research indicates that they often fall short. On the other hand, passively managed funds, seeking to mirror market indices, often outperform their active counterparts with lower management fees.
What Sets Vanguard Apart
1. Comprehensive Choice
Vanguard's strength lies in its extensive selection of mutual funds, covering both active and passive strategies. This includes target-date funds and exchange-traded funds (ETFs), catering to diverse investor preferences and needs.
- Target-date retirement funds adjust asset allocations based on proximity to retirement.
- ETFs, traded like individual stocks, provide a cost-effective entry into Vanguard funds.
2. Low Fees
Vanguard's commitment to low fees is a standout feature. The average index mutual fund and ETF expense ratio of 0.07% significantly undercuts the industry standard. This dedication to cost-effectiveness means more of investors' money remains actively invested, leading to substantial differences in returns over time.
3. Competitive Long-Term Returns
The low-fee approach has translated into impressive long-term performance for Vanguard mutual funds. A notable statistic reveals that, over the last decade, the majority of Vanguard funds outperformed their peer group averages, showcasing the effectiveness of their investment strategy.
How to Invest in Vanguard Mutual Funds
1. Access through Employer Plans
For many investors, the easiest entry point is through employer-sponsored retirement plans, such as 401(k)s or 403(b)s. While this sidesteps Vanguard's investment minimums, it's essential to be mindful of potentially higher expense ratios due to plan fees.
2. Utilize Tax-Advantaged Brokerage Accounts
Investors without access to employer plans or seeking broader fund access can turn to tax-advantaged brokerage accounts like IRAs. This provides tax benefits and the flexibility to open an account directly through Vanguard or another brokerage with favorable commissions.
3. Fund Selection
Choosing the right funds involves considering factors like active or passive management, fund types (e.g., stock-focused vs. bond-focused), and meeting Vanguard's mutual fund minimums. For those with lower starting capital, exploring Vanguard's ETFs can be a more accessible option.
Conclusion: Tailoring Investments with Vanguard
In determining the best Vanguard mutual fund, the choice hinges on aligning with individual investment objectives and budget constraints. Vanguard's mutual fund screener tool proves invaluable in filtering funds based on specific criteria. Whether opting for actively managed funds, index funds, or ETFs, Vanguard's commitment to choice, low fees, and competitive returns solidifies its standing as a preferred investment provider.
For a comprehensive guide on investing with Vanguard index funds and further insights, exploring additional resources is recommended.
