Beginner investors can create a complete investment portfolio with these low-cost funds.
In 1975, the late John “Jack” Bogle founded the now legendary Vanguard Group with one goal: to make passive investing accessible to retail investors at a low cost. To do so, Bogle created the first index fund, called the First Index Investment Trust. Originally ridiculed by Wall Street as “Bogle’s Folly,” this trust eventually grew and morphed into the well-known Vanguard 500 Index Fund (ticker: VFINX), with billions in assets under management, or AUM. Since then, Vanguard has continually innovated to bring about a host of low-cost indexes tracking stocks and bonds from around the world. Thanks to Vanguard, retail investors can invest in a diversified portfolio via a few single tickers. Today, Vanguard continues to release new, affordable funds and update their brokerage platform with the goal of democratizing investing for all. Here is a list of the seven best Vanguard funds for beginner investors.
Vanguard S&P 500 ETF (VOO)
Vanguard’s first S&P 500 index fund eventually got recreated in exchange-traded fund, or ETF, form as VOO. VOO tracks the S&P 500, a barometer for U.S. large-cap stock performance and a common benchmark for professional fund managers to compete against. Even Warren Buffett loves VOO, having selected it as one of the investments for his estate. Buffett also used VOO to win a million-dollar bet against a collection of hedge funds, by predicting that its performance would beat them over the long term. While there are many ETFs that track the S&P 500, VOO is one of the best options for a long-term buy-and-hold strategy due to its rock-bottom expense ratio of just 0.03%. For every $10,000 invested in VOO, investors will pay just $3 in fees annually.
Vanguard Total Stock Market ETF (VTI)
Buffett loves the S&P 500, having made his fortune as a value investor buying downtrodden U.S. large-cap stocks at bargain bin prices. However, the U.S. market doesn’t start and end with the S&P 500. Beyond that, there’s another 3000-plus mid- and small-cap stocks out there that comprise the remainder of the market. Jack Bogle himself advocated for buying the entire U.S. market, famously saying, “don’t look for the needle in the haystack — just buy the haystack!” Bogle’s preferred method was via the CRSP Total Market Index, which tracks 4,136 U.S.-listed stocks. The fund for this is VTI, which is roughly 82% VOO, with the remaining 18% in mid- and small-cap stocks. Despite the additional stocks, VTI costs the same 0.03% expense ratio as VOO. A great use for VTI is as a tax-loss harvesting pair for VOO.
Vanguard Total Bond Market ETF (BND)
Bonds do two things in a portfolio: they reduce volatility, which is the degree that investments fluctuate, and they reduce drawdowns, or the peak-to-trough losses experienced during market crashes. Most investors with a lower risk tolerance and shorter time horizon often hold an allocation of high-quality bonds. An easy way to instantly access a diversified portfolio of domestic bonds is via BND. BND holds roughly 66% U.S. government Treasurys of all maturities and 33% in investment grade (BBB, A and AA-rated) corporate bonds, mortgage backed-securities and municipal bonds with an intermediate duration. This gives BND a good balanced mix between protection, yield and interest rate sensitivity. BND is also quite cheap, with an expense ratio of 0.035%.
Vanguard Total International Stock ETF (VXUS)
Warren Buffett may have said “never bet against America,” but most experts today would agree that some degree of international diversification is good. Holding international stocks from developed and emerging markets can offset the risk of the U.S. market underperforming for extended periods of time. Case in point, this happened between 2002 and 2009, when U.S. stocks lost out to international stocks (the so-called “lost decade”). A great way to buy international stocks for cheap without worrying about currency conversion cost is via VXUS. VXUS holds a total of 7,896 stocks, of which 25.2% hail from emerging markets (Middle East, Asia and Africa), 39.5% come from Europe and 26.8% come from the Pacific region (Japan and Australia). The ETF costs an expense ratio of 0.07%. Holding VXUS in a taxable account can allow investors to claim a foreign tax credit on dividends.
Vanguard Total International Bond ETF (BNDX)
U.S. bonds are generally a good investment for fixed-income allocations, but investors can diversify their portfolios further by buying international bonds. Bonds of foreign governments and corporations from Canada, the U.K., France, Germany, Australia, Japan and other countries can sometimes offer better yields and safeguard against the highly unlikely, but technically possible, risk of a U.S. sovereign default. A great way to access foreign bonds is via BNDX, a bond ETF which tracks the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Because the underlying bonds in BNDX are denominated in different currencies, BNDX is hedged back to the U.S. dollar to mitigate currency risk. Holding BNDX is slightly more expensive at a 0.07% expense ratio, which is typical of international funds.
Vanguard Total World Stock ETF (VT)
Investors looking to “index the world” can always use a combination of VTI plus VXUS, but that approach comes with the need to manually rebalance the ETFs every once in a while. Investors looking to go totally hands-free while investing worldwide can do so via VT, which tracks over 9,500 stocks from around the world. While a combination of VTI and VXUS results in more holdings than VT, the sampling methodology of the latter ensures it represents world stock exposure well. Currently, VT is roughly 55% U.S. stocks and 45% international stocks. As the composition of the world market changes, VT will adjust itself as well, ensuring that investors don’t have to worry about choosing the optimal proportion of U.S. versus non-U.S. stocks. VT currently costs an expense ratio of 0.07% to buy and hold.
Vanguard Total World Bond ETF (BNDW)
Investors who opt for the “VT and chill” approach can do the same with their bond holdings via BNDW. BNDW is essentially BND plus BNDX packaged into one convenient ticker. Currently, BNDW allocates 51.3% of its portfolio to BND and 48.7% to BNDX. This allocation is dynamic and can change over time as the U.S. and international bond markets shift in terms of capitalization. Buying BNDW allows investors to gain exposure to both U.S. and international bonds without the need for rebalancing or making multiple purchases, which can rack up commissions. Investors who opt for VT and BNDW essentially have a worldwide diversified portfolio of high-quality stocks and bonds with just two tickers at a low price. BNDW costs an expense ratio of 0.06%.
7 best Vanguard funds for beginning investors:
— Vanguard S&P 500 ETF (VOO)
— Vanguard Total Stock Market ETF (VTI)
— Vanguard Total Bond Market ETF (BND)
— Vanguard Total International Stock ETF (VXUS)
— Vanguard Total International Bond ETF (BNDX)
— Vanguard Total World Stock ETF (VT)
— Vanguard Total World Bond ETF (BNDW)
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7 Best Vanguard Funds for Beginner Investors originally appeared on usnews.com
Update 07/13/22: This story was previously published at an earlier date and has been updated with new information.
