These seven Vanguard funds are cost-efficient and versatile.
There’s no “one size fits all” approach when it comes to retirement funds. But regardless of your retirement horizon, age, chosen allocations or goals for leaving money to your heirs, venerable fund provider Vanguard probably has an offering that covers your priorities. “You want to maintain an allocation that not only supports your needs, but leaves money for family and causes,” says Alec Lucas, director of fixed income strategies at Morningstar. “There’s a retirement fund for somebody who’s 22 versus somebody who’s already in retirement.” Rather than suggesting a boiler plate portfolio for investors, a curated portfolio that considers both needs and goals is important, says Kayla Rae Fernandez, financial planning executive at California Financial Advisors, adding that the “cost-efficient nature of Vanguard funds makes them very ideal” for this type of planning. Here are seven of the best Vanguard funds for investors looking to their future, nearing or already in retirement.
Vanguard S&P 500 ETF (ticker: VOO)
The passively managed Vanguard S&P 500 ETF is a great base exchange-traded fund for beginner investors as well as those who are more experienced. Fernandez says, “I would advise anyone looking to begin investing in the equity markets to begin with an S&P 500 index fund.” The point of the S&P 500 index is to provide investors with a price that roughly tracks the broader market, as it is composed of the 500 largest companies on the New York Stock Exchange. This means VOO should zig and zag with the overall market, giving beginner investors a barometer by which to judge the investing climate. VOO ranks as a 4 on Vanguard’s internal risk-ranking system of 1 through 5, where 1 carries the lowest risk and 5 is the highest risk. However, Vanguard also points out that this higher risk possibility leads to the potential for greater reward. VOO has a 0.03% net expense ratio, which means for every $10,000 investment, VOO investors pay $3, far below the average for its peers.
Vanguard Total International Stock ETF (VXUS)
Investors want to make sure that if they face a bear market in one region where they’ve invested, their nest egg remains secure. An important characteristic of a well-diversified portfolio is having exposure to several geographical regions to balance risk, including risk to political systems and currencies. This is the precise opportunity that Vanguard Total International Stock ETF offers. This passively managed fund is tied to the FTSE Global All Cap ex US Index, which tracks small-cap stocks in developed and emerging markets outside the U.S. This means that if there’s a downturn in U.S. stocks, a portion of investors’ portfolios might remain insulated. According to Lucas, VXUS is one of only four funds that Vanguard’s internal advisory service recommends to new investors. VXUS has a risk rating of 5, so it’s on the high end. But VXUS’ expense ratio is on the very low end, at 0.07%.
Vanguard Value ETF (VTV)
Vanguard Value ETF is a passively managed fund that tracks the CRSP US Large Cap Value Index. The fund carries a risk rating of 4 from Vanguard, and it has a current yield of 2.3%. By comparison, Vanguard High Dividend Yield ETF (VYM) pays a 2.7% yield. For investors looking for income, then, VTV can get the job done. In addition, Fernandez says, VTV is “designed to invest in companies that have slower growth than the broad U.S. stock market and can thus be temporarily undervalued.” The fund tends to hold stocks of companies with demand that doesn’t drastically change based on the trajectory of the economy, she says, which can be a valuable boon to investors during bear markets. VTV has a desirable expense ratio of 0.04%.
Vanguard Growth ETF (VUG)
Vanguard Growth ETF tracks the CRSP US Large Cap Growth Index. This fund is similar to but has a different strategy from VTV. Both funds hold the kind of mid- and mega-cap stocks that make up 85% of the market, but VTV is designed to track large-cap value stocks and VUG tracks large-cap growth stocks. The distinction between growth and value stocks, in this instance, is based on CRSP’s banding and migration methodologies. For example, VTV’s top three holdings are Berkshire Hathaway Inc. (BRK.A, BRK.B), UnitedHealth Group Inc. (UNH) and Johnson & Johnson (JNJ), while VUG’s top three stocks are Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Alphabet Inc. (GOOGL, GOOG). In addition, VUG “has a higher standard deviation than its value counterpart,” Fernandez says, so it’s designed to perform exceptionally well in good markets. VUG has a risk rating of 4 from Vanguard and an expense ratio of 0.04%.
Vanguard Mid-Cap ETF (VO)
Vanguard Mid-Cap ETF is a passively managed fund tied to the benchmark CRSP US Mid Cap TR Index. This index tracks U.S.-based companies with investable market caps that fall within the top 70% to 85% of the market. By focusing on mid-cap stocks, this fund can help investors further balance their portfolios for retirement. It’s important for investors to maintain a mix of large-, mid- and small-cap stocks. VO’s top five holdings are Occidental Petroleum Corp. (OXY), Valero Energy Corp. (VLO), Devon Energy Corp. (DVN), Synopsys Inc. (SNPS) and Centene Corp. (CNC). However, the fund’s 10 largest holdings only account for about 7% of total assets. The fund currently holds 374 stocks. VO’s expense ratio of 0.04% is significantly less than the average of 0.38% among 68 mid-cap ETFs traded in the U.S.
Vanguard Dividend Growth Fund (VDIGX)
The only actively managed fund on this list, Vanguard Dividend Growth Fund follows a type of investing strategy “that’s been reliably less prone to lose money in down markets,” Lucas says. It aims to provide investors with some income while giving them exposure to dividend-focused companies across all industries. VDIGX has an expense ratio of 0.27%. Although this is higher than the expense ratios of the passively managed funds on this list, it’s significantly lower than the average actively managed fund expense ratio of 0.71%. VDIGX also has a turnover rate of only 15%, lower than the average of roughly 60% for actively managed funds. Taken together, these factors mean that the expenses for this fund should be lower than for other actively managed funds. In addition, the fund yields 1.4%, good for income seekers.
Vanguard Total Bond Market ETF (BND)
As of June 14, Vanguard Total Bond Market ETF has lost more than 13% this year. In most markets, that wouldn’t make it a worthwhile investment. But the S&P 500 has lost more than 21% over the same period. This means BND is doing precisely what it should be doing for investors: smoothing out market volatility. Or, as Lucas says, “Sometimes losing less wealth is winning.” That’s not what investors like to hear, but it’s the reality of investing in the stock market sometimes. Not to mention, Fernandez says, “any balanced portfolio should include a combination of both equity and fixed-income investments.” And according to Lucas, BND is another one of the four funds (along with VXUS) that Vanguard’s internal advisory service recommends to new investors. The fund has a 3% yield and an expense ratio of 0.03%, which could take a little of the sting out of losses.
7 Vanguard funds to help keep you on track for retirement:
— Vanguard S&P 500 ETF (VOO)
— Vanguard Total International Stock ETF (VXUS)
— Vanguard Value ETF (VTV)
— Vanguard Growth ETF (VUG)
— Vanguard Mid-Cap ETF (VO)
— Vanguard Dividend Growth Fund (VDIGX)
— Vanguard Total Bond Market ETF (BND)
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Update 06/15/22: This story was published at an earlier date and has been updated with new information.