Seven top Vanguard funds for beginning investors.
Beginner investors would do well sticking to a passive investment approach. Research shows that most retail investors and even professional active fund managers often fail to beat a simple index fund over the long run. While active stock picking can be a fun hobby and lead to high returns, keeping investments simple, diversified and low cost is often the easiest and most reliable method of building real long-term wealth. For that role, Vanguard’s current lineup of exchange-traded funds, or ETFs, is ideal. Founded by the legendary investor Jack Bogle, Vanguard has become known for its accessible, low-cost, investor-friendly funds. With a history of prioritizing investor education and fee reductions, Vanguard ETFs are an excellent choice for any beginner investor. Here’s a list of the seven best Vanguard funds to start your investment portfolio with.
Vanguard S&P 500 ETF (ticker: VOO)
The S&P 500 is the most well-known stock market index in America, tracking the performance of large-cap U.S. stocks that act as a barometer for overall market performance. Known for being notoriously difficult to beat, the S&P 500 is often set as the benchmark for active fund managers to compete against. It was even endorsed by Warren Buffett as the investment of choice for his estate after his passing. New investors with a high risk tolerance and long investment horizon can invest in the S&P 500 by buying VOO. VOO is ideal for investors seeking an aggressive, bullish play on U.S. large-cap stocks. While the S&P 500 has seen slumps such as the 2008 financial crisis, it has recovered to deliver outstanding returns over the long run. VOO is extremely cheap, costing an expense ratio of just 0.03% a year. The 10-year annual trailing return of the ETF stands at 14.6% before taxes.
Vanguard Total Stock Market ETF (VTI)
The U.S. stock market doesn’t just end at the stocks in the S&P 500. There are at least another few thousand mid- and small-cap stocks excluded from the index. To capture these stocks relative to their market cap weight, investors can buy VTI. VTI covers virtually the entire U.S. stock market by holding 4,136 stocks, with around 18% of the fund concentrated in mid- and small-cap stocks outside the S&P 500. Because VTI is market-cap-weighted, its performance is dominated by its largest holdings, giving it similar performance to VOO. Still, investors who subscribe to the “buy the haystack” mentality might like VTI better, especially considering it has the same low expense ratio as VOO at 0.03%. If you want to brag about owning the entire U.S. stock market, VTI is the ticker to buy.
Vanguard Total International Stock ETF (VXUS)
Most U.S. investors make the mistake of overweighting domestic stocks in their portfolio, a tendency known as “home country bias.” While having advantages for tax efficiency, investors who do this run the risk of suffering bouts of underperformance when the U.S. market lags, as it did between 2002 and 2009. To mitigate this, an allocation to international stocks from the developed and emerging markets is recommended. To do this, investors can buy VXUS, which holds a total of 7,896 stocks, of which 25.2% hail from emerging markets, 39.5% come from Europe and 26.8% come from the Pacific region. Combining VTI and VXUS in a 55/45 proportion allows you to replicate the word’s stock market based on its current composition. VXUS is best held in a taxable account to claim the foreign tax credit on dividends. The ETF is also fairly cheap with an expense ratio of 0.07%.
Vanguard Total World Stock ETF (VT)
Combining VTI and VXUS allows you to invest in the most diversified portfolio, but there’s still a catch. Every year, you’ll have to rebalance the portfolio back to its original allocation. If this still sounds like too much work for you, or if you’re afraid you’ll be tempted to over-tinker, consider replacing both with just VT. VT is basically VTI and VXUS all contained in one ticker. The ETF holds 9,350 stocks from around the world, with 63.7% from North America, 15.5% from Europe, 10.7% from the Pacific and 9.9% from emerging markets. VT will also rebalance itself, with its composition and allocation shifting naturally as the world stock market changes. These combinations of features make VT as passive as possible, making it one of the best hands-off buy-and-holds a beginner investor can own. Best of all, VT is still very cheap, with an expense ratio of just 0.07%.
Vanguard Total Bond Market ETF (BND)
All but the most risk-tolerant and young investors should consider a bond allocation in their portfolio. Common holdings include 90/10, 80/20 and 60/40 stocks to bonds. Bonds serve as ballast in a portfolio, helping to dampen volatility and reduce losses during a market crash. Investors can rebalance during a correction by selling bonds high, and buying stock when they are low, which can boost returns slightly. A good way for beginner investors to own an array of investment-grade bonds is by buying BND. BND holds roughly 66% U.S. Treasurys of all maturities and 33% high credit-quality corporate bonds, giving it a decent blend of yield and protection. This makes it a good one-size-fits-all option for beginner investors, given that it balances safety of principal and income well. BND will cost you a dirt-cheap expense ratio of 0.035% to hold.
Vanguard Long-Term Treasury ETF (VGLT)
Corporate bonds might have higher yields, but they tend to lose value during a crash because of their higher correlation to stocks. For maximum safety, consider buying a long-term U.S. Treasury bond ETF like VGLT. VGLT holds an array of Treasurys with an average duration of 17.9 years. This trait made VGLT an excellent hedge during the 2008 financial crisis and the 2020 COVID-19 crash, as the Federal Reserve dropped interest rates and investors “flocked to safety” by buying long-term Treasurys en masse. The downside is that in a rising interest rate environment like today’s, VGLT will lose value due to its high duration. Year to date, VGLT is down 16.8%. Still, it could be a great buy at these low prices, especially if the Fed drops rates once inflation is quelled and the next market correction occurs. VGLT costs an expense ratio of 0.04%.
Vanguard Short-Term Treasury ETF (VGSH)
If the high sensitivity to interest rate changes of VGLT is too volatile for you, consider buying its shorter-duration cousin, VGSH, instead. VGSH also holds U.S. Treasurys, but with an average duration of just 1.9 years. In this case, if interest rates rose by 1%, VGSH would only be expected to lose around 1.9% in share price. This gives VGSH much better stability in a rising interest rate environment. The downside is that during a crash when interest rates drop, VGSH will not increase as much, making it a poorer hedge against equity risk. Still, VGSH is a great choice for lowering your portfolio’s volatility and parking cash. Year to date the ETF is only down 2.9%, suffering much less than other bonds. VGSH has a low expense ratio of 0.04%.
Seven best Vanguard funds to buy for beginner investors:
— Vanguard S&P 500 ETF (VOO)
— Vanguard Total Stock Market ETF (VTI)
— Vanguard Total International Stock ETF (VXUS)
— Vanguard Total World Stock ETF (VT)
— Vanguard Total Bond Market ETF (BND)
— Vanguard Long-Term Treasury ETF (VGLT)
— Vanguard Short-Term Treasury ETF (VGSH)
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Update 04/21/22: This story was published at an earlier date and has been updated with new information.